The Retirement Success in Maine Podcast Ep 041: Cryptocurrency & Your Retirement - What Should You Know?

 

 

Transcript 

Ben Smith:

Well, welcome everybody to The Retirement Success in Maine Podcast. My name is Ben Smith. I'm joined by my two co-hosts Abby Doody and Curtis Worcester, the Meg Whitman and Elon Musk to my Bill Gates. How are you guys doing today?

Curtis Worcester:

Doing well, Ben. How are you?

Ben Smith:

I'm great. I'm great. We, as you know, with our show, we like to go in lots of different angles around aging, retirement, and especially how those two themes work in the state of Maine. One of the things is financial advisors, we get asked a lot from clients, but also just people you bump into is, it seems cryptocurrency seems to be the thing of the day. Is there just seems to be lots of questions about what it is and how it's impacting people. There's questions about how it's going to change maybe our day-to-day world. That kind of led us to think about this a little bit is, maybe there's a show here of I think for a lot of us and even the three of us. That maybe there's a level of education that we can all do here to kind of get a little bit more up to speed on the history of cryptocurrency, what it is today, how it's impacting us. Also, kind of looking forward in how that's tying into our lives, our daily lives and in our retirement and how we think about aging as well.

Ben Smith:

We thought, "Well, geez, there's really a show here." That's something where for us, we wanted to dig into that. In regards to ... Of course, anytime we're talking about something and cryptocurrency is an investment, this is really isn't meant to be, Hey, this is a recommendation in any way for that as an asset class. The thought really was, well, let's just kind of get all better educated. Because we are overseen by the Securities Exchange Commission and we are kind of talking in an investment today that is investible, we do have some disclosures that I do need to read. Bear with me while I work through these. Because we want to make sure this is an important conversation, but also we want to make sure we're staying true to what we should be doing from a regulatory perspective too and making sure you guys are fully aware of the conversation we're having. The first thing I need to say is that Guidance Point advisors is an SEC registered investment advisor, and we only transact business in states where it is properly registered or is excluded or exempted from registration requirements.

Ben Smith:

Registration as an investment advisor does not constitute endorsement of the firm by securities regulators, nor does it indicate that the advisor has attained a particular level of skill or ability. The tax and legal information contained in this podcast is general in nature. Always consultant an attorney or tax professional regarding your specific legal or tax situation. Information presented does not involve the rendering of personalized investment advice. Different types of investments involve varying degrees of risk. There can be no assurance that any investment or strategy will be suitable or profitable for your portfolio. All investment strategies have the potential for profit or loss, and past performance may not be indicative of future results. Information presented is not an offer to buy or sell or a solicitation of any offer to buy or sell the securities mentioned here in. With that, we really wanted to reach out to somebody that really knew their onions here about cryptocurrency. That's something where in terms of our connections, we want to reach out to somebody that we thought, look, he's had some expertise in the past with it, but also is deeply involved, but also could help teach us.

Ben Smith:

That was the combo we were looking for. The gentleman we found, he is a manager for the Federal Reserve Bank of Boston's Applied FinTech research team. He contributes to the bank's research and experimentation with emerging technology in its potential impact on both the financial services industry and the Federal Reserve's mission broadly. Prior to joining the Boston Fed, he worked for Circle internet financial, a cryptocurrency payments and exchange company. Where he led the compliance team's blockchain forensics and market surveillance functions. Before Circle, Tyler was a senior trader with Fidelity Investments where he was responsible for supervising teams of traders in a variety of asset classes. He's a graduate of the Boston college Carroll School of Management and a CFA Charterholder.

Ben Smith:

Please welcome Tyler Frederick to The Retirement Success in Maine Podcast. Tyler, I appreciate you coming on.

Tyler Frederick:

Absolutely. Thanks for having me.

Ben Smith:

Well, Tyler, I know obviously in your role and we're all are in the financial services industries here, I know you have a little disclosure you need to make before you come on and do any formal presentation and talk here. Would you like to just share that with the audience at this point?

Tyler Frederick:

Yeah, absolutely. Just anything I mention on the podcast here are my own opinions. I don't represent the Federal Reserve System, Boston Fed and anything like that. Happy to be here.

Ben Smith:

Awesome. Well, thanks for coming on. Because obviously cryptocurrency and all the different types of cryptocurrency, the technology, blockchain, I think we've heard about it. We've read about this a lot and I know not only just maybe the audience, but our clients and us, I think we all have a lot of questions. I think this would be a really great kind of thing to walk through today with you. I appreciate you coming on. But one of the things that we always want to get to here is a little bit about you, Tyler. Is your background and kind of how you kind of got to your point today with the Federal Reserve Bank of Boston. Love to just hear, to start, just talk about your growing up experience and what that was like and any connections to Maine there.

Tyler Frederick:

Yeah, absolutely. I was born here in the Northeast. My family took me out to Southern California. That's where I did most of my growing up, but I always came back to see family in Maine and keep in touch with the roots back here. I came back to New England for school. And ultimately I was tracked back here. It kept pulling me back. Ever since, I've been back here in New England. After college, I started down in the financial services industry with Fidelity Investments. It was really during that timeframe that I did have an interest in cryptocurrency, kept an eye on it. Then this is back kind of in the early days of cryptocurrency. We would say 2011, '12, '13, '14 kind of in around there. After Fidelity, I got an opportunity to work for a cryptocurrency exchange. I did that for a couple of years. It was quite an experience, especially coming from an established financial firm like Fidelity moving into the cryptocurrency space. Then after working for the cryptocurrency exchange, moved over to the Federal Reserve Bank of Boston, studying Applied FinTech.

Tyler Frederick:

Kind of putting some of that industry experience with the innovative technologies and then bringing that industry experience within the Fed.

