The document that started it all, published on Halloween 2008 by the pseudonymous Satoshi Nakamoto, was titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This nine-page paper, first shared on a cryptography mailing list, laid out the blueprint for a new kind of electronic money that didn't need banks. That "Peer-to-Peer" part wasn't just fluff; it's key to understanding Bitcoin. It means the system is built for direct dealings, cutting out the usual go-betweens.

Several of Bitcoin's built-in features make it less ideal as a direct, do-everything replacement for the U.S. dollar in everyday shopping:

• Volatility: Bitcoin's price, when measured against fiat currencies like the dollar, has historically been very up-and-down. This price instability makes it tough for businesses to price things in Bitcoin and for people to use it for daily purchases where price certainty is key.
• Transaction Throughput (Base Layer): Bitcoin's main blockchain layer isn't designed to handle the massive number of transactions that global retail payment systems process.
• User Experience for Microtransactions: For small, everyday payments, Bitcoin's transaction fees (which can change with network traffic) and confirmation times (needed for security) can feel too high or inconvenient compared to near-instant, often seemingly fee-less (to the consumer) card payments.
  

This comparison shows that Bitcoin's base layer is built differently from systems designed for high-volume retail, aligning more with the needs of a secure system for transferring and settling significant value.

What's a settlement network? It's a system that handles the final transfer of assets or money between parties, settling their debts to each other. In these networks, especially those dealing with large amounts, things like security, finality (knowing a done deal can't be undone), and resistance to outside meddling or censorship are super important. Think of central bank systems like Fedwire for big interbank dollar transfers, or how gold was historically used to settle international trade. These systems care more about certainty and irreversibility than the raw speed needed for buying a latte.

Bitcoin has several features that make its base layer great for being a robust settlement network:

• Censorship Resistance: Because it's decentralized and no single entity controls it, Bitcoin transactions are very hard to block, freeze, or reverse by any one party, including governments or banks. This is huge for people in unstable political situations or for any transaction where you want to avoid potential meddling.
• Transaction Finality: Once a Bitcoin transaction is in a block and confirmed by enough subsequent blocks (usually 4-6 confirmations, taking about 40-60 minutes ), it's practically irreversible. This high degree of finality gives certainty to those receiving large transfers, which is vital for effective settlement.
• Great for Large Sums: A cool thing about Bitcoin transactions is that the network fee is usually based on the transaction's data size and network congestion, not the amount of money being sent. This means sending a very large sum of Bitcoin can be surprisingly cheap compared to traditional banking, which often charges percentage-based fees for big, especially international, transfers. Data shows Bitcoin is indeed used for high-value transfers, with an average transaction value much higher than retail payment networks.
• Permissionless Access: Anyone with an internet connection can join and use the Bitcoin network to send and receive value without needing anyone's approval. This is different from many traditional large-value settlement systems that are only for member institutions.
• Global and Borderless Operation: Bitcoin works 24/7, all over the world, without being tied to national borders or banking holidays. This makes it a flexible platform for international value settlement.

• Confirmation Times: An average block time of 10 minutes, and needing multiple confirmations for strong finality (like ~40 minutes for 10 confirmations), might seem slow for buying coffee. But these times are perfectly fine, even good, for ensuring the security and irreversibility of high-value settlements. Certainty often beats speed in these cases.
• Transaction Fees: Bitcoin transaction fees are paid to miners to encourage them to include transactions in a block. When the network is busy, fees can go up. However, for large settlements, a transaction fee that's a tiny fraction of the total value being moved is often a fair price for the security, finality, and disintermediation Bitcoin offers. Users can also choose to pay higher fees for faster inclusion in a block and confirmation if they're in a hurry.

• Sending Money Home (Remittances): Sending money internationally, especially small amounts to family, can come with hefty fees through traditional banks or money transfer services. Average fees can be 5% to 10% or even more, significantly reducing the value of the money sent. Banks are often the priciest, with average fees around 11.8% in late 2022. These high costs hit low-income migrants and their families hardest.

