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Summary:
Tesla Acquired 1.5 Billion Dollars’ Worth Of Bitcoin [0:01:11]
Inflation – What Is The Value Of Money? [0:05:01]
There’s A New Asset Class – Digital Assets [0:08:12]
Everybody Can Have Bitcoin [0:10:49]
The Reason Companies Are Buying Bitcoin [0:11:38]
Pump Up Your Portfolio – Diversify! [0:16:23]
Implication For The Average Young Physician [0:17:52]
Volatility Is Not A Negative Thing [0:19:40]
As Elon Musk Said, ‘In Retrospect, It’s Inevitable’ [0:22:55]
Welcome to the Financial MD Show. This is the only podcast designed specifically for residents and young physicians to help you become educated on financial planning for physicians and avoid many of the common financial mistakes doctors make. Your hosts, Jon and Trevor, explore a different topic with each episode. Jon Solitro is a financial planner and certified financial education instructor. He’s been working with young physicians for the better part of the decade and lectures to graduate medical programs around the country. Dr. Trevor Smith is a board-certified ophthalmologist with a full-time practice and he has learned the ins and outs first-hand what it takes to make smart financial decisions as a young physician. And now here’s your hosts, Jon and Trevor.
Jon: All right, so you want to get rolling on crypto?
Trevor: Let’s do it, yeah, and mostly just Bitcoin. I mean, I’m pretty…call me a Bitcoin maximalist is what they call it.
Jon: You bleed Bitcoin?
Trevor: I bleed Bitcoin. I mostly just don’t want other people to lose money in other more insanely speculative bets. It makes me nervous.
Jon: Okay. Ethereum pretty solid?
Trevor: Ethereum pretty solid – great question. That’s probably the biggest debate. Yeah, so Bitcoin is like mainstream. All of them put together, something like, you know, 1.1 trillion market cap that fluctuates a good 10 percent day-to-day, week-to-week, even more sometimes. So the whole market cap of like cryptocurrency and everything was like about 1.1 trillion, right. I think it’s a million for a second there. Yeah, so it’s definitely trillion and Bitcoin’s in the 800 billion range right now and that’s been kind of working its way up, and then Ethereum’s market cap actually should but I don’t know off the top of my head. It’s the second largest but it’s not an insane amount. I want to say – we could google it – but it’s probably between let’s say it’s 100 and 200 which I don’t think it’s that high. If it’s 100 billion then it’s still, you know, significantly smaller than Bitcoin, but it’s a significant part of the cryptocurrency kind of landscape because a lot of the other coins are either like sort of created on what’s considered the Ethereum network.
Tesla Acquired 1.5 Billion Dollars’ Worth Of Bitcoin [0:01:11]
Yeah, so those are the kind of the top two coins but like the main reason I wanted to talk about cryptocurrency and Bitcoin is because of the big news that Tesla acquired 1.5 billion dollars in Bitcoin a month ago.
Jon: Yeah, so let’s talk about that. Why do you think they got that?
Trevor: Yeah, so they called it in their filing with the SEC an alternative store of value asset. So it’s a store of value much like gold where it protects against inflation. When they say store of value, they kind of – it’s kind of like a fancy way of saying like hedge against inflation, meaning that there’s a lot of inflation and dollars losing their buying power, you know. Dollar is going to be a dollar, but a dollar versus, you know, what? A loaf of bread. A dollar versus a euro, a dollar versus a peso. You know, if it loses the ability to buy things then that’s important.