Ben Smith:

One of the things that we do have to say to the audience, when you hear Applied FinTech, and you hear that the guest is going to be talking about cryptocurrency, we are going to promise we're going to keep this as accessible to you all as we can. We've held Tyler down, he's promised to make sure that we're not talking too much technical language with you here today. But I'd love to just hear a little bit more of what you love about your job, but also in terms of why this career path has been kind of the career path that you chose. Because I know when you talk about, Hey, Fidelity to a cryptocurrency exchange to then the Fed Reserve Bank of Boston, on the surface you go, "Hey, obviously it's all financial services." But those are three very different things, very different roles. But I know there's a through thread there and I'd love to just kind of hear what that is about what has kind of grown for you and ignited that passion.

Tyler Frederick:

Yeah. I think we've obviously seen technology just generally in society rapidly advance in the last couple of decades. You think about the internet, you think about where we were, everyone was going to Blockbuster a couple of decades ago and now we stream everything through Netflix and all that. We think about these radical innovations and there's a lot of innovation potential in the financial services space. Whether that's the broker dealer investments space, whether that's the payments space. Blockchain, cryptocurrency, this whole world that we'll be talking about today, there's a lot of innovation and there are a lot of people who are incredible technologists kind of experimenting with code. We're seeing some of that just kind of radical experimentation that's kind of on the fringes, gradually working its way in. We're seeing corporations, we're seeing financial institutions starting to get a little bit involved with this stuff. It's fascinating to see that evolution happen.

Ben Smith:

Yeah. What I love about maybe our point in time capture that we're having today is, it almost kind of speaks to those of us that can kind of think about the early days of the internet. Is, well, it's this really massive thing, it becomes accessible, but we don't really know where it's going. We know it's going to be big. We know it's going to be something that's going to be impactful and change our lives and be widespread here, but we don't know how. We don't know why. We just kind of have this faith and we believe it is. I think that's where if you listen maybe 20 years from today in 2021, I think that might be, "Hey, well, that was an interesting conversation about where they were in this point in time." Because, Tyler, from your career perspective, just from obviously knowing you for some time and kind of all of us knowing you for some time here, is that look from you getting involved in cryptocurrency, look, the rules are being written on a daily basis.

Ben Smith:

I think that that's where I think we wanted to go today, was hearing about some of this, where it's gone, where it is today, but also where it's going to be and how it's going to impact our everyday people. I think that's the biggest thing that we hope people are listening to today and what they're going to get out of today's show. I'd like to really just dig into a lot of these things and maybe just start from a definitional perspective. I think it's always just kind of level set, let's just all use the same terms and really understand what we're each other talking about. The first thing I really want to ask on a definitional perspective is, what is cryptocurrency?

Tyler Frederick:

That's a good question. It's a simple question and we could probably spend a few hours just talking about what that even mean. But fundamentally, a cryptocurrency is a fully digital currency. Not issued by the government, not issued by ... It's not a liability against a financial institution or anything like that. It's a digital currency and where the crypto part comes from is it's secured by cryptography. Very fundamentally, cryptography, you have a public key and you have a private key. You put your public key out so that everyone can see it. That's fine. Basically what the public key does is, that's where people can spend money to. You have your private key and that's basically the password to your funds. If you lose your password, you potentially lose access to your money. It's very difficult, if not impossible, to recover if you didn't back it up somewhere. You don't have some of the safe guards that you may have with the traditional bank accounts or what have you where you can reset your password.

Ben Smith:

Just to add is, just from hearing your description, it almost sounds like if you think of kind of a show on the YouTube, it's like, here's your wallet and you have actual physical dollars or paper in that currency. If I left this on the bus somewhere and it's gone because the dollars that are in there are now gone. Is that essentially how you're describing that if I lost my password?

Tyler Frederick:

Yeah, that's exactly right. A lot of people refer to cryptocurrencies as digital bearer assets. Cash is a bearer instrument. If you lose that dollar bill, kind of tough luck. Cryptocurrencies are similar. If you forget your private key or lose your private key, you lose your funds. You hear those news articles from time to time about how somebody had their private key stored on a hard drive, it got sent to landfill and somebody's trying to dig it out because they had tens of thousands of dollars of Bitcoin on there. Yeah, it's ... That's fundamentally what it is. Is it's a fully digital currency. It's a digital bearer asset, not issued by the government. It's not a "Fiat" currency. Fiat currencies, dollars, euros, yens, they're put out by a monetary authority. Cryptocurrencies aren't that and they allow you to send digital payments to one another without the need for financial institutions, without the need for banks. You and I, we can just generate our own private keys, public keys, own cryptographic keys, and just send payments to one another without going through banks.

Ben Smith:

I want to ask a question here about buying a cryptocurrency? I'm just thinking about this if ... Obviously we're in Maine and a very common occurrence is that us Mainers, we travel across the border to Canada and we buy Canadian dollars. We have our American dollars, we buy Canadian dollars. We're familiar with we can go to the bank ahead of time and we say we need this much and there's an exchange rate and they take your dollars and they give you back Canadian dollars and toonies and loonies and all that. Can you just explain what that process is like from a cryptocurrency perspective if you bought a cryptocurrency? Because it's a little bit different where I have maybe physical paper dollars, but I have US dollars or I have some other currency and I exchange this into crypto. What is that process like and where do my dollars go?

Tyler Frederick:

Yeah, that's a good question. I remember back to the really early days of Bitcoin back in 2011, 2012, and you mentioned physical cash, I remember that's how that used to work. There were websites and they weren't the most sophisticated or secure websites, but you would meet up with people on a street corner or something like that and you could exchange currency for Bitcoin. Now that's certainly ... I never did anything like that because that doesn't necessarily sound like a secure-

Ben Smith:

No, not on the up and up.

