Hello Reader,
This letter will go over some key aspects of computer coins, their relation to the current economic outlook and why it matters to you.
I’ll first start off with the safety of your coins and then talk a bit about the macro-economic picture of recent events (Ukraine, Russia, Canada, USD, Gold etc).
Part 1 - Coins/Exchanges/Wallets
I’m going to be very blunt here. If you own 0.1 BTC+ or 1 ETH+, you need to get a cold storage device ASAP. Whether it is a Trezor, Ledger or anything else, this is absolutely necessary. You do not own any coins you have on an exchange, the exchange owns them and is acting like a custodian. If the exchange were to magically disappear tomorrow, your coins (hard earned money?) is gone.
If you were to end up on the wrong side of the government, or in the midst of war, or if you donate money to a protest that the government does not like, your coins on exchanges can VERY easily be taken. This defeats the very purpose of cryptocurrencies.
If you need access to the coins for ease of liquidity, keep 10-15% on a hot-wallet like BlueWallet. Many hot-wallet providers exist that let you secure your own coins, send them via lightning network or buy/sell etc. I’ll update this post or create a new one with a walkthrough on hot-wallets.
As for cold-storage, you can still do the same things. Trezor and Ledger have their own infrastructure for transacting.
Don’t be a cheap ass, the $200-300 for the device is a very small price to pay for the security of your coins. When you do buy a device, make sure you ONLY buy it from the company website. Do not go on Amazon or elsewhere in hopes of a cheaper deal, you can easily get a tampered device.
Pro Tip: If Ledger or Trezor are running a discount for a family pack (multiple devices), I would recommend getting this. As you accumulate more BTC/ETH etc, the risk of security increases and it may be wise to split your coins on multiple devices.
You can read my Crypto Investing Resources letter for more information on these devices.
Part 2 - Russia/Ukraine/Sovereign Debt/Oil
As we all know, Russia and Ukraine are in conflict. While many are focused on the physical aspect of war, what else is going on behind the veil of geopolitics?
First, it has become very clear, that the inter-banking system of the world is highly centralized. The crypto world already knew this, but the harsh reality of centralization has only come into light in these past few weeks.
The Canadian Freedom protests involving the trucker convey showed how governments can weaponize money against their own citizens. People had their assets frozen because they donated $50 to a protest. GoFundMe froze a near $10M fund. Restaurants and cafe’s that served coffee and food to protestors were also subject to police visits and retroactive interrogation.
The financial policies put in place were removed but it does set a precedence of what can be done. I may also add that I would not be surprised if the Canadian government got a tap on the shoulder from banks who were at risk of bank-runs, hence the removal of the “Emergencies Act”.
Regardless of your political views, a day may come where the government does not like the issue you are protesting against and if your hard earned money is centralized, you’re at their mercy. This can be extended to social credit systems (China), EV scores, meat consumption or anything else. Since 2020, all bets on freedom are off.
Speaking of freedom, many innocent citizens in Russia and Ukraine have lost access to the traditional banking system. In Ukraine’s case it’s due to the physical effects of war. In Russia’s case it’s due to the plethora of sanctions being placed on them.
Visa and MasterCard suspended their services in Russia today. Along with Google Pay and Apple Pay suspensions, several Russian banks were also banned from the SWIFT inter-banking system.
Now some might say “Yes the Russians deserve this, they need to be punished for their invasion etc etc.” Regardless of your views, I’m going to highlight the macro-economic picture of what these sanctions mean for the world.
With their sanctions, the US effectively killed the notion of sovereign debt. Every country holds sovereign debt as means of investment, trade, pegging currencies and political incentives. As we know, the world reserve currency is the US Dollar. The key thing to note about all the sanctions from the USA is that they do not apply to oil. This is expected as the world needs Russia’s oil.
The price of oil has increased substantially in these last few weeks. This is just a small example of compounding problems to come.
The real talking point is what Russia will do to retaliate against these sanctions. It has already been selling oil in yuan to China, moving away from the “petro-dollar”. On-top of this, Russia has axed a majority of their UST holdings in favour of gold.
This already shows a great distrust in USD dependence. From a strategic point of view, no one country wants their central bank holdings to be used against them.
Now, after seeing what has happened to Russia, do you think countries will hold/trade/transact USD? Some will, but others that are in competition with USA will take lesson from Russia’s sanctions. China, Iran, Venezuela and any other country that sees the USA as a threat will decrease their exposure to the dollar.
Note: I’m using USD as an example here but this can easily be applied to any currency in the world. If Country A is not an ally of Country B, they will decrease their exposure to B’s currency. Even if you are an ally, you would be a fool to think your friendship is unbreakable.
The same situation can be applied to technology. For years people have wondered why the Chinese run their own social media apps, their own web browsers and their own technology platforms. Looking at Russia, you now have your answer. If the world were to turn on China today, at the very least, they would be in control of the technology in their own country (and if I may add, the clothing~sorry Nike).
I will not speculate too much this in letter but from a purely economic point of view, here is what looks strategically possible.
Russia, as one of the biggest exporters of oil, can simply denominate their oil in a currency other than USD or EUR as payback for the sanctions. They can easily price their oil in rubles(doesn’t matter if they’re devalued) or any currency they see fit. If they want the US to default, they could price their oil in gold. This would wreak havoc to every financial system in the world. The reality is, countries would not have a choice. Whether climate change activists like it or not, the world needs oil to survive. If you’re a country that does not produce oil, put limits on fracking or shut-down your nuclear reactors because you listened to Greta Thunberg, you are at the mercy of Russia.
This is a fact and this is also the reason why most of Europe cannot do anything against Russia. They need oil and energy products.
The Credit Default Swap markets have already started to price in the risk of default on European institutions.
It would not be difficult for a contagion effect to spread into the west, especially if Russia decides to denominate their oil in another currency.
You’ll also notice I have not mentioned Bitcoin in this letter. I’m going to hold off on hypothesizing oil being priced in BTC for now. It would make me very happy if that were to happen but realistically gold may have the edge for now as countries already have it on their balance sheet and have used it in the past.
As an ending remark, take a look at this chart.
The European Union, which as been much talked about in the past few days, is the largest importer of oil from Russia. They have no other choice. Oil is needed to power homes, businesses, refrigerate good, run cars and produce economic output.
I wrote about oil and renewables at the start of January, highlighting how important it is to understand which types of renewables are needed and why oil is necessary for now. I also went over some investing decisions related to this topic, feel free to give it a read.
I’ll write a more in-depth analysis on the current economic crisis soon but in the meantime, I’d highly recommend listening to the recent Investor’s Podcast episode with Luke Gromen. He speaks about the macro impacts of the current crisis in much more depth.
Reminder: If you have your coins on exchanges and end up getting burned, you will only have yourself to blame. You don’t take my word, do the research for yourself and you’ll see why I am stressing this point.
Thank You
Disclaimer: The views expressed by the author are not intended to serve as any form of financial advice. This letter is for entertainment purposes only. Please do your own due diligence and research.
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