Jon: Sure. Value…
Trevor: So that’s the basis. Yeah, value, and it’s most important, you know, you can talk about like a banana at a store, okay, sure, like those prices do fluctuate and that’s kind of more on the order of the mainstream impression of what inflation is and that’s called CPI and CPI has been stable for a while and they’ll say, you know, CPI is between 1 and 2 percent and that’s stable and we like a little bit of inflation and this is all based on like a certain type of economics. When they are saying this is normal, this is good, this is fine, you know, it’s kind of like typically sort of government or the Federal Reserve. It’s the people who kind of pull these big levers. The best kind of background big picture perspective video or information that’ll just give you kind of, oh, these are the nuts and bolts of what the background of the major economy – Ray Dalio, who’s a famous investor. He runs Bridgewater Capital in New York and it’s like one of the biggest hedge funds in the world and he’s a really level-headed kind of like how do we create the perfect portfolio, weather-the-storm guy – that’s been his thing. The all-weather portfolio is sort of I think his phrase that he came up with. Yeah, so he’s been trying to figure out that sort of approach of how do you hedge against huge downturns and he put together a lot of good educational material and he put a good video together about like the levers that you can kind of pull on the economy. So like when the 2008 crisis hit, like how do you protect against that? Why did the government print a bunch of money and you know some people are opposed to it? Why are they opposed to it? Why is it may be good? What are the downsides? So it’s kind of an objective like these are the levers. His approach to almost everything is like if it was a machine, what are the parts of the machine that you can change out in order the gears that are turning and can we change the sizes of them. Like he approaches everything in his life as if it’s a machine and he wrote a great book called Principles about how he runs his company kind of like a machine the best he possibly can. He breaks everything down as small as he can. So anyways, if you’re looking for a background on this and it all sounds like, you know, a different language, you can go to YouTube and look for – I don’t remember the name of it but you’ll find it Ray Dalio, the economy, and that would probably do it for you and you get a once-over.
Inflation – What Is The Value Of Money? [0:05:01]
Anyways, that will give you some idea of inflation and that kind of stuff and what the value of a dollar is, what the value of money is, and currency and assets. Assets are things that you can buy that are worth something, worth paying money for, so gold’s an asset. Equity is a big category. It includes stocks and bonds.
Jon: Sure. Let’s think on the consumer’s side.
Trevor: Things you can trade.
Jon: Equity, you know. A house might be an asset for a person.
Trevor: That’s right. A car, cash.
Jon: And it can actually potentially be sold again or used as value.
Trevor: That’s right. All sorts of different types of things that can be assets. When you buy assets, right, like the goal in life like if you see yourself as a business or if you own a business, your goal is to increase your sales and earn more money. So for an individual, it’s sort of like you want to increase your salary, but then when you make the money, you want to put it into things that don’t lose value over time, right. So this is just really big picture stuff. If I make a hundred thousand dollars and I have to budget, spend something on my house payment, on a car or in bills and food…okay, let’s say I have 50,000 left over and now I got to save that and then I want it to be worth something later for, let’s say, I want to save for retirement and that’s what most of us do. We earn a living and we save for later when we won’t be working, okay, that’s for retirement. So you want to put that in something that will grow ideally or the very, very least something that doesn’t lose value so this is the reason that people learn about retirement investing because if it doesn’t grow as fast as inflation is growing, your losing value, right.
Jon: Yes.
Trevor: And then if even worse, if it’s devaluing period relative to everything else then it’s almost like you earned less. You’re losing the energy that you worked for. You worked, let’s say, one month of energy and you got 10,000 dollars in that month and then you save 5,000, if that 5,000 dollar loses that work energy that you stored in U.S. dollars or some sort of currency by inflation going up rapidly then if inflation goes up 50 percent then now you work for 5,000 dollars but you can only buy 2500 dollars’ worth of stuff. So that’s like the critical background like Bitcoin doesn’t matter. It will never make sense to anybody if they don’t kind of just appreciate that big picture.
So the reason companies are buying Bitcoin is they see their dollars buying value rapidly dissolving before their eyes and any company who has been particularly responsible companies who have been cash flow positive meaning they’re making money. They’re not borrowing against future earnings to pay dividends or buying back more of their stock to pump up the price. They’re responsible and they’re doing fantastic. So now they’re making money. They’re just like you listening at home. You are earning an income and you’re actually taking money home. You’re not just spending at all, okay. You’re saving a little bit extra. So these responsible individuals and companies are like okay, what do I put this into? So traditionally, it’s been stocks and bonds.
