“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
We’re kicking off this week’s mailbag edition of The Daily Cut with a philosophical quote attributed to Mark Twain. It’s a reminder that false beliefs can be more dangerous than not knowing.
One of the false beliefs most mainstream investors hold right now is it’s impossible to earn any income on your savings.
It’s easy to see where this idea comes from…
The Fed has dropped interest rates to the floor.
And this has taken the hatchet to the yields on a range of traditional income investments…
The average income banks in the U.S. pay on a one-year CD is 0.2%.
The yield on the 10-year U.S. Treasury note is about 1.5%.
And the average dividend yield on the 500 blue-chip stocks listed on the S&P 500 is also about 1.5%.
It looks pretty bleak for income investors. And you won’t find many in the mainstream press who’ll say any different.
But the idea that it’s impossible to find fat streams of income on your savings right now is false.
Sure, these meager interest rates are all that’s available on these traditional financial assets.
But if you open your mind… and look at what’s happening in crypto… you’ll find easy-to-access income at rates at least four times higher than you’ll find on the 10-year T-note.
At crypto lender BlockFi, you can lend out your bitcoin and earn an annual yield of 6%.
You just send your bitcoin to BlockFi. It lends the bitcoin out… and pays you a yield in return.
Other cryptocurrencies pay out even higher interest rates.
Take Paxos Standard (PAX). It’s a cryptocurrency whose value is pegged to the value of the U.S. dollar. BlockFi will pay you an annual income of 8.6% on your PAX tokens.
It’s part of a brand-new financial system outside of Wall Street known as DeFi, or decentralized finance. It’s a trend within crypto colleague Teeka Tiwari and his chief crypto analyst, Greg Wilson, have been covering at our Palm Beach Crypto Income advisory.
And one of the big questions on readers’ minds right now is, “What the heck is DeFi?”
Here’s how Greg explains it…
DeFi is a broad category of financial applications – including lending and insurance – developed on open, decentralized networks. These are known as “blockchains.”
The goal is to build a financial system native to cryptocurrencies that recreates and improves on legacy financial systems.
Apart from the fat income streams on offer, there are three key features that make DeFi much better than their traditional finance alternatives.
First, DeFi provides financial services to anyone with an internet connection, boosting financial inclusion. Wealth, status, and location don’t determine access.
Second, records are kept simultaneously across thousands of computers, instead of on a central server. That makes them incredibly secure and resistant to hacking.
Third, and most important, no central authority needs to ensure a valid transaction. In a DeFi system, you control your assets. A brokerage such as Robinhood or Schwab can’t stop you from trading your shares to anyone else.
For most of us, DeFi is completely new. And as Teeka and Greg have been showing their readers, it’s different from what we’re used to.
But it’s the future. So it’s something I encourage you to learn more about.
It’s also a huge profit opportunity few investors know about right now… which is exactly the kind of opportunity we like to write to you about at the Cut.
Consider the gains Teeka and Greg have given our Palm Beach Crypto Income folks a shot at.
The average annual income stream of the crypto recommendations in the model portfolio is 9.7%.
And the average gain, in addition to that income, is 535%.
That’s one of the most insane track records anyone has ever racked up in our industry.
On Wednesday, Teeka hosted an online summit all about this opportunity.
He revealed to more than 36,000 of your fellow readers how the life-changing profits ahead will be beyond anything you’ve seen before. He also showed how they can start sharing in the profits right away.
Don’t worry if you missed Teeka’s event. For a limited time, you can watch a free replay right here.
And keep an eye out in these pages for more on how to use crypto to reclaim some of the lost income in your portfolio.
This brings us to another great question about bitcoin… and its energy use.
As I’ve been showing you in these pages, bitcoin and other crypto networks use vast amounts of electricity.
That’s because bitcoin mining is a power-hungry business. You need high-speed computers to solve the cryptographical puzzles – aka proof-of-work algorithms – that help keep the bitcoin network secure.
A recent study at Cambridge University in Britain showed bitcoin uses about 121 terawatt-hours a year. That’s roughly the same amount of power that Argentina – a country of nearly 45 million people – uses every year.
Although research by CoinShares has shown that about three-quarters of the power the bitcoin network consumes is from renewable sources… that’s still a lot of power.
And one of Teeka’s readers wonders whether we’ll have enough electricity to support the mass adoption of blockchain tech…
Reader question: It’s my understanding blockchain mining takes substantial electrical power to operate the large banks of computers. Will adequate electrical power become an issue as blockchain processes become mainstream?
– Robert M.
Teeka’s response: Thank you for writing in, Robert.
I’ve been hearing this question for many years. A lot of people are worried the computers powering blockchains will use so much energy, the network will be unsustainable.
First, if you look at the energy use required to sustain the traditional banking system – from the buildings, to the computers, to the people, to the infrastructure – it’s vast.
According to Ledger, the banking system’s energy consumption is estimated to be almost double that of bitcoin’s.
Also, we’re seeing a major shift with the adoption of proof-of-stake (PoS) consensus algorithms. PoS is more energy-efficient, operating at a fraction of the energy proof-of-work (PoW) uses.
PoS achieves its network security by randomly selecting a block validator who has a stake in the network, unlike PoW, which often relies on warehouses full of computers working around the clock to mine a block.
But it’s also important to note PoW algorithms adjust to make mining easier if the mining equipment can’t keep up. This keeps that energy use sustainable as well.
So while blockchain mining requires a substantial amount of energy, there are already alternatives and solutions dealing with this problem.
We’ll wrap up with a question on bitcoin for Legacy’s maverick gold investor, Tom Dyson.
Regular readers already know how we like to bang the drum for both gold and bitcoin here at the Cut.
We see them as safe havens for your wealth. As fiat currencies around the world lose value, gold and bitcoin are “hard assets” (assets that are hard to produce more of) that will preserve your buying power.
But at Legacy Research, we don’t do groupthink. And not all our analysts are bullish on bitcoin.
Last year, Tom wrote in his Postcards From the Fringe e-letter that bitcoin was just a “clump of electrons” that would prove to be worthless.
With bitcoin up 862% since its low last March, one of Tom’s readers wrote to ask if he had changed his mind…
Reader question: Thank you for writing your Postcards, which I always enjoy reading. I’ve read every one since the summer of 2019. But I sometimes wonder if you’re too attached to your basic idea that gold is the best place to park your money, followed by silver and tanker stocks.
Over the last five years, bitcoin has gone up 126 times. Gold is up only 53% over the same time.
Have you ever considered the possibility you might be wrong? I hope the above doesn’t offend you.
Tom’s response: Your question doesn’t offend me at all. It’s a good one. I suspect many others are having the same thoughts.
You say gold has risen “only 53%” over the past five years. But I see that as an excellent return.
Gold is an inert yellow metal. It doesn’t pay a yield. It just sits in a vault gathering dust. It’s doing exactly what it’s supposed to be doing… storing wealth and preserving purchasing power.
Next, you suggest I’m making a mistake by allocating my capital to gold, and silver.
But that assumes the euphoric sentiment will continue in the markets. It might. It might not. Either way, I’m not gambling on it.
I have a 10-year time horizon. I’ve created a safe portfolio around gold that’s designed to preserve my buying power and compound as the U.S. goes deeper into stagflation [a cycle of low growth coupled with high consumer price inflation] and the government quietly defaults on its debt.
The time for having courage with your investments was in March and April 2020. If you made some big profits from cryptos and stocks, I commend you. But now is the time for caution and prudence, in my opinion.
That’s all for this week’s mailbag.
If you have a question for anyone on the Legacy team, be sure to send it to [email protected].
Have a great weekend.
February 26, 2021