• Middleman Costs and Delays: As the Bitcoin whitepaper noted , the layers of middlemen in traditional electronic payment systems add to overall transaction costs and can cause settlement delays.

Bitcoin's core features offer potential solutions or alternatives:

• Fixed Supply: The capped supply directly counters the continuous money printing that can lead to inflation in fiat currencies.
• Decentralization & Censorship Resistance: The distributed nature of the Bitcoin network makes it extremely difficult for any single party to unilaterally block transactions or seize funds, as long as users securely manage their own private keys. This offers a defense against financial censorship.
• Peer-to-Peer Network: By enabling direct value transfer between users globally, Bitcoin can reduce reliance on multiple intermediaries, especially for cross-border transfers. This could potentially lower costs and speed up final settlement for value that doesn't need immediate conversion into local fiat.

These benefits aren't equally compelling everywhere. In countries with stable currencies, strong legal protections, low financial censorship, and efficient banking, Bitcoin's advantages might seem less urgent for daily needs. However, in regions with high inflation, strict capital controls, a high risk of financial deplatforming, or sky-high remittance fees, Bitcoin's core features of scarcity, censorship resistance, and P2P global transfer become very attractive. The problems Bitcoin is designed to solve aren't universally severe but are acute for many people globally. This reinforces Bitcoin's role as an alternative system, particularly suited for peer-to-peer value preservation and transfer, rather than as a blanket replacement for everyday local currency transactions in stable, well-functioning economies.

Here's a quick look at some key issues in traditional finance and how Bitcoin's attributes address them:

You'll often hear Bitcoin called "digital gold." This comparison draws parallels between the cryptocurrency and the shiny metal based on shared traits, mainly scarcity and store of value. This analogy is pretty important for understanding Bitcoin's main use case and whether it's really "electronic cash" for everyday stuff.

Both Bitcoin and gold are seen by many as stores of value, meaning they're expected to hold or increase their purchasing power over time. They're often sought as hedges against inflation, especially when traditional fiat currencies seem to be weakening due to loose monetary policies or too much money printing by central banks. Crucially, neither gold nor Bitcoin is controlled or issued by a single central authority like a government or central bank. Gold is natural and its supply is limited by how hard it is to mine, while Bitcoin's supply is capped by its code and its network runs on a decentralized blockchain, making it resistant to direct government or institutional meddling.

While the analogy is catchy, let's compare them side-by-side:

• Scarcity: Gold is naturally scarce; getting new supply takes a lot of effort and resources. Bitcoin has a mathematically enforced supply cap of 21 million coins, with new bitcoins created at a predictably slowing rate through "halving." This programmed scarcity is key to its "digital gold" story.
• Decentralization: Gold isn't issued or controlled by any single government. Bitcoin's network is decentralized, run by a global network of participants.
• Portability & Divisibility: Bitcoin is incredibly portable; huge sums can be sent digitally across the globe easily. It's also highly divisible, down to eight decimal places (a "satoshi"). Gold, while divisible, gets bulky and expensive to move and secure in large amounts.
• Durability: Gold is physically tough and doesn't rust. Bitcoin, as digital info secured on a strong and widely spread blockchain, is also very durable as long as the network keeps running and is secured.
• Verifiability: Checking the purity and amount of physical gold can take experts and special equipment. Bitcoin transactions are verified by the network using cryptography, and ownership is proven by controlling private keys.
• Historical Track Record: Gold has been a reliable store of value and medium of exchange for thousands of years, giving it a level of trust most other assets can't match. Bitcoin, born in 2009, is relatively new, and its long-term staying power as a store of value is still being proven.
• Volatility: Gold's price is generally considered pretty stable compared to Bitcoin, making it a favorite for more conservative investors looking to protect their capital. Bitcoin has historically had big price swings, which can mean high reward potential but also high risk.
• Uses Beyond Storing Value: Gold has various industrial and decorative uses (e.g., in electronics and jewelry), which add to its demand and perceived inherent value. Bitcoin's main utility is as a monetary asset – a medium of exchange (for some transactions), a unit of account (in its own world), and increasingly, a store of value. It doesn't have direct industrial uses but benefits from its role in the growing economy.

Many investors see both gold and Bitcoin as hedges against the falling value of fiat currency due to inflation. Historically, gold prices have often been swayed by inflation and real interest rates. When real yields on traditional "risk-free" assets fall (meaning the inflation-adjusted return is low or negative), non-yielding stores of value like gold and Bitcoin look relatively better.

A key shared feature is their status as non-sovereign assets. Their value isn't directly tied to the money policy of any single government, making them attractive for diversifying wealth away from state-controlled currencies. In recent years, central banks have been buying a lot of gold, partly due to efforts to move away from the dollar, worries about fiat currency debasement, and rising geopolitical tensions. Bitcoin aims to play a similar role as a non-sovereign store of value for individuals, institutions, and maybe even nations down the line.

• Retirement Savings: Traditional retirement planning based on shorter lifespans can result in underestimating financial needs. A longer retirement demands larger savings, diversified income streams, and careful budgeting.
• Healthcare and Long-Term Care: Extended lifespans significantly increase healthcare expenses. According to Fidelity Investments, an average 65-year-old couple retiring today will spend around $315,000 on healthcare costs alone throughout retirement—not including long-term care.
• Inflation Risk: Over longer retirements, inflation significantly impacts purchasing power. Careful investment planning, including strategies designed to combat inflation, is crucial.

• Early and Consistent Savings: Begin saving early and consistently contribute to retirement accounts.
• Diversified Investments: Maintain a well-diversified portfolio capable of weathering various economic conditions.
• Insurance and Long-Term Care Planning: Explore insurance options, including long-term care insurance, to mitigate potential healthcare costs.
• Regular Financial Reviews: Conduct regular reviews and adjustments of your financial plan to reflect changing life circumstances and market conditions.

Cryptocurrencies: the digital frontier beckoning adventurous investors with promises of untold riches, technological disruption, and financial independence. As the world becomes increasingly digitized, the allure of this new asset class captivates the curious and the risk-takers alike. But as the crypto market surges and skeptics caution against potential pitfalls, a pressing question emerges: Should you dive headfirst into the volatile and enigmatic world of cryptocurrencies, or exercise caution and watch from the sidelines? It's a question that demands careful consideration, so let's explore the pros and cons, the opportunities and risks, and ultimately unravel the mystery of whether investing in crypto is a daring venture worth taking or a speculative gamble better left to the brave few.

When exploring the potential advantages of investing in cryptocurrencies, a world of possibilities unfolds before us. Cryptocurrencies offer enticing prospects such as high returns, diversification of investment portfolios, and the perception of being a hedge against inflation. As we delve into this section, we will examine these advantages in greater detail, shedding light on the potential benefits that have attracted investors to the captivating realm of digital assets.

Cryptocurrencies can provide diversification for an investment portfolio. Historically they have had a relatively low correlation with traditional asset classes like stocks and bonds. Adding cryptocurrencies to a portfolio can potentially reduce overall risk by spreading it across different types of assets.

• Low Correlation: Cryptocurrencies, such as Bitcoin and Ethereum, have historically shown a low correlation with traditional asset classes like stocks and bonds. This means that their price movements often occur independently of traditional markets. By adding cryptocurrencies to a portfolio, investors can potentially reduce the overall correlation and diversify their holdings, which can help mitigate risks associated with market downturns in specific asset classes.
• Nontraditional Asset Class: Cryptocurrencies represent a nontraditional asset class with unique characteristics. Unlike stocks or bonds, cryptocurrencies are digital assets based on blockchain technology. Their value is determined by factors such as market demand, technological advancements, adoption rates, and network usage. Adding cryptocurrencies to a portfolio can introduce exposure to this innovative and evolving asset class, which can provide diversification benefits by tapping into different market dynamics.
• Different Market Cycles: Cryptocurrencies have their own market cycles that can differ from traditional financial markets. They can experience periods of rapid growth, known as bull runs, followed by significant corrections. These cycles can be driven by factors specific to the cryptocurrency market, such as technological advancements, regulatory developments, and investor sentiment. By including cryptocurrencies in a portfolio, investors can potentially benefit from these unique market dynamics and capture returns that are distinct from traditional asset classes.
• Global Market Exposure: Cryptocurrencies operate in a global market that is not limited by geographic boundaries. The decentralized nature of cryptocurrencies allows for participation and investment opportunities from around the world. By investing in cryptocurrencies, investors gain exposure to a global market that can be influenced by different economic, political, and technological factors, providing further diversification to their portfolio.

Cryptocurrencies have gained a reputation for being one of the highest-performing asset classes in recent years, showcasing remarkable growth and delivering substantial returns for investors over their relatively short history. When compared to traditional asset classes, cryptocurrencies have often outperformed stocks, bonds, and other investment options. In some instances, the returns on cryptocurrencies have far exceeded those of traditional investments, attracting the attention of investors seeking high-growth opportunities. Bitcoin, for instance, surged from mere fractions of a cent in 2009 to reach an all-time high of approximately $69,000 in 2021. Other cryptocurrencies like Ethereum, Ripple, and Litecoin have also witnessed significant price increases, leading to substantial returns for early investors.

Before you can fully understand how crypto can be a potential hedge against inflation, it's important to understand inflation and how it works. Therefore, it's recommended to also read the Strateon Intelligent Wealth Insights article Money and Inflation Explained and the Inflation vs. Deflation section of the Strateon Intelligent Wealth Insights article Bitcoin Explained.

Simply, part of the reason inflation occurs is continuous printing of new money. There are other aspects to and causes of inflation, such as interest rates, consumer goods supply and demand, employee wages, and more, but generally if the central bank is printing new and more currency, then that currency is losing value.

On the other hand, while inflation erodes the purchasing power of traditional currencies, some cryptocurrencies, such as Bitcoin, are designed to have a finite supply. Some cryptocurrencies may already have their maximum currency supply in circulation, while others like Bitcoin are slowly inflating at a rate that decreases over time until the maximum supply is reached. There are even some cryptocurrencies that are actually deflating, meaning the supply of the currency that's in circulation is actually decreasing.

Cryptocurrencies operate on decentralized networks, typically based on blockchain technology. They are not controlled by any central authority or government. This independence from traditional financial systems and centralized control can make cryptocurrencies less susceptible to the monetary policies of governments and central banks. In times of inflation or economic uncertainty, some investors may see cryptocurrencies as an alternative store of value that is less affected by traditional economic forces.

Cryptocurrencies offer global accessibility and can be traded 24/7 across different jurisdictions. This accessibility allows investors to diversify their holdings beyond traditional currencies, potentially providing a hedge against inflation in specific regions or currencies. Investors can also use cryptocurrencies as a medium of exchange or a store of value in countries experiencing hyperinflation or economic instability.

Crypto as a whole is not a scam. It's important to keep in mind that there are many crypto projects and tokens that definitely are scams, and there are people who will attempt to use crypto for their scams. This is not something unique to crypto though, as there are many cases of scams and fraud in traditional finance and traditional stock markets. Crypto may make it easier for individuals to concoct and run their scams, though, so extra care is needed when investing in crypto. If you do invest in crypto, it's important to be careful and make sure you do your own research, or enlist a trusted advisor, to help you determine which crypto projects, tokens, and coins to purchase and invest in.

When it comes to custody of crypto, there can be more complexity, which makes using crypto more confusing, and even more risky.

Cryptocurrencies are digital assets that exist solely in electronic form. Unlike traditional assets like physical cash or stocks held in brokerage accounts, cryptocurrencies are intangible and require specialized digital storage solutions. This digital nature can make custody processes less familiar and more complex for individuals who are accustomed to traditional financial systems.

Cryptocurrencies are secured using cryptographic keys, specifically public and private keys. The private key is crucial for accessing and managing cryptocurrency holdings. Self-custody involves securely storing and managing these private keys to protect against unauthorized access, theft, or loss. Managing private keys effectively requires a good understanding of blockchain protocols, wallet software, and transaction processes to securely store and handle cryptocurrencies. Additionally, staying updated with advancements, network upgrades, and evolving industry standards can be challenging.

Due to the complexities and risks involved in self-custody, individuals and institutions often turn to specialized custodial services provided by reputable companies. These custodians offer enhanced security measures, insurance coverage, regulatory compliance, and expertise in handling digital assets. However, selecting the right custodial solution requires careful consideration, due diligence, and understanding of the specific needs and risk tolerance of the investors involved.

The regulatory landscape surrounding cryptocurrencies is still evolving and varies significantly from one jurisdiction to another. This lack of uniformity and clarity can create uncertainty for businesses and individuals operating in the crypto space. Regulatory frameworks can be complex, subject to change, and often require interpretation, making it challenging for market participants to navigate and comply with the rules.

Governments and regulatory bodies have expressed concerns about certain aspects of cryptocurrencies, such as their potential use in illicit activities, market manipulation, and investor protection. As a response, regulatory measures may be introduced to impose restrictions or limitations on crypto-related activities. This can include stricter KYC procedures, limits on trading or investment amounts, bans on certain types of transactions or tokens, or licensing requirements. Such restrictions could hamper the growth and innovation of the crypto industry and limit the opportunities available to investors and businesses.

Regulatory actions and announcements can significantly impact the sentiment and stability of the crypto market. Regulatory crackdowns or unfavorable regulations in major jurisdictions can cause market volatility, leading to price fluctuations and increased investor uncertainty. Uncertain or restrictive regulations may also discourage institutional participation, as they often require more regulatory clarity and certainty to navigate compliance and risk management obligations.

It is important to note that while regulatory challenges exist, they also aim to protect investors, mitigate risks, and foster market integrity. The maturation of regulatory frameworks can bring legitimacy and institutional confidence to the crypto industry, potentially attracting more mainstream adoption and investment. However, striking a balance between regulation and innovation remains a complex challenge that needs to be carefully addressed to ensure the sustainable growth and development of cryptocurrencies.

Tax regulations regarding cryptocurrencies can be complex and often lack clarity. Tax authorities may struggle to keep up with the fast-paced nature of the crypto market and the evolving technology behind it. Determining how cryptocurrencies should be classified, valued, and taxed can be challenging, leading to confusion and potential errors in compliance.

Crypto taxation requires individuals and businesses to maintain detailed records of transactions, including the acquisition, disposal, and value of cryptocurrencies. The need to track every transaction and calculate gains or losses can be burdensome, particularly for active traders or businesses that accept cryptocurrencies as payment. The complexity of reporting requirements and the need for accurate record-keeping can result in increased administrative work and potential compliance errors.

The increase in the value of cryptocurrencies can lead to significant tax liabilities when crypto assets are sold or exchanged for traditional currencies or goods and services. Taxation based on capital gains or income from crypto-related activities can result in substantial tax obligations, particularly for those who have accumulated significant gains or engage in frequent trading. Paying taxes on crypto gains can reduce the overall profitability of investments or limit the potential for reinvestment.

Calculating the tax liability for cryptocurrencies can be technically challenging. Factors such as the determination of the cost basis, accounting for different types of transactions (e.g., exchanges, forks, airdrops), and handling wallet transfers can add complexity to the tax calculation process. Although more tools and tax software tailored for cryptocurrencies exist and more are coming out, they do have an added cost, and could be quite expensive for those with hundreds and even thousands of transactions, further complicating the process for individuals or businesses.

Tax authorities may struggle to provide timely and comprehensive guidance on cryptocurrency taxation due to the novelty of the asset class. This lack of guidance can leave taxpayers uncertain about how to accurately report their crypto-related activities. As regulations evolve and tax authorities issue new guidelines, taxpayers may face challenges in staying up to date and ensuring compliance.

Taxpayers should consult with tax professionals or accountants who specialize in cryptocurrency taxation to ensure compliance with the applicable laws and make informed decisions.

