Welcome to our Friday mailbag edition!
Every week, we receive some great questions and comments from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
This week, we have questions on what will happen to Bitcoin… how crypto gains are taxed… and who’s paying for all the electric vehicle (EV) charging stations President Biden has promised to build…
Let’s dive right in… starting with these questions from Charles and Len in response to my recent essay on Bitcoin halvings. (This is when the reward miners receive for processing transactions on the blockchain gets cut in half. This happens every four years or so.)
There are lots of things I do not understand about Bitcoin (most of it). But reading your article, I cannot figure out why, once the miners are making so little, they won’t shut down. So who will track the movement of the coins then?
– Len R.
If the Bitcoin mining process pays the miners to validate the transactions, what happens when all the Bitcoins are mined? How will the transactions get validated?
– Charles G.
Thanks Charles and Len for writing in. As your questions are similar, I’m going to answer them together, if that’s ok.
Now, although some of us buy Bitcoin as an investment or even speculation, it’s important to remember that miners don’t do this for fun. Bitcoin mining is a business.
Miners receive “payment” in two ways…
First, they receive transaction fees for processing transactions. These are paid by Bitcoin users, for example, when they send Bitcoin to each other. It’s much the same as your bank charging you to transfer money to another bank account. With Bitcoin, the transaction fee is usually set and processed by the exchange or wallet you use.
Second, every time a miner completes a block of transactions, it earns Bitcoins as a reward. Right now, miners earn 6.25 Bitcoins per block. That’s worth around $250,000 at current prices.
And that reward is halved once every four years or so, in what is called a halving.
As you may recall from my essay, the next halving will happen in mid-2024. The reward will drop to 3.125 Bitcoins.
And as I told you, Bitcoin loves halvings. Its track record after each halving event to date bears this out. Every time it had a halving event, its price exploded.
So the Bitcoin reward dropping doesn’t mean miners’ operations will suddenly become unprofitable.
If Bitcoin is changing hands at, say, $100,000 at that point, miners will be making even more money. $312,500 per block. That is a lot of money. So it still sounds like a decent gig to me, even when the rewards drop.
And don’t forget, miners are also receiving transaction fees.
So I believe this will incentivize them to continue mining, even as the reward is being cut.
Now, I can only speculate what will happen when the last ever Bitcoin is mined. (That is likely be in the year 2140. So more than 100 years from now.)
But firstly, even after the last of the 21 million Bitcoins has been mined, miners will continue to get paid transaction fees for any Bitcoin transactions they process.
Also, the purchasing power of Bitcoin will likely increase over time. So the transaction fees should also increase, due to demand. This should also act as an incentive to miners to continue to process transactions and thereby maintain the ledger. Even in the absence of new coin rewards.
Next, Keith has a question that relates to purchasing Bitcoin, something I’m sure many of you may be wondering about…
Nomi, thanks for your helpful insights on the halving of Bitcoin. Are there any comments you can or care to make on Gemini as a site to buy Bitcoin? I have purchased Bitcoin through them, but I really don’t have any knowledge as to whether or not they would make your recommendation-to-use list.
– Keith H.
Thanks for writing in, Keith. As you probably know, I can’t give any personalized investment advice. However, generally speaking, there are many ways to buy Bitcoin.
Gemini is certainly one of them. It’s a legitimate and regulated business. It consists of a cryptocurrency exchange, wallet, and custodian that makes it simple to buy Bitcoin and other crypto assets.
Coinbase would be a similar option. Generally, Coinbase and Gemini are beginner-friendly (they offer quick-buy features, for example). But they tend to charge higher fees.
PayPal or Block’s (formerly Square’s) Cash App are also convenient options for someone buying Bitcoin for the first time. Or for someone who only wants to invest a small amount. With both of these popular apps, you can start your crypto portfolio with just $1.
Or you could consider using Swan Bitcoin. It’s a relatively new platform I’ve started using. It offers easy, regular savings options to convert your dollars to Bitcoin savings. And its fees are low compared to many larger platforms.
At the end of the day, the right service for you will depend on the type of investor you are and what matters most to you.
And just remember that cryptocurrencies are speculative assets. So treat your investment in Bitcoin accordingly.
Next, my March 16 essay on the White House’s recent Executive Order on cryptos, got Eric thinking. And he poses a question about how cryptos are taxed under the U.S. tax code. He believes the answer gives a strong hint about central banks’ intentions towards cryptos…
Hi Nomi, I am really surprised to see that as an ex-banker you are still in the throes of the central bank’s desire to limit its greatest threats, which lay in the pricing of precious metals.
Central banks have Tier 1 reserves in allocated gold. But do they hold Bitcoin? In the past, governments have not tolerated competing currencies very kindly. But they are clearly tolerating crypto for the time, being as it aligns with their agenda of preserving the failing fiat currencies through the dilution of interest by the young and those digitally addicted to the meta-world.
In the face of a world drifting further toward a chaotic future, central banks are increasing their stockpiling of precious metals. Let me know when they start piling into crypto for real instead.
More likely, this will be the introduction of state-controlled cryptocurrencies. That will provide the state complete control of our individual freedoms as they can track and control the function of our money at will.
