Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
So let’s dive right in… starting with this question from James about one of my favorite topics – the Federal Reserve…
From what I have read, the Federal Reserve is actually a private bank, with the stock held by the families of the six financiers who were there at the creation and helped create it.
The statute creating the Fed forbids the release of this information, as I understand it. Could you please confirm these items?
– James A.
Hi James, thanks for writing in. There’s so much mystery surrounding the Fed. And there’s a lot of confusing information out there.
Here’s the scoop… According to the Federal Reserve Act of 1913, each of the 12 regional reserve banks of the Federal Reserve system is owned by its member banks.
What that means is that the banks in each region are shareholders of their own part of the Federal Reserve system.
When the Fed first started, these banks put up the capital to get and keep their respective regional reserve bank operating. In return, they received stock in their Fed.
In that way, they are shareholders of the Fed. And the Fed is organized like a private corporation.
However, the Federal Reserve Board of Governors is appointed by the president and approved by Congress. So in that way, there’s a political tie to the government.
There’s nothing in the Federal Reserve Act that prohibits the Fed from disclosing the names of their shareholder banks, how many shares each owns, or how much their shares are worth.
However, there’s also nothing requiring that disclosure. When I was researching my book, All the Presidents’ Bankers, the last report I found on that was issued in 1941. It was created by the St. Louis Federal Reserve. But it isn’t available online anywhere.
By the way, a few months ago, I shared an excerpt from All the Presidents’ Bankers about the creation of the Federal Reserve. It shows how wealthy Wall Street bankers pushed the White House to create America’s central bank, the Fed.
Just in case you missed it, and for readers who have just joined us recently, here it is again.
And if you’re interested in a more in-depth exploration of the 12 different Federal Reserve banks, I’m putting together a video series on that for my Distortion Report Elite members. I call it The 12 Faces of the Fed.
Click here if you’d like to learn more about becoming a Distortion Report Elite member.
Next, Ravi asks for my thoughts on a different way to buy cryptos, following my recent update on the crypto market…
Thanks for your update “Here’s What’s Happening in the Crypto Market Right Now.” I would like to know your opinion on buying Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE) as proxies for Bitcoin and Ethereum.
They are quite expensive, and my discount brokerage does not offer either Bitcoin or Ethereum. Additionally, I can buy calls or puts on the above stocks.
– Ravi M.
Thanks for your question, Ravi. You’re right, many brokerages don’t actually offer direct crypto trading on their platforms.
One notable exception is Interactive Brokers. It recently made it relatively easy to trade cryptocurrencies on its platform.
This isn’t an endorsement (and I can’t provide personalized investment advice). But you might consider researching it if you want to explore other options to meet your investing needs.
Meanwhile, Grayscale’s Bitcoin Trust (GBTC) and Ethereum Trust (ETHE) products allow investors to gain exposure to the price movement of Bitcoin and Ether right from their brokerage accounts.
This gives them convenient and safe ways to invest in Bitcoin and Ether. I’m all for that.
That said, these products come with several disadvantages anyone interested in them would do well to understand:
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Bitcoin trades 24/7, but GBTC doesn’t – Grayscale Bitcoin Trust trades on the over-the-counter OTCQX market. Its market hours are 6.00 a.m. to 5.00 p.m. ET on weekdays.
But Bitcoin, like all cryptocurrencies, trades 24 hours per day, 7 days a week around the globe.
So if Bitcoin prices crash while OTCQX is closed, investors in GBTC could face a liquidity crisis.
Of course, this is less important if you take a long-term approach to your crypto investments, as I recommend.
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High management fees – Grayscale Bitcoin Trust charges a 2% annual management fee. Grayscale Ethereum Trust’s annual fee is 2.5%. That’s pretty steep, whichever way you cut it.
The average equity mutual fund and exchange-traded fund (ETF) charge 1.43% and 0.53%, respectively, in annual expenses. The expense ratios are much lower for index funds in those categories. This may be a deal-breaker for some.
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Potentially high premiums – The difference between the market price and net asset value (NAV) per share is an important thing to consider for GBTC and ETHE.
