Bitcoin is undergoing a fascinating evolution, with various perspectives on its nature. Some view it as a currency for everyday transactions, others as a modern equivalent of gold for storing value, and yet others as a decentralized global platform for securing and validating off-chain transactions. While these views all hold some truth, Bitcoin is increasingly establishing itself as a digital base money.
The Rise of Digital Base Money
Functioning akin to physical gold as a bearer asset, inflation hedge, and providing currency denominations like the dollar, Bitcoin is reshaping the concept of monetary base assets. Its transparent algorithm and fixed supply of 21 million units ensure a non-discretionary monetary policy. Contrastingly, traditional fiat currencies like the US dollar rely on centralized authorities to manage their supply, raising questions about their predictability and effectiveness in an age of volatility, uncertainty, complexity, and ambiguity (VUCA).
The Debate on Leveraging Bitcoin
For staunch Bitcoin proponents, the immutable 21 million supply cap is sacred. Altering it would fundamentally alter Bitcoin itself, making it something entirely different. Thus, within the Bitcoin community, skepticism towards leveraging Bitcoin is widespread. Many see any form of leverage as akin to fiat currency practices, undermining Bitcoin's core principles.
The Collapse of Leveraged-Based Bitcoin Lending Companies
Even nuanced perspectives within the community are cautious about leveraging, aligning with figures like Caitlin Long, who has been warning against the dangers of leveraging Bitcoin. The collapse of leveraged-based Bitcoin lending companies in 2022, such as Celsius and BlockFi, further reinforced the concerns voiced by Long and others about the risks associated with leveraging Bitcoin.
The Crypto Credit Crunch of 2022
The crypto market witnessed a significant upheaval reminiscent of the Lehman Brothers collapse in 2022, triggering a widespread credit crunch that affected various players in the crypto lending sector. Contrary to assumptions, most crypto lending activities were not peer-to-peer and carried considerable counterparty risks, as customers lent directly to platforms, which then deployed these funds into speculative strategies without adequate risk management.
The Importance of Bitcoin-Based Yield
Where does this leave us? Given this 2022 episode, more and more Bitcoiners have been posing the question: Should we embrace Bitcoin yield products, or do they pose too great a risk, echoing characteristics of the fiat system? While valid concerns exist, it's unrealistic to expect Bitcoin-based yield products to vanish entirely.
The Trust Spectrum of Bitcoin-Powered Finance
Bitcoin-powered finance will necessarily be built in layers. From a system’s point of view, this isn’t much different from today’s financial system, where there is an inherent hierarchy in money-like assets. To properly understand the inevitable trade-offs that come with this, it is important to have a high-level framework to distinguish the different implementations of Bitcoin residing on different layers.
Assessing Bitcoin Yield Products
When it comes to offering yield on Bitcoin, it is essential to understand that options can be built along a three-folded trust spectrum. The primary aspects to look at are: Consensus, Asset, and Yield. Assessing Bitcoin-like assets and Bitcoin yield products based on their degree of Bitcoin nativeness provides a valuable framework for evaluating their alignment with Bitcoin's ethos.
Consensus Angle: Categorizing Bitcoin Yield Products
This assessment categorizes Bitcoin yield products based on their alignment with the Bitcoin blockchain's consensus, distinguishing between four categories: No Consensus, Standalone Consensus, Inherited Consensus, and Native Consensus.
Asset Angle: Aligning with Bitcoin
When considering the asset used by Bitcoin yield products, alignment with Bitcoin (BTC) can be categorized into three main groups: Non-BTC, Tokenized BTC, and Native BTC.
Yield Angle: Examining Bitcoin Yield Products
When examining the yield side of Bitcoin yield products, the question of Bitcoin alignment also arises, leading to similar categorizations as with the asset side: Non-BTC Yield, Tokenized BTC Yield, and Native BTC Yield.
Bitcoin's Gold Standard: Native All the Way Through
Contemplating the ideal Bitcoin-based yield product, the gold standard product would combine the following three attributes: Native Bitcoin consensus, native Bitcoin asset and native Bitcoin yield. Such a product would mimic near-perfect Bitcoin alignment.
This article was researched and written by Pascal Hügli in collaboration with Brick Towers. Hügli is a dedicated Bitcoin analyst and researcher, deeply immersed in all facets of the Bitcoin ecosystem. This article has originally been published in a longer form version.
Frequently Asked Questions
How much should I contribute to my Roth IRA account?