There’s A New Asset Class – Digital Assets [0:08:12]
Well, now, there’s a new asset class which is digital assets and the king, so far, the winner of the digital asset competition – just like you would say Netflix, Amazon, Facebook, Tesla, and Berkshire Hathaway have been the winners of the stock kind of world – the winner of the cryptocurrency world is Bitcoin. No question. It’s the biggest market cap and it’s got the best network. It’s got the most people working on it, most security, it’s active, and then the way it works – that’s a whole another topic in podcast – but it’s decentralized. So a lot of people’s computing power and energy is maintaining the network. So it’s established is what you might say. So there’s this new asset and the entire purpose of this asset it was created in like the mid to late 2000s and then like kind of pushed out into the world by an anonymous group or individuals, Satoshi Nakamoto – doesn’t really matter – somebody anonymous made it and then it grew naturally over 10 years and the goal was sort of out of the financial crisis to create something that has a hard cap, meaning, a limited supply rather than like the U.S. dollars where you can just print more and more and more. It’s a limited supply. So when you own this, you know how much of this type of asset you’re going to own in the future, so it’s very similar with real estate. It’d be like saying there’s only one neighborhood in the whole world and it’s got 21 million houses so if you buy one of those houses, no one’s making more houses. It’s impossible to make more houses. So think about how valuable it would be to have one of those houses, and then if you said that you could send the value of that house electronically across the world and it was immediately transmissible and that it was a network that like banks could use to transmit, you know, the “value” of a house – obviously we’re getting too currency or dollar equivalent and then it’s, you know, Bitcoin. So it’s transmissible value electronically but it’s also final settlement just as if I was to hand you in person a 5-dollar cash, that’s final settlement. It’s the same thing but electronically, and that’s never existed before. So there’s a long list of features that makes it a unique asset but the thing that I want to highlight is that it can’t be the – people call it scarcity – but it’s a limited, it’s a hard cap of how many Bitcoin will ever exist and that’s based on a code from when it was first made in 2009 and that can’t be changed.
Jon: Can everybody have some Bitcoin eventually?
Everybody Can Have Bitcoin [0:10:49]
Trevor: Yeah, everybody can have Bitcoin. So even there’s 21 million, it’s divisible down into a hundred million – each Bitcoin is divisible into hundred million – so that’s a ton of decimal places and you go down a ton of decimal places. I want to say it’s like 9 or 10, you know, 0.0 nine times and then a one.
Jon: Sure.
Trevor: Is that right? One, two, three, four, five, six, seven, eight – I think it’s actually eight. Yeah, eight.
Jon: Yeah, eight.
Trevor: Yes, it doesn’t matter. It’s a lot. So they can always extend that. They can further devise it without increasing the number of Bitcoin available. It can become increasingly divisible if the U.S. dollar equivalent becomes too high like if it was a hundred…if it’s a hundred million dollars in coin then, yeah, it’s going to be hard to start dividing down to smaller denominations. This is probably pretty far out so I don’t think that’s a problem for today. That’d be a great problem for a lot of people to have I think.
The Reason Companies Are Buying Bitcoin [0:11:38]
So the reason companies are buying it is because the dollars that they have in their account – MicroStrategy is the famous company that last August bought 450 million on their first buy of Bitcoin – and they saw that they were losing 25 percent of their buying power annually for the past 10 years. So in 2010 to buy a bond that would yield 50,000 dollars annually was 1 million dollars in 2010 and then by 2020, it was 10 million dollars which over that period of time and that’s their asset, right. So you’re buying power, my dollars, are worth substantially less to buy that bond. That’s compared to the bond. So may be bananas were similar but the thing that makes me money is way more expensive. Now I can’t afford it.
Jon: Yup. It takes more to get the same income for the same.