Until recently, GBTC traded on a 20%-30% premium to its NAV. The premium even shot above 100% in the 2017 Bitcoin mania.
That’s because whenever there’s a surge in Bitcoin’s US$ price, performance-chasers flood into GBTC. This, in turn, further unhinges its market price and NAV per share.
So why pay an expensive premium when you can buy Bitcoin itself? I think a lot of investors will be asking themselves that question again (when Bitcoin and Ether resume their upward trajectory, as I expect).
On the flip side, a fund’s premium to NAV can become a discount when a price correction happens. GBTC’s premium to NAV quickly morphed into a large discount to NAV in 2022 as Bitcoin’s price declined.
Today, the premiums of GBTC and ETHE stand at minus 32.8% and minus 30.3%, respectively.
The Grayscale products aside, the crypto space has expanded over the past year to include Bitcoin ETFs. So, anyone looking to invest in Bitcoin could check to see if their broker offers them.
For instance, below are several Bitcoin ETFs that trade on exchanges such as the New York Stock Exchange ARCA and Nasdaq:
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ProShares Bitcoin Strategy ETF (BITO)
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Valkyrie Bitcoin Strategy ETF (BTF)
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VanEck Bitcoin Strategy ETF (XBTF)
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Global X Blockchain & Bitcoin Strategy ETF (BITS)
It’s important to note that these ETFs are not “pure” Bitcoin ETFs. In other words, they’re not physically backed by Bitcoin.
Instead, they invest in Bitcoin futures contracts and traditional securities.
Of course, given the current market realities, this isn’t the time to go all-in. Instead, my advice is to simply invest a fixed amount of money on a regular basis, typically monthly or bi-weekly.
That way, you may buy more when the price is low and less when prices are high. This is called dollar-cost averaging.
PayPal or Block’s (previously called Square) Cash App may be the most convenient options for doing this. With these popular apps, you can start your Bitcoin portfolio with as little as $1.
Another way is to purchase Bitcoin or Ether on a crypto exchange such as Coinbase and simply store it in a crypto wallet.
Again, I can’t provide personalized investing advice. But I hope the research I outlined above gives you some good pointers.
And finally for today, Bruce and Beverly have a question about the Federal Reserve’s plans for a digital currency and how that might work…
Nomi, I note with interest that you feel that the Federal Reserve will take over the domestic USA banks. When it does, it will establish a uniform digital currency system and put a stablecoin (Fedcoin = $1.00) into use; getting rid of paper currency and stopping the printing of money and the minting of coins. What is your estimated timeline for this event?
Does it seem possible that the Treasury Department might purchase the crypto coin exchange Coinbase, Inc. and use it as the agency to carry the plan forward?
We are interested in your insights on these two possibilities.
– Bruce and Beverly A.
Hi, Bruce and Beverly, thanks so much for your email. I think it’s terrific you are working as a team on these issues.
Let me just clarify that I don’t think the Federal Reserve will take over the domestic U.S. banks.
What I do believe is that a digital currency and digital currency system will allow the Fed to capture more financial services business away from U.S. banks.
People will prefer to do all their banking online and may not even open an account with these banks. Or they may move some of their money to new, Fed-serviced digital accounts.
The Fed would be best able to do this by issuing a uniform digital currency or some sort of Fed-coin, as you mention.
But I think we are several years off from this being established or having a significant impact on the consumer or corporate banking landscape.
Now, to the second part of your note… I don’t think the Fed or the Treasury Department would want to buy Coinbase, or any other external crypto-exchange or application.
That’s for their own security and control reasons.
Instead, it’s much more likely that either of those two bodies would build an exchange of its own.
That said, Coinbase just let go a whole bunch of people – so it’s quite possible that some of them may wind up in the Fed or in other government jobs that involve blockchain technology or digital currency development.
Their expertise could be used in any exchange the Fed or Treasury might decide to build.
And that’s it for this week’s mailbag. Thanks to everyone who wrote in.
And 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].
In the meantime, have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins