☝️ The point of stablecoins
October 14, 2021
The Gist
TOGETHER WITH

Happy Thursday. Take a guess at the number of people in the world who have bought or sold crypto as of June 2021, according to BofA: a. 51 million, b. 221 million, c. 1.1 billion. Check the answer in the Trending section below.

Here are the money topics for today:

  • Stablecoins—the bridge between crypto and fiat
  • Rebalancing your portfolio is a good habit
  • Talking to your parents about their retirement plans

FYI, last chance to fill out this survey from yours truly—it should take only a few minutes of your time. We're giving away $50 Amazon gift cards to two randomly selected respondents tomorrow. We're grateful for the feedback 🙏!

CRYPTOCURRENCY

Stablecoins: The bridge between crypto and fiat

Cryptocurrency can be confusing, even to the veterans, but especially if you’re just getting started. There’s a lot of technology, new terms and overall novelty to this emerging asset class, so it’s very easy to overlook some of the most important parts of it.

Depending on how deep you are into the crypto sphere, you may not have even heard the term ‘stablecoin.' It’s an easily overlooked aspect of the crypto world, but it plays an important role nevertheless.

What are they?

  • Stablecoins are cryptocurrencies run on blockchains apparently tied to the value of "stable" reserve currencies, usually the US dollar, or exchange-traded commodities like gold or silver.
  • That means their value is pegged to the specific stable reserve asset it's tied or collateralized to. In that way, stablecoins are like the bridge between cryptocurrency and their reserve assets.
  • Crypto still has the inherent issue of being volatile, and stablecoins set out to solve that problem, just like their name implies.
  • Ultimately, this provides both the instant transaction speed and privacy of crypto while accomplishing the stability and backing of reserve assets. 
  • Some of the most well-known stablecoins in the US are Tether, USDCoin, Binance USD, Dai, and others with an aggregate market capitalization of more than $100 billion.
  • There's an inherent risk though. A large majority of such coins are backed by companies or organizations that claim to have every invested dollar backed by fiat currency or assets with the equivalent value. Yet there's no way to know with any certainty what the companies are actually holding. 
  • And none of these coins are regulated like a national currency or exchange-traded commodities.

Are they for you?

Today, stablecoins aren't really meant to be an investment or used as such. They’re a value holder that serves as a substitute for USD or any other fiat currency you might’ve used otherwise. Just like NFTs are usually bought with Ethereum, stablecoins are for purchasing crypto or holding cash in a wallet.

They can be a viable option for users whose traditional currency tends to be volatile, for those who need to transfer money between exchanges or wallets, or simply to store some funds on an exchange on standby for periods between investments. Crypto traders usually keep their money in stablecoins invested on a crypto exchange in between crypto trades to avoid paying the high fees to cash out.

Thought for the road

The SEC is looking to start regulating the cryptocurrency industry more heavily. Whether that’s good or bad is not for us to decide, but despite their seeming innocence, stablecoins won’t likely be exempt from this audit. 

In pursuit of this, the White House has actually formulated a couple specialized, Treasury-led committees to look into these coins, and they seem to be planning to recommend that the Financial Stability Oversight Council (FSOC) consider whether or not stablecoins pose a broader financial risk.

While this is all up in the air at the moment, regulation to some extent seems all but certain.

₿ Need a review of the basics of cryptocurrency? Look no further:

INVESTING

Rebalancing your portfolio is a good habit

Rebalancing your portfolio is like getting your tires balanced. Just as you'd want to wear your tires evenly at all times to get the most life out of your car, the same logic applies when it comes to rebalancing your portfolio. And if you own stocks, bonds, mutual funds, or ETFs in any combination within your retirement or taxable accounts, rebalancing applies to you. 

The point of rebalancing is to basically keep your portfolio allocations and risk levels you initially set in check. For example, say you had a portfolio that was 50% stocks and 50% bonds. Let's say that over time and given the hot market, your portfolio shifted to being 75% stocks and 25% bonds, which is a lot riskier than how you started out.  What happened here is that stocks outperformed bonds and overtook a larger percentage of your portfolio. 

Your risk preference and ideals for where you want your money to sit are personal based on your unique financial situation and goals. There’s no one right way to do it. That being said, here are a few things to know before digging in.

