BP's Investing definitions and thoughts
Dollar Cost Averaging - Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.
What Is a Roth IRA?
A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator.1
Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how they’re taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. But once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.2
This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers.
- KEY TAKEAWAYS
- A Roth IRA is a special retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free.
- Roth IRAs are best when you think your taxes will be higher in retirement than they are right now.
- You can't contribute to a Roth IRA if you make too much money. In 2021, the limit for singles is $140,000 (In 2022, the limit is $144,000). For married couples, the limit is $208,000 (In 2022, the limit rises to $114,000).34
- The amount you can contribute changes periodically. In 2021 and 2022, the contribution limit is $6,000 a year unless you are age 50 or older—in which case, you can deposit up to $7,000.34
- Almost all brokerage ﬁrms, both physical and online, offer a Roth IRA. So do most banks and investment companies.
Cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same ways as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions safe, and let other people check that the transactions are real. The first cryptocurrencies were made to be free of government-given currencies.
Cryptocurrencies use 'decentralized control'. That means that government can not control cryptocurrencies. This is different to 'centralized' electronic money and central banks. The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain, that serves as a public financial transaction database.
Bitcoin, first released as open-source software in 2009. It is often called the first decentralized cryptocurrency. Since then, over 4,000 cryptocurrencies (sometimes called altcoins, which is short for alternative coins) have been created.
My personal favorites - Dogecoin, Etherium, Bitcoin, Etherium classic.
My crypto strategy - I treat crypto investing as a third level priority of investment. This may continue to move up my investment list as fiat currency continues to devaluate (inflate). I would not necessarily recommend crypto as a single source investment strategy unless you are willing to risk losing everything.
That being said, my crypto portfolio is now occupying a significant portion of my portfolio but I have years of Roth and Trad IRA contributions. As inflation is projected to continue at staggering rates, I see blockchain as a hedge against inflation and it seems more and more individuals (free from mutual fund/investment/retirement planners) are moving towards crypto. As governments continue to print more and more Fiat the value to me is becoming increasingly worthless. A hedge against this would be to own bitcoin and ultimately use those tokens as payment for goods and services. I feel like the day is around the corner when that may happen.
I am currently on Robinhood and Coinbase.
I have been using the Robinhood “Cash” for daily small coffee, gas, and lunch out purchases - linked to my Apple Wallet. Robinhood cash is essentially a pre-paid debit card the account comes from designated profit from sold crypto assets or stock gains.
In many cases, cryptocurrencies cannot be converted to real currencies; it is only possible to convert them to other cryptocurrencies, or to use them to buy things. Some cryptocurrencies can be converted to real currencies: They usually have a high volatility, and using them carries a high risk. They are also a target for so-called Pump-and-Dump-Attacks. They act like a big distributed economic system: as they are not issued or controlled by central banks, their value is difficult to influence: For this reason, they cannot really take the place of a stable currency.
Cryptocurrencies are prone to speculation, which makes building a system of more or less stable exchange rates very difficult.
Whales - Another problem is the inequality of distribution: Many cryptocurrencires are held by only few people. As an example: about 1.000 people hold half of the total amount of bitcoins in the world. This means that if any of these persons starts using their cryptocurrency, this has an effect on the exchange rate. It also means that these people have a great influence on the value of the currency, and are able to change its value easily. The currency itself only documents ownership changes. Exchange rates of cryptocurrencies are established outside the system. Exchange rates are issued by brokers and traders; their indication is no guarantee that the currency is traded at the value proposed. In itself, the unit of cryptocurrency has no value.
In contrast to cyptocurrencies, real currencies are controlled by central banks. Certain econnomic phenomena such as inflation or deflation may change the value (and exchange rate) of a currency. The people who own units of the currency have no direct influence on its value.
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
- The system does not require a central authority, distributed achieve consensus on its state [sic].
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines if new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the how to create new units, and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The owner of a unit of cryptocurrency can transfer this unit. For this transfer to be successful, the current owner must prove the ownership.
- If two different instructions for changing the ownership of the same cryptographic units are entered at the same time, the system performs at most one of them.
What Is Fiat Money?
Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
- Fiat money is a government-issued currency that is not backed by a commodity such as gold.
- Fiat money gives central banks greater control over the economy because they can control how much money is printed.
- Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
- One danger of fiat money is that governments will print too much of it, resulting in hyperinflation.
Brent Phillips - Professor, FIR - University House