Estate planning involving cryptocurrencies can present unique challenges and complexities. Here are some difficulties associated with estate planning for crypto assets:

• Digital Asset Management: Cryptocurrencies are digital assets that exist solely in electronic form. Unlike traditional assets like physical property or bank accounts, cryptocurrencies are intangible and stored in digital wallets secured by cryptographic keys. Managing and accessing these assets after the owner's death requires a clear understanding of the private key management process and knowledge of the deceased person's wallets and holdings.
• Complexity of Private Key Management: Private keys are essential for accessing and transferring cryptocurrencies. If the private keys are lost, forgotten, or not properly documented, it can result in the permanent loss of the crypto assets. Estate planners and heirs need to identify and locate the private keys or employ suitable methods for secure key management to ensure the smooth transfer of crypto assets to beneficiaries. This is complicated by the need to keep private keys secure in a manner so that those who should not have them cannot have them.
• Lack of Centralized Authority: Cryptocurrencies operate on decentralized networks, and there is no centralized authority or institution that can facilitate asset transfers or provide account recovery services. In the event of the owner's death, there is no default mechanism to transfer or recover the assets. Without proper planning and documentation, heirs may face significant challenges in accessing and managing the crypto assets.
• No Uniform Standard for Beneficiaries: For those who keep their crypto assets on a centralized exchange, not every centralized exchange has a specific way to declare an individual as a beneficiary to an account should the account owner pass. That makes it difficult to get proper legal access to a deceased's crypto assets.
• Privacy and Confidentiality Concerns: Cryptocurrencies offer a level of pseudonymity and privacy, which can make it difficult for heirs or estate administrators to identify and locate the crypto assets held by the deceased. The nature of blockchain technology allows individuals to transact without disclosing personal information. As a result, without proper disclosure or documentation, the existence and extent of crypto holdings may remain unknown, making it challenging for estate planners to account for these assets.
• Legal and Regulatory Uncertainty: The legal and regulatory framework surrounding cryptocurrencies is still evolving, and there may be variations in how different jurisdictions treat crypto assets in estate planning. The lack of uniformity and clarity in regulations can create uncertainties and legal complexities when it comes to transferring and distributing crypto assets as part of an estate.
• Valuation Challenges: Cryptocurrencies are known for their price volatility, and determining the accurate value of crypto assets at the time of the owner's death can be challenging. Estate planners may need to engage professionals with expertise in crypto asset valuation to ensure accurate assessment and fair distribution among heirs.

Given these difficulties, individuals who hold cryptocurrencies should consider the following estate planning measures:

• Documenting crypto holdings, wallets, and private key information.
• Establishing clear instructions and guidelines for heirs regarding the management and transfer of crypto assets.
• Engaging legal and financial professionals experienced in crypto estate planning to navigate the complexities.
• Regularly reviewing and updating estate plans to account for changes in crypto holdings and technologies.
• Communicating with heirs about the existence and nature of crypto assets to ensure a smoother transition.

Proper planning and professional guidance can help mitigate the challenges associated with estate planning for cryptocurrencies and ensure that the wishes of the deceased regarding their crypto assets are carried out effectively.

Today the Federal Reserve (aka the central bank, or the Fed) raised its interest rate, known as the Fed Funds rate, by another 0.5%, up to 4.5%. There's been a lot of talk this year over the Fed raising interest rates in an effort to fight inflation. What is the Fed Funds rate and why does it matter so much?

The Fed Funds Rate is the interest rate that the central bank sets for banks to charge each other for borrowing and lending cash between each other. Essentially, it's the cost the banks pay to borrow money from other banks. Banks and other financial institutions are required to maintain a certain amount of money on reserve to cover depositors' withdrawals and other obligations. When necessary, banks and other financial institutions will borrow money from a Federal Reserve bank, and they are charged the Fed Funds interest rate for borrowing.

The Fed Funds rate influences what is called the prime lending rate. You may have seen a bank refer to the prime rate when you've applied for a loan. For example, the bank will charge an interest rate that is the prime rate plus a certain percentage. The prime rate is the interest rate banks charge their most creditworthy borrowers, which are usually very high net worth individuals, businesses, and other financial institutions.