  • How often you rebalance is, unironically, a balancing act ⚖️. Becoming obsessed with rebalancing your portfolio any time you see the numbers tick a bit further than you’re comfortable with is distracting and potentially costly. The opposite can be said about just letting it ride without action. Like Aristotle said, somewhere in the middle lies virtue. If you don't know where to start, pay attention when your allocations are off by at least five percentage points; and if your weights are off 10 points or more, it may be time to act.
  • It’s a good time to diversify 🕰️Gaining a lot in one area of your portfolio also means you’ve got a lot to lose in one area of your portfolio. Especially as you near retirement, it may be time to diversify and lock in some gains, reallocating them to more friendly, less volatile asset classes.
  • Clear out some of your losers 🧹. It may be time to dump some of your losing investments in your taxable account to realize capital losses. You can then use those losses to offset gains elsewhere in your portfolio. If you have more losses than gains, you can deduct as much as $3,000 of loss towards your ordinary income. If you've got more than $3K of losses, bank them to use in future years.

📚 Refresh on what it means to rebalance your portfolio and why you should do it:

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FAMILY PLANNING

Talking to your parents about their retirement plans

A surprising number of boomers are still financially unprepared for retirement, even despite holding the largest portion of wealth. Per data from the 21st Annual Transamerica Retirement Survey, golden years savings average about $202,000 amongst this generation, and 45% have none saved at all, which leaves them largely short of the mark. (Check out this prior Gist for ballpark figures.)

In a 2019 poll, 73% of Americans said they’d never had an in-depth financial talk with their parents. So, it might be time to step up and have a conversation with your parent(s) about their finances.

A few guidelines on approaching this subject:

  • Proceed with care: If you’re broaching the topic of finances with your parents, it’s important to come at it from a loving perspective, not a condemning one. The objective of opening up this dialogue should be to help them progress, not lament any of their missteps. 
  • Offer advice: Chances are if you’re considering this, you may be more knowledgeable about investing than your parents. Offering advice to point them in the right direction is a good first step, and perhaps the best thing you can do for them. 
  • Be consistent and supportive: We can’t expect our parents to drop everything and follow our suggestions. In some cases, it might take some time and persistence on your part. That’s part of the process, and keeping your altruistic demeanor throughout is key.

ASHU'S CORPORATE CORNER

Today's Movers & Shakers

  • Morgan Stanley (+2%) topped the street on earnings and revenues on strong asset management and investment banking businesses
  • BofA (+2.5%) beat earnings and revenue forecasts on the back of a solid increase in net interest margin. Wells Fargo (+1.2%) also saw solid earnings and revenues
  • Citi (+1%) beat profit estimates handsomely on the back of great equity and fixed income trading as other banks have also seen. Citi also did well in investment banking but is seeing weakness in consumer banking. Citi is still trading below the tangible book value so it might take a bit of time for Jane Fraser to make the changes of the type MS did under James Gorman
  • United Healthcare (+2.5%) beat the street on sales and profits
  • FedEx (+1%), the package delivery firm, got a boost from 24-hour operations at US ports
  • Walgreens (+1%) had great earnings and revenue as a result of covid-19 vaccinations
  • Caterpillar (+1.2%) after Cowen began coverage with a “buy” rating
  • Deere (-1.5%) as workers went on strike
  • Taiwan Semiconductor (+3.8%), the world’s largest semiconductor maker, saw its profits jump 13.8%, exceeding forecasts
  • Shopify (+1.7%) is partnering with MSFT, Oracle and other cloud providers to streamline its operations
  • Avis (-4.3%) was downgraded by MS because the car rental firm is “at peak cyclical earnings”
  • UPS (+2.6%) was upgraded to “buy” by Stifel Financial
  • Boeing (-0.5%) on fresh production woes

This commentary is as of 9:10 am EDT.

📈 TRENDING ON FINNY & BEYOND

  • Answer: 221 million people have bought or sold crypto as of June 2021, according to Bank of America's recent survey on Digital Assets. Btw, this is up from 66 million as of May 2020. (BofA survey “Digital Assets Primer: Only the first inning")
  • 💡 If estate planning is on your or your parent's mind, check out Trust & Will*—they make the process of setting up your will, trust, or nomination of guardianship as simple as possible. (Trust & Will)
  • 🙌 Record number of women opening retail investing accounts. (Yahoo)
  • ₿ Jaime Dimon, CEO of JP Morgan, thinks Bitcoin is worthless. Here are his many bitcoin moments of regret, in one chart. (MarketWatch)
  • ✨ Finny quiz of the day. If you're rebalancing your portfolio or even trading more, please beware of the wash sale rule. Review the gist of it here:

Finny is a personal finance education start-up offering game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools. Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own bosses! Finny does not offer investment or stock advice. The Gist is sent twice a week (Tues & Thurs). The editorial team: Austin Payne and Chihee Kim. Thanks to Ashu Singh for Today's Movers & Shakers.

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