To end with a question… Are crypto sales treated as a capital gain, as stocks are? Or as collectibles, such as gold and silver coins are? The answer might be a clue to their actual intentions.
– Eric E.
Hi Eric, thank you for writing in. You’re right, central banks don’t hold Bitcoin. Except for El Salvador. And I believe Panama may be considering it.
To your point about the possible introduction of state-controlled cryptocurrencies… The main intention of central banks is to keep control over money supply. That’s important to always keep in mind.
A Central Bank Digital Currency (CBDC) would be a way for them to do that. It is a digital form of central bank money.
In the U.S., there are two types of central bank money. The first is physical currency. This is issued by the Federal Reserve. The second is digital balances that are held by banks at the Fed.
To be clear, this does not mean digital currencies. It is basically accounting, in an electronic form, of the money that banks hold in reserve with the Fed.
We also hold money in digital form – in our bank accounts and payment apps. And we transact digital money via online transactions.
A CBDC would be different from that because it would be connected to the Fed, not a commercial bank.
In that way, the Fed could wind up eventually usurping the power and customer base of traditional banks.
Depending on how they go about it, the Fed could adopt a digital system whereby customers can bank directly with the Fed using its digital currency.
If that were to happen, it would mean more ordinary people could hold their savings, for example, at the Fed rather than at their current bank.
This is very much a development in flux. I will continue to watch and report as it unfolds.
This is a big, evolving space under our theme of New Money. It’s one we will be examining for months and years to come.
Now, to answer your question about how crypto sales are treated… Under current U.S. tax law, there is a flat 28% capital gains tax (CGT) on profits from the sale of collectibles, including precious metals, coins, art, and antiques, regardless how long you have held them.
Precious metals aren’t as easily measurable, in terms of pricing appreciation for tax purposes, which makes them excellent investments.
But gains on the sale of capital assets, such as stocks and bonds, are based on how long you have held them.
If you hold them for 12 months or less, you must pay short-term CGT. That’s up to 37%, depending on your circumstances.
If you hold them for more than 12 months, your profits are subject to long-term CGT. That’s up to 20%.
Gains on crypto sales are taxed in the same way.
This treatment reflects central banks’ and the U.S. Treasury’s perspective: Cryptos are not classified as collectibles, or hard items that appreciate over time.
As a result, their tax treatment sees them as more of a financial market investment, for which capital gains taxes are used.
Switching gears now, Jim has a problem with the government’s plans to build EV charging stations I told you about in my recent essay on how to profit from the New Energy sector…
How many gas stations did the government build? Why do I need to be taxed for government, with all its corruption, to build charging stations?
– Jim L.
Hi Jim, thank you for your questions. I think the larger point here is that all companies get tax breaks from the government, in some manner. Big oil companies are no exception.
So, even if the private sector is involved with the physical building of gas stations, there is a relationship somewhere in there to government funding. And yes, that means our tax dollars.
In general, all large, private companies pay less in tax (as a portion of overall taxes paid) than individuals do. I haven’t done a piece on this yet, but I’ll put it on my radar.
Regarding charging stations, the government will be funding some elements of these. They will give certain companies in the space tax breaks, as well. To me, this is a given.
But even if you never own or travel in an electric vehicle, it’s worthwhile looking at this purely from an investment standpoint.
That’s why, as I said above, rather than focusing on the source of the money, I focus on where that money is flowing and who’s getting it.
And most importantly, how we can position ourselves to grow our investments as a result.
Well, that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at feedback@rogueeconomics.com.
A Request
Before I go… I have a small request.
I love trying new ways to engage my readers… be that with innovative approaches to familiar topics… or with new ways of delivering my message.
I recently sent a couple of my daily updates by video. I usually shoot them when I’m on the road. Which I am quite a lot, to various parts of the country.
The first video update I sent was from Manhattan’s financial district, otherwise known as Wall Street. That was all about the important lesson I carry with me from my days working there over two decades ago.
The second video update was from Washington, D.C. I was there around the time of the last Federal Open Markets Committee (FOMC) meeting in March. And, as always, I picked up a lot of interesting insights from my meetings and conversations in and around the corridors of power, which I shared with you.
Several readers have written in to say that they like the video format. Here’s a comment from Paul…
Great video! I really like the way Nomi talks and writes. She always has information I’m not receiving anywhere else.
And she’s very straightforward and doesn’t “beat around the bush” saying it! She gets straight to the point, or as we say in Texas: gets right to the rat killing! Her thoughts are clear, concise, and short.
“Less is more.”
– Paul E.
Thanks for your kind words, Paul. And I’m so glad you’ve enjoyed my video updates. I appreciate you taking the time to send me your thoughts.
So I want to “poll” all my Inside Wall Street readers…
Have you enjoyed the video updates I’ve sent you? Would you like me to do more? If so, what other topics would you like me to cover in my video updates? All suggestions are welcome.
You can email me at feedback@rogueeconomics.com.
In the meantime, happy investing… and have a fantastic weekend!
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins
Like what you’re reading? Send your thoughts to feedback@rogueeconomics.com.