WSID? Step 7 - Protecting Wealth

Don't rely on systems that are deemed to be normal and eternally reliable today to preserve your wealth or as part of an investment strategy.

Pensions - I'm 20+ years from retirement age.  I've been paying into various pension funds for 20+ years.  It is my personal opinion that these will be utterly useless by the time I'm supposed to retire, so I have stopped paying in to them. Why?

1. My latest pension statement quotes a forecast annual growth rate of between 6.5% to 7.5%.  Where on earth are they investing this?  Spanish 10 year bonds?  There's nothing out there that is legal and providing a return like this.  So the growth estimates are grossly exagerated
2. The value of £1 in 20 years time will be considerably less than today, i.e. inflation.  However, governments have been manipulating inflation figures for years, so even investments keeping up with official inflation probably are losing out in real terms.  My shopping as jumped up a helluva lot more than the 2+% of official inflation. My view is it's because the basket of goods used to calculate inflation is averaging out the ups ad downs of individual items.  Food is going up, but flatscreen tellies are going down in price.  Problem is who buys a new telly when they are struggling to put food on the table.  We feel the pain of the expensive items and get no benefit from the cheaper items

Savings - Yes the government suposedly backs the first £85k of savings.  That is until they have to change the rules because they can't keep that promise.  Won't happen?  The government promised?  You mean some lying, double talking politician promised?  IF we get to a full collapse of the financial system, I'm not going to be relying on the government to protect my savings

The credit society -  in Germany now, and in the past in the UK, the mentality has been to save for something you wanted.  We now have a consumer society in the UK that wants everything now and is happy to go in to debt to pay for it. I cleared ALL my debts 3 years ago.  If I need (not want) something expensive, I save up for it.   It's better to have the money in my control earning pitiful interest and available to use for something else in emergencies, than it is to have a new LCD tele and be paying crippling interest in a loan.

The lemmings that believe and don't challenge the financial system are going to follow it straight over the cliff.  Learn to think differently!

The long term prospects for fiat currencies seem to follow the same trend: they all go bust eventually. This is because it is necessary for governments to use inflation to reduce their debts and make their currency attractive to foreign investors. Unfortunately, this leads to a dependency on continuous growth because every tenner that gets printed has to be offset by a tenner's worth of debt from the future. Clearly over a long period of time it is unsustainable and a default must occur. This default typically wipes out most people's savings through no fault of their own.

Any investment that depends on a legal structure to support it would be at risk. For example, ownership of stocks, shares, gilts, bonds, ISAs, land, property and everything else that could be easily grabbed during a crisis would be taken in order to reduce the scale of the default. This has happened many times in the past (just see America's response to their crisis when gold ownership became illegal under Executive Order 6102). Bartering for essentials would probably be the most common response at this time until the economy adjusted to the new level of wealth.

So where can you keep your wealth where it will be safe during a financial crisis? Bitcoin provides one answer.

What follows should not be interpreted as financial advice. I am merely making you aware of a technology that exists and is proven to work.

Bitcoin, for those who are not aware of it, is an internet currency that has the following characteristics:

+ You do not have to pay any fees to receive bitcoins
+ You do not have to register with anyone to send or receive them (nobody knows if you have them or not)
+ You can exchange bitcoins for most currencies (certainly USD, EUR and GBP) any time or day of the week (24/7)
+ You can receive bitcoins offline (i.e. you can print the address on paper handouts if required)
+ You can store bitcoins offline (i.e. you can print the access code on paper and hide it if required)
+ You can send and receive bitcoins to or from anyone, anywhere in the world (Bitcoin is global)
+ You are outside of the traditional banking system
+ All the software required to operate them is free and open source and supported by a strong community
+ Bitcoin itself promotes a fair and just economy by offering people an internet currency not under anyone's control (no government, no corporation, just a collaborative global effort)
+ It is deflationary by design (a bitcoin today will buy more tomorrow) with the rate of deflation tending to zero over a known curve
+ It has been running continuously since January 2009
+ It is based on solid, proven cryptography that is at least as strong as any existing bank

There are some downsides that you need to be aware of:

- The price of bitcoins is extremely volatile with variations of 5% per day being common. This is due to the small size of the economy, but it is growing every day.
- At present you need access to an internet connection of some kind to spend bitcoins. This is to allow public transactions to synchronize. Private transactions can be made entirely offline.
- It is by no means mainstream. You won't be spending bitcoins in the supermarket any time soon.
- You are in charge of your own security. If you lose your access code then you lose access to your bitcoins. Your access code could be stolen if you don't protect it properly. There are detailed instructions that tell you how to protect it properly, but if you lose it then no-one can help you. This is the same as looking after a wallet full of cash. If you leave it lying around and it gets stolen then you're your own in getting back the cash.

If you want to go ahead, then you need only do 2 things (overall time to complete is under 5 minutes):

1) Download a free and open source program to generate a Bitcoin address (think of it as like an email address for money)

2) Provide that address when you want to receive bitcoins

An example of how bitcoins can be received on a blog is shown on my personal blog here: http://gary-rowe.com/agilestack/2012/01/09/how-to-accept-bitcoins-on-your-blog-with-no-code/

You can find out more about Bitcoin at the main site here: http://bitcoin.org

You can dispel the usual FUD about Bitcoin here: https://en.bitcoin.it/wiki/Myths

If you decide you want to try it out. Then see here for the main client choices: http://bitcoin.org/clients.html. I recommend MultiBit for most people's requirements.

If you want to buy bitcoins online in the UK, I would recommend the Intersango exchange: https://intersango.com

If you have any further questions, I would be happy to answer them for you.