Why Bitcoin is Back in the News | First Friday

0:00First, I want to say a big hello and offer a warm welcome to everyone from Emma Chamberlain podcast, who is now part of the Afford Anything community. Welcome. I had an amazing conversation with Emma on her podcast. For those of you who haven't heard it, go listen to the Emma Chamberlain podcast. She is so inspiring and so much fun. And we had a brilliant discussion about money, about some of the internalized messages that we are led to believe, including money negativity. We're taught that money is the root of all evil. We're taught to be ashamed of having money. We're taught that rich people are greedy.

0:36We often internalize these messages and then we very subtly self-sabotage ourselves. Because in a society that gives us conflicting views about money, in a society that often reduces money to either something to be worshipped, i.e. the people on Instagram with the Lamborghinis and the flashy lifestyles, or something to be disparaged, i.e. the pendulum swing that states that not only does money, quote unquote, not matter, but that those who have it are greedy, like the cartoonish versions of Montgomery Burns and Scrooge McDuck that we see in the media, right? Ebenezer Scrooge. You know, we see money simultaneously glorified and vilified.

1:21Those are between the Lamborghinis and the Ebenezer Scrooge. Those are the two stories about money that we are told through most of the media that we consume. Money is either something to be idolized or something to be feared. It is rare that we ever encounter media that gives us a healthy relationship with money that says, we encourage you and empower you to be wealthy, not for the sake of flashing Lamborghini photos on Instagram, but rather for the sake of expressing your values, your best life, your priorities through this medium for the sake of living in the way that you want to live and having that lifestyle be enabled by the freedom, the choice that money allows you.

2:12It's very rare that we encounter media that leads us to a healthy relationship with money. And so if you just discovered Afford Anything recently, welcome. I'm so happy you're here. And if you've been a longtime listener, welcome back. This is the First Friday episode for March 2024. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice that you make carries a trade-off. And that doesn't just apply to your money. It applies to your time, to your focus, to your energy. to your attention to any limited resource that you need to manage.

2:50Saying yes to something implicitly means that you are saying no to other opportunities. So what matters most in your life and how do you make daily decisions that reflect that? Answering these two questions is what this podcast is all about. My name is Paula Pant. I am the host of the Afford Anything podcast. And today is the first Friday of the month. And you know what that means? the first Friday of every month, we do something different than our usual format. We cover the big economic news from the preceding month. What are the stories that you might have missed that affect your wallet? Well, right now, Bitcoin is back in the news because it is getting really darn close to its previous record high.

3:38So as of today, the first Friday of the month, as of this morning, the price of Bitcoin was around 62 ,000. That's pretty darn close to its previous record high of 68 ,700. Now, why is this happening? For the very simple reason that the next Bitcoin halving event is scheduled to take place in April. Now, a Bitcoin halving event, quite simply stated, means that the supply of new Bitcoin that will enter the market is going to get cut in half. And when that supply gets cut in half, basic supply and demand. If demand stays constant and supply decreases, that means the price grows. Now, I'm going to drop a link in the episode description below to an episode that we put out called Bitcoin for Beginners.

4:29If you really want a deep understanding of how Bitcoin works, listen to that episode. Again, I'm putting the link in the description below. The main takeaways in terms of what's happening right now are the following. Number one, when Sam Bankman-Fried's cryptocurrency exchange FTX collapsed, millions of investors collectively lost billions of dollars. In addition, government scrutiny of cryptocurrency increased substantially. And many people wondered if digital currency was going to be worth anything at all. We've established that if supply gets cut in half, but demand stays the same, then yeah, the price is going to go up.

5:11But if the demand drops, then it's still not going to be worth anything at all. Bitcoin is only going to be worth something if enough people want it. Now, when FTX collapsed and Sam Bankman-Fried went to jail, a lot of people wondered if there would be sustained demand. A couple of things have happened recently that have caused that demand to spike. In January, the Securities and Exchange Commission, the SEC, authorized nearly a dozen financial companies to offer exchange-traded funds or ETFs that track the price of Bitcoin. Now, an ETF is basically a low-fee, passively managed basket of assets that's traded on the open market.

6:00And so by virtue of establishing ETFs, ordinary investors, people like you and me, can buy shares of an ETF through a traditional brokerage and participate in some of Bitcoin's upside. And what that means is that we don't have to mess around with buying cryptocurrency directly and then storing that cryptocurrency on a digital wallet. Like that can get very technical. And that can come with a number of risks. So first of all, there's what's called custodial risk. That's just a fancy way of saying there's the risk that the custodian, meaning the institution that's holding these assets, might collapse.

6:40You remember about a year ago, Silicon Valley Bank collapsed. And that set off a chain reaction that showed weakness in Signature Bank and First Republic Bank, which then got taken over by JPMorgan Chase. Now, when that happened, people who had money in those banks were freaking out. And these are traditional banks in which the deposits up to$250 ,000 are insured by the federal government. It's called FDIC insurance. That doesn't exist in the world of crypto. And so part of the risk of buying a cryptocurrency directly is what's called custodial risk, meaning if you hold that cryptocurrency in some type of an institution, that institution might collapse and then you lose all your money.