Tyler Frederick:

... way to do it. Nowadays, fortunately, we've come a long way, we've advanced. There are pretty numerous cryptocurrency exchanges and you can open up an account online. You can link a bank account, you can link a credit card, debit card, you name it. You can send the dollars to the exchange. Some of them have an order book where you can do sophisticated trading, more like a brokerage platform. Some of them, you just have a conversion rate and it's just charging you a fee and your funds are converted. You're exchanging your dollars to the platform and then you get that coin in return. A lot of times, the Bitcoin are held in your account with the exchange. Then from there, you can transfer the funds to a wallet on your phone or a personal wallet, which we can talk about. Then conversely, you can sell your Bitcoin to an exchange and receive dollars back. So these cryptocurrency exchanges, and I work for one of those exchanges as I mentioned earlier. Those are sort of your on-ramps and off-ramps to convert between a Fiat currency and cryptocurrency.

Ben Smith:

Interesting. I appreciate that explanation because I think that knowing how that works is helpful to maybe understanding then how it's applied. I know one thing that you mentioned already, Tyler, was this thing about blockchain. I think we're maybe some of us have heard maybe cryptocurrencies and some of the popular ones out there. But that we also hear maybe a second right after that is something called this blockchain and blockchain technology and how that's the fancy thing behind it. I know obviously we only have a finite amount of time on this show, but I'd love for you to explain to us as simply as you could what this blockchain thing really is.

Tyler Frederick:

Yeah. I think so we'll talk generally, because if you talk to a bunch of technologists, you talk to 10 technologists, you'll probably get 11 different answers on what blockchain is. Blockchain gets a lot of buzz. Before we dive into blockchain, let's think digital currency. You've got to store numbers in a database somewhere, electronically. We can think about that. Hypothetically, I could run an Excel spreadsheet on my computer and just keep track of who owns a certain amount of money and just have a big Excel spreadsheet on my personal computer. Now, I could hypothetically do that, but there are a bunch of actual problems with that. For starters, what happens if I unplug my computer? Now, all the people using this digital currency can't access the spreadsheet that I have on my computer. That's obviously an issue. You probably want to distribute copies of this in some ways, so that if one computer goes offline, the whole thing doesn't break.

Tyler Frederick:

If it's going to be a currency, it probably needs to be available 24/7. You need to distribute the copy of the ledger across different platforms. The other problem if I'm just running a spreadsheet on my computer is, well, what if I just edited some numbers and changed somebody's balances or inserted money? that's a problem too. Those are a couple of the problems that blockchain tries to solve, is this one piece resilience making sure that the system remains available at all times. Then the other piece is integrity of the data, making sure that somebody doesn't make unauthorized edits to the ledger and so on and so forth. What a blockchain is, is it sometimes you hear distributed ledger technology. Essentially what you do is you take copies of the ledger and you spread them across a bunch of nodes or a bunch of different computers that have copies of the spreadsheet. That helps the resilience piece that make sure it doesn't go offline.

Tyler Frederick:

That presents some challenges because how do you make sure all the different copies of the spreadsheet that are potentially spread all around the world match each other? How do you ensure that when one computer makes a change, that that authorized change is replicated across all the different machines? That leads to a little technical jargon you hear, consensus sometimes. Computers have to maintain consensus. There's a process through which all these different cryptocurrencies they have their own consensus protocols and they ensure that all the different copies of the ledger are in sync. Now where the blockchain piece comes from ... Because we haven't talked about blocks, we haven't talked about chains. Where the blockchain piece comes from is you have transactions that get submitted to the platform. Now, each individual transaction is going to update the ledger. If I send $5 to Bob or a 10th of a Bitcoin or whatever the unit of currency is, there needs to be an adjustment to my account, my balance and adjustment to Bob's balance or his account.

Tyler Frederick:

Those transactions get submitted. Now how blockchains work is they bundle these transactions into blocks. A block will contain however many different transactions. When a block gets added to the ledger to actually process the transactions, there's a cryptographic proof that gets generated. Then when a new block gets created, it refers back to the old block. So you can't edit old blocks. They're cryptographically linked together. If you try to edit an old block, it breaks the link. So other nodes, all the other computers with the copies of the ledger will be able to see, this block, it broke the chain. It violates the rules of our platform, so we'll recognize it as an invalid block. That's where the name blockchain comes from. Each block of transactions is chained together cryptographically.

Ben Smith:

I know maybe kind of the next thing there is ... Yeah, I guess we're going to get to a little bit of fraud later, but I think that was a really good explanation, Tyler, because I think that's really important to know those two things and how they're working together. A question that we get at the end of the day because it feels like from a media perspective or maybe those that are out there they're, and maybe they're just kind of dismissive of like, "Well, cryptocurrency, it's really just digital gold." What do you hear or what do you feel like, or what do you think of when you hear people say, "At the end of the day, this is just a digital version of gold."

Tyler Frederick:

I think one of the interesting things about cryptocurrency is, it captures a lot of people's imagination for a lot of different reasons. You do get people who liked the idea of having an asset. You can sort of think about it as, it is sort of like a commodity, cryptocurrency. It's not linked to a company's financials. It's not put out by a government. In a certain sense, you can think about certain cryptocurrencies like gold. But each cryptocurrency is different. There are a bunch of reasons for each respective cryptocurrency, why somebody might choose to invest or not invest. But I think one of the key innovations that blockchain allowed, if you really boil it down, it allows two people who don't trust one another to send a digital payment through the internet without any third-party intermediary maintaining the books and records. That fundamentally is the innovation of Bitcoin and cryptocurrencies generally and that's kind of a novel concept.

Ben Smith:

I know we're going to talk about all the reasons why and lots of different things later, but I appreciate that explanation.

Abby Doody:

Your answer before was a perfect segue into my next question, which is, how many cryptocurrencies are there? You mentioned that there's a bunch of different ones, so how many of them are there?

Tyler Frederick:

Yeah. There are a bunch. There are thousands out there. I think it's between six and 7,000, somewhere in there. It's concentrated at the top though. Anybody can go out and create a cryptocurrency, there are no rules against it. It's just software, so I can just take a copy of one of the leading cryptocurrencies, just create my own version and spin it up. No one can stop me. But that doesn't make it valuable. Likewise, I can just print off some Tyler's dollars out of my printer and it doesn't make those valuable. You have Bitcoin, which is definitely the top cryptocurrency. It's about 60% of the market when you look at it by market cap, how much the asset's worth in total. You have Ether, Ethereum, that's second place, about 10% of the market. Right between those two, you have 70% of the market.