Since the Fed Funds rate affects the prime rate that banks use, it then has an effect on the rate individuals are able to borrow at for things like mortgages, auto loans, and credit cards. As the Fed Funds rate increases, the banks' interest rates increase, and thus the interest rate they charge borrowers for things like homes and cars goes up. It isn't always a change in the rate by the same amount. Banks try to forecast what they think the rate will be later down the line and what the cost of the money for them will be, and then they charge accordingly. That is why sometimes you'll see an increase or a decrease in mortgage rates when the Fed hasn't made any changes to their target interest rate.

The Fed Funds rate also has an effect on short term interest rates. These are interest rates the bank pays for savings accounts, money market accounts, CDs, and more. It also affects the rate for short term bonds, such as Treasury Bills. For interest rates on savings accounts and CDs you'll generally see the rate the bank offers is lower than the Fed Funds rate. That is because the bank will try to lower their expenses by using depositor funds at a lower rate than the rate they would need to borrow from other banks. For example, before the Fed raised rates earlier today, the Fed Funds rate was up to 4%, but most high-yield savings accounts paid depositors an interest rate of 3%. The bank can pay you 3%, and then loan money out at 4% (or more, depending on who it's being loaned to).

The basic concept of inflation is that it is the rate at which a currency loses its purchasing power as prices increase over time. Inflation can be caused by a number of factors. In the current case of high inflation, the cause was more than one factor. Here are the most prominent causes:

• An increase in the money supply. At the end of 2019, the M2 money supply (which includes financial assets held mainly by households such as savings deposits, time deposits, and balances in retail money market mutual funds, in addition to more readily-available liquid financial assets as defined by the M1 measure of money, such as currency, traveler's checks, demand deposits, and other checkable deposits)¹ was approximately $15.32 trillion. At its height during the COVID-19 pandemic, the money supply had reached up to approximately $21.74 trillion, a nearly 42% increase in only 2 years.² The M2 money supply has been decreasing as the Fed has implemented quantitative tightening (QE), where it is reducing bonds held on its balance sheet, which pulls money out of circulation. The M2 money supply is approximately $21.4 trillion as of October 31, 2022.
• Economic stimulus checks sent to taxpayers during the COVID-19 pandemic, whether individuals needed the assistance or not.
• Supply chain constraints caused by the COVID-19 pandemic.
• Low interest rates.
• The war in Ukraine caused a supply shortage in energy supply and food.

During the COVID-19 pandemic, the U.S. government, along with other governments in nations around the world, stimulated their economies by dropping interest rates and sending stimulus checks to taxpayers. Central banks also injected trillions of dollars into the global economy by buying up bonds and other debt. Doing so put money, and even more cheaply borrowed money, in the pockets and bank accounts of individuals and businesses. Those actions did keep employment up and kept people spending, so the economy kept going. Stock markets roared to new all-time highs and economic growth surged. Demand was high. Eventually, though, the supply couldn't hold up. There were shortages of an array of goods from wheat to microchips, and that caused prices to soar. Thus, inflation.

You may be wondering how inflation comes into play with the Fed Funds rate. A large part of how the economy grows, and the pricing of goods, has to do with liquidity. Liquidity is the availability of cash to pay for goods, services, and investments. When liquidity is low, meaning there isn't a lot of money available, then demand slows. When liquidity is high, meaning there's a lot of money available, then demand increases. For example, if you make $100,000 per year, then you have a certain amount of money available to you to spend. If suddenly you were making $142,000 per year (a 42% increase) you would have more money available to spend, and would probably spend more money.

Interest rates affect liquidity by making borrowing money easier. For example, you want to buy a house. If the house you want to buy would result in a $1 million loan at 2% (which was possible during the pandemic), then the mortgage payment would be about $3,700. Now, with mortgage interest rates at 6%, that payment would be about $6,000, a 62% increase. To keep the payment at about $3,700 with the same 6% interest rate, the loan would need to be no more than $620,000. Here in California, in some areas, it may be very difficult to find a home at that price, and that makes people not want to buy a new home, decreasing demand. And that's exactly what the Fed is trying to do with interest rate increases... crush demand. If the Fed can bring demand down enough with interest rate increases (and removing liquidity from the system), then prices should stop rising at the same rate they once were. Not only that, but prices may even begin to fall. We've already seen that in some real estate markets. It remains to be seen if goods and services will also experience price declines in general, though used car prices, energy, and gas prices have come down already.