7:28You lose your deposit. Alternatively, you can hold the money yourself in what's called cold storage, meaning it's off the internet, completely offline, and you can do that with a hardware wallet, but that is a physical item that you are in charge of not losing. And you hear these horror stories of people who have millions of dollars worth of Bitcoin on a piece of hardware that they accidentally threw in the trash or that they lost when they moved apartments. So there are lots of risks that come with buying any type of cryptocurrency directly. Because fundamentally, any blockchain-based asset is stored on server architecture.

8:14And that makes it very different from having dollars that are insured and backed by the full faith and credit of the federal government. I mean, US dollars can only be worthless if the federal government collapses. And if that happens, we all have much bigger problems. At any rate, after the SEC approvals, the price of Bitcoin instantly started climbing. And the fact that we are nearing April's halving event is only adding fuel to the fire. It is yet to be determined if this enthusiasm is going to last. Remember, when you're trying to decide where to put your money, your dollar can only go to one particular place.

8:54Every dollar that you're putting into Bitcoin is a dollar that you're not putting into a total stock market index fund. And if you get a total stock market index fund, you get a share of the entire economy. You get Apple, you get Alphabet, you get NVIDIA. You get all of these AI companies. So it's not my place to tell you how to invest. My job is simply to educate you on the pros and cons of different decisions and then leave the final decision up to you. But it's inevitable that over the coming weeks and months, you are likely to hear more friends and colleagues start talking about Bitcoin. You're likely to hear the proverbial water cooler conversation.

9:39And so I wanted to make sure that you understood why this is coming up in conversation now when we haven't – 2023, no one was talking about it, right? Why is it that we went from obsessing about it in 2020 to forgetting about it in 2022, 2023, other than following the FTX collapse, to suddenly now at the beginning of 2024, why is it that people are excited about it again, right? What is it that's changing the popular mood? I want to make sure that you have a good understanding of that because anytime that people start talking to you about a given investment opportunity, always ask yourself the question, why now?

10:24The question is not simply, is this particular investment good or bad in isolation? The question is, why are people talking about this now? And how come no one was talking about this two years ago or 10 years ago? when a bunch of Redditors on a subreddit called WallStreetBets, when they all started piling money into GameStop and AMC Theatres and Bed Bath & Beyond, the meme stock era during the pandemic, the question that not enough people were asking was, why now? The popular story that was being told in the media at the time was that the internet enabled this. You know, now that investors can talk to one another on platforms like Reddit, investors can band together and collectively decide that they're all going to pile into one stock like GameStop and pump that particular stock for a little while until it comes crashing back down, which it did very quickly.

11:24So the story that was being told in the popular press at the time was simply that, that this was enabled by social media. But the question that nobody was asking was, but wait a minute, why now? We had social media, well, we didn't have social media, but we had internet chat forums back in the 1990s. So how come this didn't happen on a Yahoo forum in the 1990s? How come this didn't happen in the early 2000s? Why didn't this happen in 2010? Why now? And when you really start digging into that answer, you discover, well, during the pandemic, sports betting disappeared. Think of how big of an industry sports betting is.

12:08Even if you're not into sports, you've heard of FanDuel. You've heard of DraftKings. They're huge. During the pandemic, especially during the early days, March, April, May, professional sports were not being played, which means there was no sports betting, which means that money, that attention, that energy had to go somewhere. And so the sudden halt of professional sports and with it sports betting at the start of the shutdowns in 2020 fueled the energy that went into Wall Street bets and the meme stock era. And when you understand that, then you can put the meme stock era into perspective and realize, man, this is really a pump and dump.

12:55This is a house of mirrors. And this is not something to get excited about. And it's certainly not something to put that$1 ,000 savings bond that you got from grandma into. But when we lack historical context, and when we fail to ask the question, why now? then we can often get sidetracked by the next hot thing. Do you remember back in 2016 when real estate crowdfunding was all the rage? For those of you who are paying attention back in that era, there was this brief period of time when these real estate crowdfunding websites were like super hot. They were the big fad. and all of a sudden everyone was like, oh, have you ever tried crowdfunding?

13:44What do you think of crowdfunding? And these crowdfunding sites were websites where you could go and, you know, for$500 or$1 ,000, you could have your little piece of an apartment complex that was being built in Tallahassee, Florida or a retail development in Boise, Idaho or Santa Fe, New Mexico. It was your way of, for a very small amount of money, getting a little piece of some big project and it felt really exciting. But why did it become super big in 2016 when nobody was talking about it in 2006 or in 2010? Well, it's because there were legal changes that stemmed from the 2012 Jobs Act and those legal changes opened up real estate crowdfunding.