Roth IRAs are retirement accounts that allow you to withdraw your money tax-free. You cannot withdraw funds from these accounts until you reach 59 1/2. There are some rules that you need to keep in mind if you want to withdraw funds from these accounts before you reach 59 1/2. You cannot touch your principal (the amount you originally deposited). This means that no matter how much you contribute, you can never take out more than what was initially contributed to this account. If you are able to take out more that what you have initially contributed, you must pay taxes.
The second rule is that your earnings cannot be withheld without income tax. Withdrawing your earnings will result in you paying taxes. For example, let's say that you contribute $5,000 to your Roth IRA every year. Let's say you earn $10,000 each year after contributing. This would mean that you would have to pay $3,500 in federal income tax. This leaves you with $6,500 remaining. Since you're limited to taking out only what you initially contributed, that's all you could take out.
You would still owe tax on $1,500 if you took out $4,000 of your earnings. In addition, 50% of your earnings will be subject to tax again (half of 40%). So even though you received $7,000 in Roth IRA contributions, you only received $4,000.
There are two types if Roth IRAs, Roth and Traditional. A traditional IRA allows for you to deduct pretax contributions of your taxable income. Your traditional IRA allows you to withdraw your entire contribution plus any interest. You have the option to withdraw any amount from a traditional IRA.
A Roth IRA doesn't allow you to deduct your contributions. But once you've retired, you can withdraw the entire contribution amount plus any accrued interest. There is no minimum withdrawal requirement, unlike traditional IRAs. Your contribution can be withdrawn at any age, not just when you reach 70 1/2.
Is it a good retirement strategy to buy gold?
Although gold investment may not seem appealing at first glance due to the high average global gold consumption, it's worth considering.
The best form of investing is physical bullion, which is the most widely used. There are other ways to invest gold. It is best to research all options and make informed decisions based on your goals.
For example, purchasing shares of companies that extract gold or mining equipment might be a better option if you aren't looking for a safe place to store your wealth. If you require cash flow, gold stocks can work well.
You can also invest your money in exchange-traded fund (ETFs), which give you exposure to the gold price by holding securities related to gold. These ETFs may include stocks that are owned by gold miners or precious metals refining companies as well as commodity trading firms.
Can I have a gold ETF in a Roth IRA
While a 401k may not offer this option for you, it is worth considering other options, such an Individual Retirement Plan (IRA).
Traditional IRAs allow for contributions from both employees and employers. A Employee Stock Ownership Plan, or ESOP, is another way to invest publicly traded companies.
An ESOP gives employees tax advantages as they share the stock of the company and the profits it makes. The tax rate on money that is invested in an ESOP is lower than if it was held in the employees' hands.
A Individual Retirement Annuity (IRA), is also available. An IRA allows you to make regular payments throughout your life and earn income in retirement. Contributions made to IRAs are not taxable.
Statistics
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- If you accidentally make an improper transaction, the IRS will disallow it and count it as a withdrawal, so you would owe income tax on the item's value and, if you are younger than 59 ½, an additional 10% early withdrawal penalty. (forbes.com)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
External Links
cftc.gov
law.cornell.edu
- 7 U.S. Code SS 7 – Designation of boards of trade as contract markets
- 26 U.S. Code SS 408 – Individual retirement account
forbes.com
- Gold IRA: Add some sparkle to your retirement nest egg
- Understanding China's Evergrande Crisis – Forbes Advisor
investopedia.com
- Are You a Good Candidate for a Gold IRA
- What are the Options? Types, Spreads, Example and Risk Metrics
How To
Tips for Investing with Gold
Investing in Gold has become a very popular investment strategy. There are many advantages to investing in Gold. There are several ways to invest in gold. There are many ways to invest in gold. Some prefer buying physical gold coins while others prefer gold ETFs (Exchange Traded Funds).
Before you buy any type of gold, there are some things that you should think about.
- First, check to see if your country permits you to possess gold. If you have permission to possess gold in your country, you can then proceed. You might also consider buying gold in foreign countries.
- Secondly, you should know what kind of gold coin you want. You can choose between yellow gold and white gold as well as rose gold.
- You should also consider the price of gold. Start small and build up. You should diversify your portfolio when buying gold. Diversifying your portfolio should be a priority, including stocks, bonds and real estate.
- Don't forget to keep in mind that gold prices often change. You need to keep up with current trends.
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By: Pascal Hügli
Title: Understanding Bitcoin's Evolution: A Deep Dive into Bitcoin-Based Yield Products
Sourced From: bitcoinmagazine.com/markets/can-bitcoin-be-a-productive-asset-
Published Date: Thu, 13 Jun 2024 15:30:21 GMT
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