Abby Doody:

Yeah. That's great. That answered my next question, which was what are the more popular versions of them? You just named them. I think another thing that people have a lot of questions about is how is more cryptocurrency created?

Tyler Frederick:

That's a good question. Let's talk about from a users' perspectives, how a cryptocurrency transaction happens. Because we hear about mining cryptocurrency a lot. That is how new units of cryptocurrency are created and it's part of the flow of a transaction. Let's say I'm an end user and I'm looking to send funds, send Bitcoins to my friend, Bob. I create a transaction. I sign it with my private key. It's a technical term, they call it a signature. You can think about it like a chat for. You write it, you put your signature on it. I put my cryptographic signature on the transaction. I submit it to the network through the internet. That gets picked up by a computer who's mining transactions. Now what cryptocurrency mining is, is we talked about before, you can't just give one person the power to edit balances or one person the power to reject or accept transactions. What mining is, is each block, miners need to solve a puzzle that meets certain criteria. Computers ... It's a simple ... Sometimes you hear it described as complex calculations. They're actually simple calculations, but it's like a lottery.

Tyler Frederick:

You just have to hit the right one. The more guesses you get, the more likely that you're going to get the answer right. Once your computer generates the right number that solves the puzzle, you have the right to create a new block. You have these powerful computers. They're churning out guesses. They're buying a bunch of lottery tickets. They're churning out a bunch of guesses. That consumes a lot of electricity. But they're churning out a bunch of guesses. When you win the lottery, when you generate that number, you have the right to take the block, to pick which transactions go in the block and add the block to the blockchain. When you add the block to the blockchain, you receive transactions fees. Each transaction that goes through the Bitcoin network pays transaction fees. If the network's overloaded, for example, the more fee, the closer you are to the front of the line. If you put a really low fee, you might be waiting until the higher fee transactions get accepted and added to the blockchain. Then minors also get newly created Bitcoin as a reward. That's the incentive for miners to actually process transactions.

Tyler Frederick:

We think about traditional payment systems, you have credit card companies who their systems do all the processing. How do they make money? They charge fees. With Bitcoin and other cryptocurrencies, it's decentralized. Anybody can be a miner if they want to, but we need to be able to incentivize and make sure people actually do that job. By paying them transaction fees and also by paying them newly created Bitcoin, that's how miners are incentivized to do their jobs.

Ben Smith:

Tyler, I guess that leads to a follow up question then is, obviously when you're making your own cryptocurrency or whatever coin that's out there that's being created for the first time, is there some level of predetermination of how many of these additional new kind of coins are coming out just in a month or in a year or whatever? Because I could see where if all of a sudden we get really good at mining, all of a sudden we just ... Knowledge, it's not the lottery anymore. We gamed it. We figured out how to really make as many of these as we possibly could. It feels like that would devalue because if we put so many out there, we created all this extra amounts of these currencies, wouldn't it just devalue the entirety of the group itself?

Tyler Frederick:

That's a really good question. Yes, each different cryptocurrency is going to have its own monetary policy. That's actually the term that some of these cryptocurrency people use, is monetary policy. One of the neat things about cryptocurrency is, the software is publicly auditable. Anybody can just go on the internet, look at the code, anybody can run this up for themselves so they can see what the code says. For example, with Bitcoin, it's part of the protocol that 21 million Bitcoin is the maximum that's ever going to be mined at this point. You have periodically, so miners get larger block rewards early on and gradually that tapers off over time. The idea is that there's going to be more adoption over time, so transaction fees would take up a bigger slice of the pie and you can decrease the block rewards. A Bitcoin has a set cap at 21 million. Contrast to Ether, no cap on that. They have a target inflation rate, if you will, a target supply increase over time.

Tyler Frederick:

But, yeah, it's one of those things that can change like currency and then even cryptocurrencies themselves they can change their monetary policy over time if enough users agree. It's a good question.

Ben Smith:

Tyler, just today though, I know, again, we're talking 2021 in the spring, where is ... You just mentioned Bitcoin of having that cap of 21 million. How close are they to the 21 million today? Do you know?

Tyler Frederick:

That's a good question. I believe we're ... The block reward has been decreased a few times. I don't know off the top of my head. I think we're in the tens of millions.

Ben Smith:

Okay. It's just helpful. It's like, well, because at some point then you've reached your cap and then does that mean, Hey, it's more valuable because your cap has been met or is less valuable because now there's less incentive because you don't get extra coin for you? It's all the transaction fees at that point. It'd be interesting in a feature instance of what does it mean when you've reached the cap?

Tyler Frederick:

There is a lot of debate about this even in the crypto space. There's debate about what are the implications for the security of the platform, there's debate about ... For Bitcoin, the rewards, like we said, gradually decreased, taper off over time. People are saying is that part of the reason the price is going up? One of the other kind of novel things that Bitcoin does is it can dynamically adjust the difficulty of mining depending on how good people get at it. What Bitcoin does is it targets a 10 minute block time. If it sees that, all right a bunch of miners came online, everyone's taking guesses, we're getting faster blocks, it can make it harder so that ... It does it automatically. It's not a human being flipping a switch or anything. It kind of tries to reset it back to that 10 minute goal.

Curtis Worcester:

I have kind of what I feel like is a loaded question for you to, Tyler. Why do you think cryptocurrencies are so popular?

Tyler Frederick:

That's a good question. It'll definitely depends on who you ask. I think if we go back all the way to when Bitcoin was created and the white paper was published in 2008, the first block was mined January of 2009. What was going on in 2008, 2009? Well, the world was in a complicated situation financially. We were in the middle of the global financial crisis at that point. The first Bitcoin block that was mined, the miner, and this is probably the identity of Mr. Satoshi Nakamoto that you hear people talk about as the inventor of Bitcoin, but they embedded a message in there. It was a headline from The Times and it was in the UK that the banks were on the verge of a second bailout or something like that. There could be an aspect to that, that they wanted to prove that the block was mined after that news article came out. There could have been an element of that. But there was probably an element of reaction to wall street, bailouts, too big to fail, all this stuff. It's a novel financial asset that isn't controlled by banks, isn't controlled by the government.