Even if the Fed is able to initially crush some demand to make inflation slow down, there's the possibility of the issue of falling prices becoming appealing to buyers, which would again increase demand and cause inflation to rise again. For example, with mortgage rates at 6%, what if that home you wanted suddenly dropped in price dramatically where the loan would only be $600,000 with the $3,700 payment? You might jump on it. And so might many other homebuyers.

How can that scenario be prevented? By making those potential homebuyers unable to buy that home no matter what its price is. To do that, people need to have a lack of money, which means they need to lose jobs. Make no mistake about it, the Fed is looking to bring down the labor market. There are currently more job openings than there are workers available to fill them.

To truly crush demand and bring inflation down, the Fed needs to cause unemployment to increase, so that people don't have as much money to spend, in order to keep supply up and demand down. By making business expenses increase with higher interest rates, businesses will find that they can no longer afford positions they have open, and may even need to layoff workers. That will bring down the number of available job openings, and bring down worker demand, which could bring down wages and eventually cause unemployment to rise.

As you can see, the Fed's target Fed Funds Rate is an important part of the economy. Increasing and decreasing the interest rate could affect not only the interest you pay on a loan and the interest you receive with a savings account, but also supply and demand, the labor market, the amount of inflation, and more. And all of that has an effect on us an individuals and what we're able to do with our money.

Incorporating interest rates and inflation into your short-term and long-term financial plan can seem like a Herculean task. Fortunately, Strateon Intelligent Wealth is here to help you implement a financial plan designed to take interest and inflation into account, as well as other factors, to enable you to reach your goals. To find out how, feel free to...

The last Strateon Intelligent Wealth Insights post looked at Bitcoin. Now it's time to look at the second largest cryptocurrency by market cap, and the one that may have had the biggest impact on the financial system besides Bitcoin: Ethereum.

More than just ether can be sent from and received to an Ethereum account. Many of the apps that run on Ethereum have their own cryptocurrencies, called tokens. Tokens can have various purposes and uses. They can allow for voting power within the app or protocol it represents. They can also be a medium of monetary exchange within an app. For example, if Minecraft ran on a blockchain, rather than purchase Minecraft coins within Minecraft to purchase items within the game, a user would purchase Minecraft tokens. The value of those tokens could change over time, a person could sell their Minecraft tokens to anyone they wanted, or a user could create their own upgrades for the game and sell them for Minecraft tokens.

When you pay with a credit card, you might receive authorization right away, but it could take a few days for the transaction to actually be on your credit card account. For merchants, it's the same delay, if not longer, before they can have access to those funds. For checks, it could be even longer. Depending on the amount it could take a week. For an ACH transfer it could take a few days, but some merchants require up to 10 business days. Wire transfers could take a few days as well, even with high fees, especially for international transfers. With Ethereum, transaction settlement times could take as little as a few seconds. Most do take longer, from a couple minutes to a few hours,, depending the network load and the gas fees you're paying, but the speed at which Ethereum transactions are able to verify and settle is significantly faster and less expensive than with the traditional banking system.

There is potential for Ethereum to increase in value. However, Ethereum does have a high amount of volatility and does have risk. Each individual should research Ethereum on their own and weigh the pros and cons when deciding whether or not to purchase ether or invest in some. Strateon Intelligent Wealth does offer advice on digital assets and cryptocurrency, so if you would like assistance in making the decision, feel free to...

All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent, and predictable.

There is potential for Bitcoin to increase in value. However, Bitcoin does have a high amount of volatility and does have risk. Each individual should research Bitcoin on their own and weigh the pros and cons when deciding whether or not to purchase bitcoin or invest in some. Strateon Intelligent Wealth does offer advice on digital assets and cryptocurrency, so if you would like assistance in making the decision, feel free to...