14:33Prior to the JOBS Act, you had to be an accredited investor in order to get in on these projects. After this new law went into effect, ordinary individuals who are not accredited investors could start participating in these deals. That doesn't mean that these deals are necessarily any better than they were before. The fact that you now have access to these deals doesn't mean that they're a good idea. It just means that they're an option. But because they came on the market so suddenly or seemingly so suddenly, they became this hot new fad. And so the 20 teens was really the heyday for that kind of investing being trendy.

15:17And then it fell out of favor when people realized, eh, returns aren't really that great. At any rate, that's what I want you to think about the next time that you hear somebody, your neighbor, your brother, your sister, someone at the water cooler, start talking about crypto because I guarantee you someone in your life is going to bring up Bitcoin in the next couple of months.

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17:59There's a love story unfolding between Capital One and Discover. So Capital One announced that it is going to acquire Discover in an all-stock transaction that's valued at$35.3 billion. And that means that Capital One slash Discover could become a bigger competitor to Visa and MasterCard. Right now, Visa and MasterCard and to a lesser extent American Express are the behemoths of payment processing networks. Visa and MasterCard don't directly issue cards to the public. This is a major misconception. The credit card that you have is not issued to you through Visa or through MasterCard. The credit card that you have is issued to you through some type of a member financial institution.

18:54And then Visa and MasterCard work in the background as the payment processing network. By contrast, Discover and American Express issue cards directly to the public. To you. Now, because Visa and MasterCard are so widely accepted everywhere, whereas a lot of places don't accept Discover or Amex, Visa and MasterCard have long been criticized as having a duopoly on the credit card network market. Now that Capital One is taking over or plans to take over Discover, it's likely that Discover could finally have enough muscle behind it to take on Visa and MasterCard and to disrupt this duopoly. And that could have implications on what are known as swipe fees.

19:42We call them swipe fees, even though these days most people tap. But the swipe fees are the fees that get incurred every time you swipe or tap or insert your credit card, every time that you use your credit card. These fees get charged to the merchant, which, of course, the merchants typically are going to pass them on to you in the form of higher prices. This deal could be very good for you and me, but it's going to be a while before we see any impact. Remember, this is still a proposed plan. The merger has not happened yet. The news, however, has certainly shaken up the credit card space, and it's something that we're watching very closely.

20:20And I'm going to be particularly interested in what effect, if any, this is going to have on credit card rewards. Because if you want to, well, I'll just say, I myself on Tuesday, I am flying business class to Mongolia. That's entirely on points. So perhaps by the time you're listening to this, I'm going to be on a business class flight to Ulan Vitar, where I'll spend a few days before going on to Beijing and then Shanghai. And all of that is paid for with credit card points. We'll do later a longer episode that really deep dives into the world of credit card points. But one of the major things to watch in the coming months is the Capital One Discover merger and how that's going to impact each and every single one of us, both in terms of the swipe fees that we're paying, that we're invisibly paying without realizing it, through our merchants, as well as how that impacts the points that we receive, the cash back, the rewards, the airline miles, all of the things that we love about our favorite credit cards.

21:29Those are the major economic stories of the month that I wanted to draw attention to in today's first Friday update. If you haven't heard it yet, check out our interview with Pulitzer Prize winner Charles Duhigg. That interview just aired two days ago on this podcast. Charles Duhigg is an incredibly insightful writer. He did his undergrad at Yale. He has an MBA from Harvard. He won a Pulitzer for business reporting for a series of stories that he did on Apple. His previous two books, The Power of Habit and Smarter, Faster, Better, have been mega, mega bestsellers. I believe they've sold over 5 million copies.

22:07And now he has a new book, Super Communicators, and he joined us in an episode that just aired a couple of days ago to talk about how to really develop the skill of communication so that you can be better at negotiating with your boss, having better relationships with your clients, with your contractors, with your colleagues, with anyone that you want to talk to. Make sure that you listen to that episode if you haven't heard it yet. Make sure that you are subscribed to our newsletter. In fact, we even have a free ebook. I don't know if you've checked it out, but it's all about escaping the nine to five grind.

22:43You can download that at affordanything.com slash escape. That's affordanything.com slash escape. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. This is a very special first Friday bonus episode. So it's a little different than the format of our normal episodes. Typically, we alternate between interviews with interesting guests and Q &A episodes in which I answer questions that come from you. So normally on this podcast, most of the episodes you're going to hear are either interviews or Q &As, but once a month, the first Friday of the month, we break format and just have a little update about what's currently going on in financial news.

23:27Thanks for tuning into this first Friday bonus episode. By the time you hear this, I may or may not already be in Mongolia, but I'll be posting lots of photos on Insta. I'll be sending photos out to people who are subscribed to the newsletter. Come join me there. Again, affordanything.com slash escape. That will sign you up for the newsletter. That will get you our free ebook. All of the above, affordanything.com slash escape. Make sure you check it out. Thank you so much for being part of this community, and I'll catch you in the next episode.