Tyler Frederick:

There are a lot of people who find that part appealing. There are definitely a lot of people who find it appealing from a speculative perspective. In a lot of manias, you just have people piling in because they want to make money on trading. But if we kind of go under that a little bit, what are people speculating on? Why are people speculating on Bitcoin? We talked about digital gold. Some people do kind of like that sort of thesis that this is a digital gold, it's a hedge against inflation. You have the added component of gold, there's not much more adoption of gold. There are tons of people invested in gold. But you could probably foresee more people investing in Bitcoin, so you could foresee adoption. I think there are a bunch of reasons why people would be interested. Some people are interested just because the technology, the software is compelling. I think you get into some of these other cryptocurrencies where it's not just payments and you can do further complicated financial trading and create financial instruments.

Tyler Frederick:

It's kind of a melding of finance and technology where it's just open source software, the rules aren't set in stone. A lot of our investment advising and retirement planning and all this, there's a lot of science to it. The cryptocurrency world, it's not as formulaic. The rules haven't really been written yet, conventions and standards haven't been generated. I think people find that compelling. You can be creative within the finance context, which it's not always possible to do.

Curtis Worcester:

You're teeing up my next follow-up there perfectly. Speaking of rules, I think there's a common I guess thought or question of the legality of cryptocurrencies. You mentioned ... I think it's just for someone who may not be that informed on it, they see it as this currency that, as you said, it's not backed by a bank. It's not backed by a government. Is it used for me to buy illegal things on the internet? Can you kind of get into that aspect of it a little bit?

Tyler Frederick:

Yeah, absolutely. Cryptocurrencies are definitely legal to own. We'll start with that. Sometimes you hear, there are no rules, it's the wild west. There are rules. It's not quite the wild west, but there's a balance to all this. There is a lot of unknowns and there are some knowns. One of the places that is definitely known is anti-money laundering rules. When you send a Bitcoin or obtain Bitcoin, when you're touching an exchange, when you're touching a financial institution where you're getting Bitcoin from, or you're sending Bitcoin, or maybe you're storing your Bitcoin with a financial institution and using them to send it somewhere. When you're using a financial institution, they need to follow anti-money laundering laws. When you sign up for an account to buy some Bitcoin, you're going to need to provide your identity. You're going to need to submit your name, your address, a social security number if you're in the United States, that sort of thing. This is assuming we're talking to US laws here. Money laundering happens with dollars, money laundering happens with Bitcoin.

Tyler Frederick:

There're certainly stories about Silk Road and places like that where people do buy illicit substances and goods using cryptocurrency. That's definitely true. One thing I would say though, is, this is a unique thing that some people don't necessarily realize. On the Bitcoin network and a lot of cryptocurrencies, your name isn't attached to your address. It's not attached to your wallet on the blockchain. You won't see Tyler Frederick in the Bitcoin blockchain. The blockchain is publicly accessible and viewable however. I know my public key. I can go on and see all the transactions I've ever done before. If I transact with you, I presumably can see your public key because I need to send the funds somewhere. I can also go online and see all of the transactions that your wallet has ever made before. If you're a compliance person at one of these financial institutions touching Bitcoin, that's actually somewhat helpful. If you're a law enforcement professional, that's actually somewhat helpful. You can't do that with cash. Now, there's the downside of, is that something where you want to store massive amounts of wealth?

Tyler Frederick:

Where if you transact with somebody else, they can now just check out your wallet on the public blockchain and see that you have a bunch of forms on there. There's some privacy implications and there're techniques that you can use to kind of mask that stuff. But there are some interesting implications there. Another kind of area of ambiguity is securities regulations. Sometimes you have some businesses or quasi businesses and they raise funds by issuing their own cryptocurrency. Securities laws still apply, but there's some gray area over how do you actually determine whether it's a security or not? Some of those laws were written in the '30s or Supreme court rulings came down in the '30s, '40s, '50s. Well before digital. Well before cryptocurrency. There are some unknowns around there, but definitely money laundering laws still apply, tax laws still apply. Some of these again, innovative things that cryptocurrencies do aren't necessarily well-represented in the tax code because these things are developing at a rapid pace. There are lots of unknowns, but I would say, I think sometimes the regulatory uncertainty angle is a little bit overblown in the cryptocurrency space.

Curtis Worcester:

Got you. Then just kind of I guess looping back to my original question about popularity, if you were looking forward with cryptocurrencies, what do you see as kind of an optimistic outlook and then the opposite side of that kind of a pessimistic outlook for cryptocurrencies?

Tyler Frederick:

That's a good question. I think one thing that you could likely see is some of this technology ... I almost think about cryptocurrencies, blockchain, it's like a sandbox for experimentation. There is a lot of money moving into the space. Bitcoin, at the time we're talking here is about a trillion dollar asset. But it's still, especially a lot of the smaller cryptocurrencies people can experiment and not really break things. We think about moving fast and breaking things. You can't really move fast and break things with the US dollar or if you're huge bank or a financial services company. But when you're developing cryptocurrencies, you can do that. I think one thing that you can see is some of these innovations that have come out of the cryptocurrency space, making their way into the traditional financial system. I think one of the things that we could potentially look forward to is, I think a lot of these innovations are actually going to be behind the scenes. If we can make payments more efficient, we don't really want to think about the plumbing.

