Welcome to our Friday mailbag edition!
Every week, we receive fantastic questions from your fellow readers. And every Friday, I answer as many as I can.
Up first today, a question from reader Catharine on the likelihood of the U.S. government banning Bitcoin…
Like China, might our government prohibit the buying and trading of Bitcoin? Is that likely, and what happens to any coin(s) you may already own?
– Catharine C.
Hi Catharine, thank you for writing in. That’s a great question. The idea that the U.S. government will ban Bitcoin is a popular notion – and for an understandable reason. Crypto could threaten a major source of the government’s power – the power to create money out of thin air and force everyone to use it.
That said, that hypothetical situation is still a long way off. The crypto space, as it is right now, poses no existential threat to the survival of the central banks.
It would also be entirely impractical for governments to ban Bitcoin and other crypto assets.
Governments in Argentina and Venezuela have laws restricting their citizens from accessing U.S. dollars. But these laws have little effect on their citizens’ desire and ability to use them. These actions just create a thriving black market.
Now, that’s not to say that governments can’t restrict things by prohibiting the buying and trading of Bitcoin. What they cannot do is make something that is valuable and desired by many people just go away by passing a law.
For instance, the U.S. government could decide to prohibit banks’ use of Bitcoin for transactions. But that would require a major bipartisan regulatory overhaul of the banking system. And I just don’t see it happening. And even if that did happen, people could use their online and smartphone app banking platforms to transact in Bitcoin such as Cash App and Venmo.
And there’s something else you have to consider…
Even in China where they actually tried it, there are calls from high-level officials to remove the ban on Bitcoin.
Huang Yiping, a former central bank official, called for China to review its strict regulations regarding crypto. He believes the ban is not sustainable in the long term because it will lead to missed opportunities in blockchain.
And despite the ban on crypto trading in China, China continues to be the second-largest Bitcoin miner in the world as of January 2022. For example, China customers accounted for 8% of the collapsed crypto exchange FTX.
And even in China, the government has not banned the possession of crypto. So when the country with one of the most aggressive policies against crypto does not or can not suppress it completely, that should give you some ideas about the difficulty of being able to ever fully ban Bitcoin. So it’s unlikely that the U.S. government could do so, either.
And in the case of Bitcoin and crypto, it doesn’t really want to.
For one, it doesn’t want to miss out on any income from the industry. See, the crypto market is no longer just a fad. It has increased substantially in recent years. At the start of 2020, it was worth $191 billion. In November 2021, it was around $3 trillion. That’s a lot of taxable revenue.
Under the current tax code, if you hold Bitcoin or any other crypto for 12 months or less, you must pay short-term capital gains tax (CGT) on any profit made on the sale. That’s up to 37%, depending on your circumstances.
If you hold it for more than 12 months, your profits are subject to long-term CGT. That’s up to 20%.
So, instead of fighting it, we could see the government help Bitcoin. President Biden’s executive order on crypto is a case in point. I wrote about why it legitimizes the space a while ago. (You can catch up here.)
Now, I don’t recommend you put all your savings into Bitcoin (or any other single asset, for that matter). A diversified portfolio is the best way to protect your wealth in times of volatility.
Investing in a mix of Bitcoin and gold strikes me as a reasonable proposition, too.
That said, if you’re looking to dip a toe in Bitcoin, this isn’t the time to dive headfirst.
With so much uncertainty in the space regarding future regulation, I recommend putting only a small, speculative amount of your investment portfolio into Bitcoin.
PayPal or Block’s (previously called Square) Cash App are some of the most convenient options for investing small amounts of money on a regular basis. With these popular apps, you can start your Bitcoin portfolio with as little as $1.
That way, you can buy more when the price is low and less when prices are high. This is called dollar-cost averaging.
But remember: never invest more money than you can afford to lose.
Next, reader Catharine also wants to know more about the safety and use of physical gold in a crisis situation…
I have a lot of the same questions regarding physical gold that have never been answered. Like, what’s to stop the government from confiscating it again? Bars have serial numbers, so I assume it can be traced from where it was bought. And how does one use it in a crisis situation? Kind of hard to receive change from an ounce of gold, isn’t it?
– Catharine C.
Thank you for this question!
In short, there’s nothing to stop the government from trying to confiscate gold through an act of Congress or executive order. However, the role of gold today is very different than it was when we had a gold standard.
So it makes that possibility very unlikely. Let me explain…
President Franklin Delano Roosevelt issued an executive order that went into effect on May 1, 1933. It demanded Americans to turn in their gold or face a $10,000 penalty. The idea behind this was that the “hoarding” of gold during the Great Depression was stalling economic growth. So it constituted a national emergency.
On December 31, 1974, President Gerald Ford repealed Roosevelt’s order through Executive Order 11825. That was three years after President Richard Nixon took the country off the gold standard. What that did was detach gold from the U.S. dollar.
Today, there’s no direct connection anymore between gold and the printing of our currency (physical or digital). So it’s much less likely that the government or president can connect a national emergency and gold confiscations to fund it (like they did during the Great Depression.)