Trevor: It takes more to have an asset that, yeah, kicks out an income that I could live off of. So you could do the same thing with a lot of other assets and if you just look along those same 10 years, Bitcoin outperformed a lot of those. So companies are just on a basic level going this asset outperformed it, has a lot of unique characteristics, basically just my dollar suck compared to Bitcoin. I mean it’s not too much more complicated than that so they’re taking poor performing assets like bonds or dollars. Cash is an easy one because that just melting away the value of – the bind power of cash just melts like that right now. That’s average over 10 years at the 23 percent inflation rate for dollars buying bonds and getting a yield off of them. Corporate, you know, CEOs, it’s their job to make decisions about like how do I not lose the company money so right now not buying Bitcoin loses the company money and so it’s just becoming what they’re all calling a consensus trade, meaning, everyone’s kind of starting to agree and it sounds like a lot of big-name companies are having these backroom discussions, okay, how do we buy it. So because it’s nontraditional asset, they kind of have to get the permission of the board. They have to figure out how much if we buy too much, do we have to declare it on quarterly reports. They have to have public announcements. Are we going to look bad? How our stockholders going to feel about that? How do the board members – since a lot of people’s feelings that are delaying what is essentially an obvious outperforming asset – and then the question is like what are the risks involved, right, so it’s not all upside from here. There’s risks for stocks, there’s risks for bonds, there’s risks all across the board and the financial community, this is how they make their money. They assess risk. Insurance community – same thing. They assess individual’s risk like we talk about disability insurance. They can’t take on too many people that are getting sick or else they’ll lose money. It’s kind of basic, right, so you can’t take on too many assets. You can’t own too many risky things like you can have a handful of Pokémon trading cards, you know, as an individual but you’re not going to put 50 percent of your portfolio into Pokémon trading cards. You might feel like one percent and it might like go crazy if that’s your market. You know a lot about it. It might go 10x.
Jon: Yeah.
Trevor: You take your one percent and then you just increased your whole portfolio, it’s 10x. You increased your whole portfolio, your net worth by 10 percent, you know. But you have to know that asset if you’re going to do that so what the delays are how do we do it mechanically, legally, corporate structure, custodian, who holds it, who owns it, who secures it, what are the insurances and now they have to insure this asset in a different manner because it can be taken or lost in a different way.
Jon: Sure.
Trevor: So last week, MicroStrategy held a Bitcoin Summit and I attended that and they went through and basically shared their playbook, open source, all of their legal approaches. They didn’t say like this is our company and this is where we hide our Bitcoin, this is where we secure it, but they said like these are your options. This is how we decided which company to go through it and here’s like, you know, how you could do it, and they just give it away for free because they view it as a net good and because they have a lot of Bitcoin. Those are legitimate, you know, really good reasons. People are trying to figure it out and they know that it’s super valuable. They know that it has volatility in the short term. This is the big knock, if you’re watching CNBC today, every other show it sounded like was and I only saw a couple of clips on Twitter, but it was basically just like, what are they thinking and wow, don’t they know it’s volatile, and it’s like yeah, don’t you know that everything is volatile but if you kind of combine it all correctly that it’s not volatile and that’s what diversification with stocks and bonds has been since forever.
Pump Up Your Portfolio – Diversify! [0:16:23]
Bonds are volatile. Stocks are volatile. Buying a boat – the value of that is volatile. But there’s goals and then there’s risk appetite and then there’s diversification and if you combine all of those and you pick a few outperforming assets, it can really pump up your portfolio. So yeah, that’s kind of the main gist of what’s been going on. This is why it’s catching on.
Jon: Yeah. Does that give it some validity that, you know, a company like Tesla has decided a billion and a half made sense?
Trevor: To me it does, you know. Certainly, that’s open for – that’s a subjective thing but I don’t see how it couldn’t.
Jon: Yeah.
Trevor: How it could not add legitimacy. Some people are like, oh, here’s Elon pumping his stock again. You know, people already think Tesla is overblown. It’s an RO company that doesn’t even sell that many cars and you know, some companies still have auto analysts figuring out Tesla’s valuation thing. It’s overblown. Of course, an auto analyst is not going to see the growth of energy and solar and it’s crazy. Yeah, so anyway, people will try to poke holes in stuff that doesn’t agree with their investment pieces just like I would about my investment pieces I would, you know, defend against it. So we all have our biases but there are so many valuable aspects to this digital asset that it will break down almost anybody’s biases gradually over time.
Implication For The Average Young Physician [0:17:52]
Jon: Yeah. I guess we were to take this full circle, what does this mean for the average young physician, do you think? Does it have any implication?
