My Approach to #cryptofinance has evolved

Earlier, @theycallmedan asked "How Has Crypto and Blockchain Technology Impacted Your Personal Finance?" This is a timely question as I have only recently decided where Crypto and Blockchain technology fit into my life. My thinking has evolved over the years from blockchain as a currency to blockchain as a store of value in more than one sense.

Crypto As a Currency

My first dabbles into crypto were to use Bitcoin as a currency to buy things. I have made campaign donations, bought computer parts, and made other purchases. This was not something that I would do often, however. The problem I have with crypto as a currency is that there are transaction fees to acquire crypto. There are transaction fees when you spend it. And, there are tax consequences to each transaction. From my experience, crypto isn't very good as a currency. However, in a similar vein, it is great for remittances. Crypto can bypass the rent seekers on the path of money traveling internationally.

Long-term, I have a problem with cryptos in general as currencies. The blockchains will grow longer and longer over time with each transaction. It seems frivolous to add every minor transaction, like a morning coffee, a lunch, or movie tickets to the blockchain. Perhaps this is where layer 2 solutions can help, as a buffer from writing data to the main blockchain. Still, the point is that over time, the chains will grow monstrously large. What happens when the blockchain is 100 TB? 1000 TB? At some point, only institutions will be able to run nodes capable of storing entire blockchains. That's the end of decentralization to some extent. This is why I am not all that convinced that blockchain is cut out to be currency.

Crypto As a Store of Intellectual Value

A blockchain like Hive is an excellent store of intellectual value. This blog post, for example, is recorded and forever etched into the Hive blockchain. This means that it is indelible and time stamped with my date of creation, protecting it from blatant plagiarism. Attempts to make Hive into a currency, I think, are derivative. Hive has value in the sense that having more Hive gives you greater influence. People are willing to trade influence, thus there is some monetary value. But, as long as people are willing to give Hive a financial value, it keeps the blockchain alive and accessible for me to store my intellectual property.

I am not too certain how LEO tokens fit into my view of crypto and blockchain. I don't know exactly what LEO does. It doesn't store my blog posts. I don't know where I could spend LEO like a currency. My understanding is that it is a share of the revenue from advertising and market price. However, I don't know how I would extract any value from LEO other than selling it. But, I am getting distracted from the question.

As far as a store of intellectual value, blockchain is perfect for applications like Vechain that can track a supply chain from end to end. This is a very specific sort of data that has immediate and long-term value. In the short-term, you can check if the product you bought is authentic. In the long-term, you can run analysis of sales figures for all kinds of products. Because all of it runs on one blockchain, the data is standardized to the type of data that can be stored on the blockchain. In this regard, there is financial value, although it is in raw form like wooded land that can be converted to lumber, paper, or firewood. Google and Facebook make billions from data. So, if data were public on a blockchain, those billions could be available to anybody with an idea on how to work with that data.

Crypto As a Store of Financial Value

To finally get to where I currently stand with crypto and blockchain in my crypto finances, I have settled on them being a store of financial value. As mentioned earlier, I think crypto has failed as currency. At least with the way tax law treats crypto in the USA, it is not worth using crypto as spending money. The real value is in storing your savings. This is particularly because of how deflationary a blockchain like Bitcoin is. All you have to do is hold it and the value increases.

The way I will use BTC, or any other crypto that catches my interest, is as a place to store my savings. I will continue to dollar cost average throughout my life, building my savings. Thus, I'll convert cash to crypto. And, as needs arise, I can use my savings as collateral to borrow cash back out. I do not intend to sell my crypto. There should be no tax consequence from borrowing.

What happens if I die with an outstanding loan? Life insurance could cover that. I would have to be disciplined enough to only borrow what I could pay back from my income. Or, disciplined to borrow what I could pay back from an investment. I do worry a bit about crypto inheritance laws. I'm not sure how things would be handled for my heirs. It is worth investigating.

So long as I follow sound financial practices, like budgeting and investing in cash flow, I should be able to use my crypto savings as my own personal bank in much the way that nobility used their lands to borrow money for business ventures. Back then, land was finite and in the hands of the few. It also produced income. This made it a low-risk collateral for loans. So long as I do not overstretch my finances, I should be able to borrow, pay back, and borrow again.

This is nothing new. Farmers do this all the time. If they need to buy a tractor, they can mortgage the farm. Then, they can pay off the mortgage from profits earned from farming. Some are able to use whole life insurance as their bank to finance these purchases. In any case, so long as you own an asset that can be collateralized, you are able to borrow cash to finance a business venture. Of course, there is also some discipline required to make the budget numbers work.

Where crypto shines as collateral is that, unlike land, there is still no property tax on it. Thus, simply holding it between investment opportunities should not have a cost.

Ultimately, what crypto and blockchain have meant to my finances is a demonstration of what saving and investing can do for you long-term. If crypto weren't so difficult to spend, I may never have saved up as much as I have. And, if I had not saved up as much crypto as I have, I may never have had the scale of savings to make collateralizing worthwhile.

What is funny is that you can do many of the same things with cash. For example, you can save up a few thousand dollars, buy certificates of deposit, and use those CDs as loan collateral. It seems stupid to pay interest when you have the money. However, doing it this way improves your banking relationships and also lights a fire under you to ensure that you pay off the loan, which may be lacking if you just used your own cash. In this regard, crypto is no different. You borrow against it. Now you have motivation to pay back the loan to avoid being liquidated. Your savings are simply a safety net in case your venture doesn't work.

It is because of crypto that I have a better understanding of finance as a whole. Ultimately, my crypto holdings will be the source of funding for future investments. They will also be the place where my profits will be placed for funding those future investments. My crypto holdings should be a growing storage of value that is only available to me, not the banks. Fiat money is a great currency and a poor store of value. I think crypto and cash complement each other. Cash for spending. Crypto for saving. This has been the impact of crypto and blockchain to my personal finance. It is a path to long-term prosperity. If I become rich, that's icing on the cake. I'll settle for prosperity.

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