Tyler Frederick:

When we make a payment, we don't want to think about how the data is moving from this entity, to this entity, to this entity, to that entity and my payments finally complete after two days or three days. We want to make a payment to somebody and have it get there within a few seconds or a few minutes or something like that. We can stream a video instantly nowadays, so it sort of makes sense that we would be able to send money that way. I think some of these innovations can help traditional payments in a behind the scenes almost invisible way. I think on the more pessimistic angle, there are definite concerns from some policymakers ... I am certainly not a policymaker. I'm a technologist, experimenter and all that. There are concerns from some policymakers about the anti-money laundering piece, about the terrorist financing piece. There frankly has been stories of terrorist organizations putting Bitcoin addresses out there publicly and requesting donations. You can look at the blockchain. Again, it's public for Bitcoin. You can see that that sort of stuff does happen.

Tyler Frederick:

I could see some policymakers wanting to clamp down on some of that stuff. You do see some countries around the world putting in significant restrictions and pretty much outlawing cryptocurrency. Again, pessimistic case you can say that that could happen in the United States. I don't know what the likelihood is one way or the other, but it is a possibility. It is a ... It's a high risk space. There are lots of unknowns. I think you have to lay that out there as possibility.

Ben Smith:

Tyler, I'd like to ask the question because you've gotten to a few times in our conversation today is about, all right, if we purchase a cryptocurrency and how do we protect ourselves from fraud or theft? You talked about the password, obviously that would be a very obvious one. Is if you had a very obvious password or left it on your ... None of us do this by the way. But if you left it on your monitor and people could just kind of see it and then get access to certain things. But other than kind of that as a password protection ... Because I think some of the question is you just talked about public keys and people seeing things and going like, "Okay, that's Tyler." Or if you knew like, "Okay, well, that's Tom Brady. Here's Tom Brady and here's his public key of Bitcoin." We now know that. That everybody's wants to go after Tom Brady and maybe all the New York Jets fans go after him. They try to hack into his private key in order to get access to his accounts.

Ben Smith:

I guess that's the question is, as these things are evolving, but even today, how do we protect ourselves from fraud or a theft of our investment here?

Tyler Frederick:

That's a really good question. There's always a balance between how easy it is to use and how secure it is. You can lock a bunch of dollars in a vault somewhere and those are going to be very secure, but it's going to be hard to pay for dinner or give those dollars to a friend if they're locked in a vault. Maybe it's appropriate to lock a million dollars in a vault, but maybe it's not appropriate to lock 10 bucks in a vault. Wallet security is really important and it's a really complicated topic. There are a lot of security measures you can take with wallets. I think the thing with cryptocurrency is, if you're storing your funds yourself on a smartphone, if you have a Bitcoin app and there are a ton of different wallets out there, if you're storing it on your phone or on your own personal computer, you're responsible for your own security. If somebody compromises your security, if there's a virus and all that ...

Tyler Frederick:

There certainly are viruses that people try to detect when you're typing in a Bitcoin address into a website and they switch it on you and they replace it with theirs. You send it directly to an attacker instead of whom you were trying to send it to. It's complicated. There are a bunch of issues, and there are companies that provide custodial services for this stuff. They store your Bitcoin for you. You might have a login, a username and password, you might give them your identity information. So if you lose your password you can recover your password. It's more like a traditional bank experience that we may be used to. It's a complicated issue. I would say that and it's tough when it's such an emerging technology. Everything is new. People need to be really careful because you do see a lot of scams. Sometimes for example, on social media, you see people pretending to be celebrities and they'll put a tweet out there and they'll say, "Send me 10 Bitcoin and I'll send you 100 back."

Tyler Frederick:

If we think about this as a digital bearer asset, I'm not going to mail somebody 100 bucks in cash and then just trust them to mail me $1,000 back in cash. It doesn't make any sense. But the technology can be complicated or agnostic or like, well, is that real? Is it not? I would say, people need to be very careful with interacting with technology they don't understand. Especially where cryptocurrency it's a mix of technology and money. It's your wealth, and your wealth is particularly important to us. People just need to be very careful to not ... We hear people say invest in what you know. Be careful when you're transacting and spending money on some of these assets which may require a lot of technical expertise.

Abby Doody:

Kind of shifting gears a little bit because this podcast is called The Retirement Success in Maine, talking about retirees a little bit. They're probably more digital than they give themselves credit for. So online banking, buying stuff through the internet, all that kind of stuff. Why should retirees really be paying attention to this blockchain and cryptocurrency technology, and how could it impact them on a day to day basis?

Tyler Frederick:

That's a good question. I think the fraud piece is really important. A lot of times we hear about novel technologies. We feel like we need to catch up or we need to jump on the bandwagon. There are a lot of things that can go wrong with cryptocurrency as a digital bearer asset. If you lose your funds, you can't submit a dispute to your bank and get your funds back. It's complicated. It's hard for us who are in the space to keep up with all the developments. The people who aren't in the space kind of experimenting with the tech on a regular basis, there's a lot of potential for fraud and things to go wrong. But I wouldn't say, and we've talked about this a little bit earlier, but payments are more and more digital. If we think about Maine in particular, Maine's a rural state. Lots of places may not have access to bank branches right down the road.

Tyler Frederick:

If we can make digital payments, and this isn't necessarily suggesting that everyone goes out and starts making all their payments in Bitcoin or you name it, but if we can make digital payments more efficient, a lot of the innovations will be behind the scenes. They'll be invisible. But in practice, if people can start making payments and the whole thing settles within a minute instead of sometimes we mail checks or we wait for ACH payments and sometimes they take two or three days, we can start seeing some of these real-time payments. That can be a real practical benefit for a lot of people who may be more digital than they give themselves credit for.

Curtis Worcester:

Tyler, I want to kind of rotate here because I think many countries globally, including the United States are undertaking this stronger sense of nationalism, putting their country first. I think many developed countries use their economies, their currencies, financial systems as ways of bartering with other nations to give whether it's favorable trade, to change environmental conditions, negotiate rules of war, et cetera. I think the question here is, if the citizens of these developed countries start putting a lot of their wealth into currencies, example cryptocurrencies, that aren't that currency of their home nation, does that seem to threaten the nation of state?