Trevor: Yeah, it totally does. The two areas that I’m focusing on personally – one is financial independence. You can certainly achieve financial independence earlier if you have an outperforming asset. There’s so many different ways to do that. Get advice from your financial advisor, you know. Make your own decisions is probably the best advice. Think for yourself and apply it really, really solid, critical thinking about like what is it, what are the risks, you know, read a ton about it. I always tell people only buy to the level of what your conviction is in any asset because that’s not financial advice, that’s just good, you know, advice. It’s like don’t buy a car if you’ve never read about the car, you know.
Jon: Sure.
Trevor: It’s on the same level.
Jon: Look at consumer reports.
Trevor: Yeah. Do your research. Compare. Find out what are the factors about a car that make it valuable, that make it last, and then decide for yourself what do you want in a car like you do want leather seats? Do you live in Michigan? Do you want it to remote start and be heated?
Jon: Four-wheel drive and, yeah.
Trevor: Yeah, it sounds silly, but it is like people can do awesome approaching their finances in a ton of different ways but Bitcoin is sort of just like this brand new tool with totally different features. It’s not a Swiss Army knife – it’s pretty close. It does a lot of things well, but it has a lot of short-term volatility but long-term, it has trended up aggressively throughout its entire existence. You have to just kind of figure out who you are and what that means and if you want to put a hundred percent of your portfolio in something that can drop in half in a week and nobody would be surprised and then it will bounce back and keep going.
Volatility Is Not A Negative Thing [0:19:40]
I was talking with a friend of mine today about volatility and volatility – it’s not a negative thing, right. If I told you – and this is accurate history for Bitcoin – that it was going to double every six months but it would be very, very volatile throughout that process, it’s going to double every six months for the next 12 years and it’s going to go up and down up to 30 percent, maybe even from a high to a low of 85 percent loss, but it’s going to double on average over six months for 10 years. Would you want to buy that?
Jon: Yeah, if I knew what the future was going to be, sure.
Trevor: If you knew that you could buy it and hold it for 10 years?
Jon: Yup, long-term.
Trevor: It would be an obvious yes, right? But if you knew that you bought stuff before that have gone down and you panic sold it because you were afraid it would go down further and you think you’re going to do that again because you know from experience you have that you might know yourself well enough to know that you don’t want to buy that, right?
Jon: Yeah.
Trevor: So it’s not really an easy answer but controlling…
Jon: Everybody wants the upside but doesn’t want to deal with the volatility in between.
Trevor: Right. I mean, me too, right. It’s scary, but volatility has been like tampered. The whole idea of diversification isn’t necessarily to maximize returns in the idea of like buying the lowest and selling the highest. The idea with tampering volatility – and correct me if I’m wrong – but my take is that tampering volatility prevents us from our worst tendencies of selling scared at the bottom and buying at the top because we’re exuberant and we think we’re going to catch the next hottest thing going to the moon, right. So volatility isn’t bad but if we reduce it for the average and probably for 95 percent of people, it helps them to not sell. It helps them to not run away from the market when it gets kind of scary. And you have to say, too, it helps clients stay with financial advisors so they don’t get freaked out and leave when stuff takes off. One of the big reasons for diversification is the financial advising industry as a positive thing has found that people will not do as well over the time if they have to see their portfolio rocket up and down.
Jon: Yeah.
Trevor: But that doesn’t mean it wouldn’t have been good for it to rocket up and down over time.
Jon: No, that’s what I tell some of the younger physicians like you stick it all in stocks a hundred percent and just know it’s going to go up and down but long-term, you’re going to be better off.
Trevor: Yeah. So it’s the same discussion, you know. If we didn’t say the asset, we could have totally been talking about stocks, you know, for a lot of that. And it’s a new asset with new features and it’s now been well-established to the point where publicly traded companies have their board as a group and individually buying and approving holding a Bitcoin to prevent loss of buying value. That is what has been going on to the point where, you know, one of the most valuable companies in the world and the most valuable automaker bought a billion and a half a month ago.
Jon: Yup.