You see, the whole point of getting off the gold standard was that it enabled the Fed to print more money in times of emergency. That’s because there was no need to hold gold to the dollar anymore. So right now, the Fed being able to print money or issue digital currency does the trick.
Now, onto your next question regarding gold bars. You’re correct when you say gold bars have serial numbers that can be traced. But like I said above, it’s very unlikely that the U.S. government would confiscate them.
Even so, if you’re still concerned about this possibility, it’s worth knowing that you can hold gold bars in vaults outside the country. This makes it more difficult to access.
Now, as a U.S. citizen, you will still have to declare to the IRS that you have gold in a foreign country. You would have to check on these details with your accountant or tax lawyer as we cannot give tax advice here.
Other than that, you should make sure you can access your gold, that it is physically safe and secure, and that the vault is in a country that is stable. Again, you have to make that decision for yourself based on available information. That said, countries considered good places to store gold include Singapore, Switzerland, New Zealand, and Germany.
As for your last question about the liquidity, or “changeability” of gold bars… you can buy different sizes of them from 1 gram through 10 ounces. Today, a 1 oz gold bar will cost about $2,000. One gram costs about $50. The point is, smaller sizes are easier to use.
Plus, you can also buy gold coins, which are also easier to use in exchange for items or services in times of crisis. For more on buying accredited and secure gold coins, check out my previous essay about the Perth Mint program.
So you should be able to use coins in times of crisis for services or items that accept these coins for their value at the time. Consider having gold coins on hand in a safe place at home. That way you can access them quickly.
And even in a world where people or institutions are using historical exchange assets of wealth such as gold, you will be able to exchange different denominations of gold for items or services as you would cash today.
So it’s best to stock up on physical items of value that people can use as a currency of exchange in times of crisis. It’s just a good thing to do as a precaution.
Finally, our last question this week comes from Stephen, who wants to know about the liability of CBDCs…
When I transfer money from one bank to another, it’s not like they load up the cash in an armored car and send it over to the receiving bank. It’s debited from one account and credit to the other.
As I understand it, the CBDC is a liability of the Fed while my checking account is a liability of my bank. So is the difference that it’s easier to create money with a CBDC?
– Stephen S.
Thanks for writing in, Stephen! The currency notes we hold are liabilities of the U.S. Federal Reserve. This includes U.S. paper currency, as well as money that commercial banks hold in accounts at the Fed. So, you are absolutely right: the digital dollar would also be a liability of the Fed.
That’s because the CBDC would be issued by the U.S. Federal Reserve, like all the U.S. dollar bills we use now. It would just be in a digital form.
This means that a digital dollar should be worth the same as its paper counterpart.
But you are absolutely correct… The fact that it would be easier to fabricate a CBDC out of thin air than a fiat currency is one of its distinguishing features.
And as we know, the greater the money supply, the less valuable each unit of it becomes.
Now, as I’ve said before, a CBDC isn’t necessarily all bad.
It might come in handy if you need to receive a stimulus check… or even spark innovations in the financial sector.
Unfortunately, I don’t believe the potential benefits outweigh the potential dangers.
I find it worrisome that, with a digital dollar, the government could have complete knowledge of – and control over – every transaction you make.
So, is there anything you can do to protect yourself?
Well, it’s too early to say… In these initial stages, we just don’t know the precise nature of the beast.
But since we do know that the digital dollar will enable the Fed to inflate our money supply even more than it is now, we can consider assets that help us protect our wealth.
Gold fits the bill perfectly.
This precious metal is the ultimate form of wealth insurance. It has preserved wealth through every kind of crisis imaginable.
The best way to buy gold is with a combination of physical gold and gold stocks. You can buy physical gold online through accredited places like the U.S. Mint.
I actually wrote a piece detailing the best places and practices to buy physical gold. If you didn’t catch it, read up here.
You can also buy a gold exchange-traded fund (ETF) that is backed by physical gold. Gold ETFs offer the advantage of holding gold without the hassle of storing, securing, or transporting it. (I covered this in more detail in one of our mailbag issues.)
Lastly, I’ve identified my No. 1 gold pick for 2023 and beyond… and three “unprintable” plays to take advantage of the Fed’s adoption of CBDCs. For more information, go here.
And that’s all for this week’s mailbag. Thanks 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. Just remember, I can’t give personal investment advice.
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 [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. The Federal Reserve, the White House, and the financial elites are gearing up to enact the biggest change to our money since 1971.
This isn’t the first time they’ve overhauled our financial system. They’ve done it three other times in modern history. And now, they’re preparing to replace cash with the digital dollar, or CBDCs.
Luckily, I found one asset that will help you position yourself on the right side of this monetary shift and become your own banker.
I put the details in this new video presentation I just released. I’ll also show you my No. 1 gold pick for 2023 and beyond… and three “unprintable” plays to take advantage of the Fed’s next major distortion of the financial system. Watch it here.