Tyler Frederick:

Yeah. Borders don't exist with cryptocurrencies. There's no concept of cross border payments with Bitcoin because there's just no countries involved. A payment from a person sitting in the United States to a person in Canada, it's invisible to the actual Bitcoin protocol itself. That sort of concept has the potential for some benefits. When we think about cross border payments, well, borders are invisible. That makes cross border payments easier. But there's some implications to that strategically. A lot of the ways that capital flows around the world now, it just sort of relies on the fact that there are borders and that's how payment systems work. Bitcoin certainly disrupts that. If we think about how mining works, miners are located all over the world and anybody can be a miner. You don't have specific institutions validating transactions. I think that is a big variable for policy makers. If there is a lot of adoption, I think that may make policymakers consider that reality and take certain measures if they feel like that's appropriate to retain some of that control.

Ben Smith:

Yeah. Tyler, I think one of the things that I like what you're saying here is, look essentially why is cryptocurrency available is that there's a market for it. Is there's a demand for this. Just because there's a demand for this one thing does not mean that it's binary from other things that are already in existence from being still around. We hear this example on the investment world in active management of stocks and bonds versus passive management. It's like, well, they can be conflicting ideas and philosophies, but there's still a place for both. I think what I heard you say a little bit there was, Hey, just because this is there, it doesn't mean that maybe it throws out all world currencies. There probably still is a US dollar. There's still a ... By the way, the euro is still a pretty new currency by the way. There's still ability for new currencies and new nations or consortium of nations to band together and create this and create their systems on it.

Ben Smith:

I think that's just a really important point I just want to make here that you were kind of saying as well is, it has a place because there's a market for it. If there wasn't a market for it, then it would go away. Maybe there's other things that 20 years from now, the technology is still there and crypto isn't there for some reason. But it will have an impact. I want to ask another question here of you, Tyler, is because I think there's more adoption or we're hearing just more popularity of cryptocurrencies, but also we're hearing there's a groundswell for some time, but even more so is this concept of being green. It having a neutral carbon footprint and a neutral carbon impact that I think we're a little bit, maybe more aware of our impact on our world fellow citizens. I think where we're seeing of these themes is, maybe there's a little bit of friction between the two. I want to hear a little bit about that because you talked about this, you've mentioned it for a little bit in terms of that mining.

Ben Smith:

I don't have that much at all experience just tangentially hearing about it, but you hear about especially the people that own these computers and they're investing in video cards and all these hardware equipment that has to be able to process these levels of transactions and try to get the lottery as you put it. But it seems like that consumes energy. We can talk about this cryptocurrency, and is this really a green thing? Or is this maybe not really a green trend at all?

Tyler Frederick:

Yeah. Power is a big component of securing the network. Forgetting about putting the green stuff aside for a second, when you're doing just is mining profitable for me? A big part of the calculation is what are your electricity costs. For a lot of people, if they have high electricity costs, mining simply isn't profitable for them. Power is an important part of the equation. When we get ... Bringing back the green environmentally friendly component, Bitcoin does consume a lot of energy. It consumes more power than a lot of countries around the world. Now that power has a purpose. We're not just burning up energy. The more power that it takes to mine, the more secure the platform is. Essentially, if you want to reverse an old transaction, you need to redo the work that everyone else did. However many blocks back you're going, and you need to redo that, and then some. You need to catch up and build a new chain that surpasses the existing chain. So more electricity does make the platform more secure. But the other component is, their estimates, I believe approximately 70% of the energy used to mine Bitcoin is renewable.

Tyler Frederick:

Is green energy. If you think about stuff like hydro and all that. But one of the clever things about Bitcoin is it operates 24/7. Blocks are being generated approximately every 10 minutes around the clock. What that can do is, it can consume some of the surplus power that's not being used in certain locations. We think of some of the hydroelectric dams in China. China's planning cities that aren't occupied, aren't populated yet, but they have hydropower. Well, nobody's living there yet, but if we have the ability to generate all this hydropower, why not plug it into the Bitcoin blockchain? Otherwise it would simply be wasted. We think about some of these natural gas operations, and sometimes they just need to vent some of the unused gas into the air if there's no demand for power. Why not plug that into the Bitcoin blockchain or any blockchain? But it is a concern. We talked about all the innovation that's going on. Some of these cryptocurrencies are beginning to develop ways to add new blocks that isn't mining. That these computers don't need to churn out all these puzzles.

Tyler Frederick:

Really what you're trying to accomplish as one entity, isn't in control of validating transactions who's in and who's out. If you can do that through a voting process and ensure that one entity doesn't control 51% of the votes, that's another way to do it. You don't need to do it via mining. We talked about Ethereum, that's one of the things that Ethereum is striving for. That's on their roadmap for innovation. They've started to roll some of that out, is a voting based process that is less energy demanding, more environmentally friendly.

Ben Smith:

Interesting.

Abby Doody:

We've talked a lot about where cryptocurrency is today. If we look in our forward-looking thought, where do you think cryptocurrency is going to be in the next 10 to 20 years? Where do you think it's going?

Tyler Frederick:

I have no clue. I'm not going to pretend to have any idea. If we think back to a year ago, we're in March 2021, if we think back 12, 13 months ago, there was a lot of chaos in the financial markets. Sometimes people ... We talked about why people might hold Bitcoin. One of the reasons some people thought is, it's a stable store of value. In chaos, people are going to want to get into Bitcoin. That definitely didn't happen a year ago. We saw Bitcoin plummet down to $3,000 per Bitcoin. Right when the financial markets were experiencing chaos, Bitcoin was right with it and you could probably say experienced more chaos. As little as a year ago, Bitcoin was in the 3,000s. As we speak, Bitcoin is in the 50, $55,000 range. It's an incredible rate of return over 12 months. Who knows where it's going to go from here. Bitcoin has experienced many periods where it's been 70, 80% off its highs for an extended period of time. it's obviously experienced a 20 fold increase the past 12 months. Who knows?