As Elon Musk Said, ‘In Retrospect, It’s Inevitable’ [0:22:55]
Trevor: I mean that’s huge. It’s crazy. It’s crazy and it’s also like I think as Elon said, in retrospect it was inevitable, and that’s how he described. He didn’t say they were Bitcoin but I mean he’s talking about Bitcoin and it is one of those things. It’s going to especially five years down the line, it will seem like so insanely obvious. So insanely obvious. To me, and that’s my take based on the features of the product, you know. It’s like the iPhone came out and as soon as you saw it, you’re like that’s going to be the phone everybody wants, that’s going to be the phone everybody copies, and everyone’s going to have one, and they’re not going to care how much they have to pay for it. They’re going to pay as much as they have to. And I have that same level of conviction and I would say understanding of the value of the product and just like the iPhone dematerializing – that phrase I’m stealing from Michael Saylor – dematerialize books, dematerialize CDs, right. They’re not physical things anymore and there’s potential for Bitcoin if you really want to go kind of like whoa, this could be big. It could dematerialize things. It could dematerialize the transfer of money intermediaries. I don’t think it’s going to blow up the U.S. dollar. I’m not extreme in that sense. I don’t think it matters if it does. I don’t care about that. I just care about owning an asset that other people can’t control and can’t reduce the value of it. Anyways, that’s my big overview on Bitcoin and it just seem like a good day to chat about it.
Jon: No, definitely. I think that’s helpful and I think we’ll do some more on it.
Trevor: Sure.
Jon: I’m going to put a link in the show notes about a video someone recommended to me today that’s on Amazon that you can watch. I think it’s on Amazon Prime called Bitcoin – I don’t remember what the subtitle is – but we’ll find it. We’ll put it a link in there and that’s a good way to get a quick primer on what it is and how it was created and what it means. But yeah, that was good, Trevor. Thanks for sharing a perspective and the implication of that and just another – I think you and I both agree – it’s another positive sign that Bitcoin is not going away and is a mainstream thing even though most consumers probably don’t realize it yet but like you said five years it will be a completely different story.
Trevor: Yup, absolutely. Yeah, if anybody has any questions, I mean, I’ll put my personal email out there again. I do that occasionally – trevorsmithmd@gmail.com – not a financial advisor; can’t give any advice but happy to answer questions.
Jon: Oh, he loves talking about it.
Trevor: I love talking about it. I’ll totally connect with you – and tsmith@financialmd.com. Either of those emails are fine. I check both of those.
Jon: And Trevor’s on the Facebook group too so if you’re on the Financial MD Facebook, you know, and you want to talk about it in a group setting like that’s a good place to chat about it.
Trevor: Yup. Awesome. Hey, thanks Jon. It’s great chatting with you. I did most of the talking but it’s great chatting with you. It’s all right.
Jon: Yeah. I’ll let you go. Enjoy the weather down there and we’ll see you soon.
Trevor: Sounds good. Awesome. Thanks, man. See you later.
Thanks for joining us for another Financial MD Show. Be sure to head over to financialmd.com to get more in-depth resources on financial tips for physicians and don’t forget to join the Financial MD community group on Facebook, where physicians at all stages of their career gather to share tips and get ideas on achieving true financial success. We’ll see you next time.
The Financial MD Show is for informational purposes only and is not an offer to invest. It is not financial, tax, or legal advice. Be sure to seek financial, legal, or tax professionals when making any financial decisions. Before investing, you should make sure that any investment strategy or investment meets your individual investment needs, goals, and objectives. Financial MD makes no claims or guarantees to individual investment performance. All investing involves the risk of loss as well as the potential for gain.
Resources and Links:
What is Bitcoin? – https://bitcoin.org/en/
What is Ethereum? – https://ethereum.org/en/
Store of value definition – https://www.investopedia.com/terms/s/storeofvalue.asp
What is Consumer Price Index (CPI)? – https://www.bls.gov/cpi/
Ray Dalio, Investor – https://www.bridgewater.com/people/ray-dalio
How the economic machine works by Ray Dalio –
Cash flow positive meaning – https://blog.revolut.com/a/positive-cash-flow/
MicroStrategy – https://www.microstrategy.com/en
How Bitcoin dematerializes things –
Financial MD Website – https://www.financialmd.co/
Financial MD YouTube page – https://www.youtube.com/channel/UC6qEAQxK8L8JM7joy3wvdkA
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