Tyler Frederick:

I think that's one of the things that is appealing for certain people. They do like the volatility and the excitement and the ability to speculate and all that. I think that is appealing for people. But there were real risks and real unknown. I don't know. I think anybody who does claim to know, I don't know, I wouldn't really trust that.

Curtis Worcester:

That's great. Tyler, we have reached the end of our conversation. I have one last question for you that is not related to cryptocurrency. Well, it could be, not directly. Obviously we're here on The Retirement Success in Maine Podcast. A question that we love to ask all of our guests, so I want to ask you, what is your personal definition of retirement success?

Tyler Frederick:

For most of our lives, we need to put food on the table, we need to pay the bills, we need to pay what we need to pay to get through life and watch out for our families and all that. We need to work full-time jobs for the most part to make that happen a lot of us. Some of us are fortunate enough to work in jobs that we love and don't really consider that work. But for many of us, we just got to do what we got to do to put food on the table. If you've been fortunate enough to prepare for retirement over that course of time, retirement is when you take that constraint away. You don't need to spend 40, 50 hours a week doing something you don't necessarily like to put food on the table. Now, you can kind of take charge of your life without that constraint. For me, it's finding fulfillment. It's being able to pursue whatever area of life it is that you really want to without that constraint. Whether it's going on vacations, whether it's moving closer to family and being around kids or grandkids.

Tyler Frederick:

Whether it's getting more involved with your faith, with your church. Kind of you name it, it's you're able to take charge of your life and spend time on things that you love rather than stuff you just need to do to put food on the table.

Ben Smith:

Well, Tyler, I think that's a really insightful answer. I appreciate you sharing that with us today. I really can't thank you enough for coming on and just sharing just your knowledge, your expertise on just cryptocurrency in general. Just again, I think for a lot of us is that we've never really had the explanation of what this is. What's it about? How's it going to impact me? I think you did an excellent job of covering all that today and then some with it. I really appreciate your time and we'll catch you next time.

Tyler Frederick:

Happy to be here. Thanks for having me.

Ben Smith:

Take care. Really great to have Tyler Frederick on the show today. Again, for somebody that has really been around it, worked with it, been part of a crypto exchange and done research projects just kind of touch cryptocurrencies in lots of different ways and have him come on the show today and really explain and even to the three of us in as much of a understandable, relatable way as we can, I thought Tyler did a really great job kind of covering the topic of cryptocurrency in your retirement and what to know. I thought he did a fantastic job there. As always, we love to wrap up our shows with lessons that we learned from today. I'd love to have maybe Curtis, do you want to kick off what you took from today's conversation with Tyler?

Curtis Worcester:

Honestly, I think the whole conversation was the takeaway for me. It's clear just how much Tyler knows about the cryptocurrency world, as you've said. But specifically to hear about for him to dive into the blockchains the way he did and the security, whether it's your public key and the private key. For me that answered a lot of questions on the security of owning cryptocurrency. When he got into the mining of it and hearing about the transaction fees and the rewards for that, that the whole thing again was very informative for me. It's just clear how much expertise Tyler has in the area.

Ben Smith:

Yeah. Abby, how about yourself? What was something that you took away from today's show?

Abby Doody:

Yeah. I thought he did a really good job of explaining kind of the technology behind these exchanges and cryptocurrency and payments between different parties. I thought it was interesting the way that he linked that to the fact that we may see changes behind the scenes of online payments or digital payments that we might not even notice all stemming from this technology that originated with cryptocurrency. It's something I had certainly never thought of and a really good takeaway that he brought up, I thought.

Ben Smith:

Yeah. That's a really good point because again, I think there's something where maybe the headline of it, or maybe the value of it is I think what gets a lot of the attention and maybe less of the indirect impacts that it might be having on today's world and especially on a retirement. Or as if he's saying, Hey, speed of payment may change over time. I know for businesses, that's a big deal where it may be you've paid your employees first without receiving revenue which happens to a lot of contractors. Things like that could be extraordinarily beneficial for lots of different places. That's a really good one. I think it was really an important point where Curtis asked the question about nationalism. Is, Hey, this is something we're engaging US dollars is important and something where ... I could see where there's a pride in kind of doing business in my own home country's currency.

Ben Smith:

But from a another perspective, you could also see the criticism of that, of, Hey, in especially looking back and just the last two financial crisis of our countries in the world where we've actually the government wanted to stimulate the economy. One of ways that they do to stimulate the economy, get it back out of recession is they start to maybe making payments or they start loaning money. One way to do this is they're printing dollars. Print more of your currency, put more out there to get in people's hands. Well, when you do that, now, there is an entity manipulating the value of your wealth. That's a very traditional, I think, complaint or criticism of maybe country issued currencies. Cryptocurrency kind of being, again, a little more formulaic and a little bit more determined ... Again, I think he was also interested in here, Tyler's kind of take on, well, here's some criticism of crypto too.

Ben Smith:

One of those being that, Hey, these are new rules and the values of them, while they are that, but again it's digital, so you are trusting a computer system. There's a lot of ... I know from, especially from a rural perspective and we've had lots of digitization of the economy, including jobs, there's a lot of distrust around computers in general. We can absolutely see where cryptocurrency and what it represents is very much against what a lot of people feel and where they believe. Again, what today's show was really wanted to be about was really just an education point. Not an investment conversation, not of the merits pros and cons of things, but this is out there. There's lots of things about it. You're hearing this more and more, and how does it impact people and how can we maybe educate all of us a little bit more about it is very important. I think again, Tyler did a great job today. For those that are of course looking for a little bit more information, we will have a few more links in our show notes of course.

Ben Smith:

You can go to blog.guidancepointllc.com/41. So we're show 41 today. You can find more information there. We'll try to get some more things that if you want to read or get a little more up to speed on cryptocurrency, you can find it there. As always, we appreciate your listenership. If you like, feel free to just hop in and either in your favorite platform, just drop a review or let us know how we're doing there. We'd always appreciate that. But until next time, take care.