Wednesday, May 31, 2017

Thoughts about Bitcoin

I've recently started a Facebook group for this blog where members are encouraged to ask any question about money. Out of the blue, one member asked about Bitcoin. In an effort not to monopolize the forum, I waited several hours. But nobody was keen on answering the question.

I eventually end up writing a brief but very informative answer only to see the post mysteriously deleted (ugh!). I'm writing this to preserve what I wrote and to expound on the topic a bit while the upfront research is still fresh in my mind.

I'm no crypto-currency expert and never owned Bitcoins, but I'm probably more qualified to write about the technological aspects of Bitcoin than most bloggers out there given my experience:

  • spent almost 20 of my working years developing a Foreign Exchange trading system
  • led the development of an FX order management system used by broker dealers
  • implemented a web-based payment system used by various regional banks
  • architected my company's web security infrastructure.

In other words, I used to eat currencies, payments and digital certificates for breakfast. However, I'm going to spare you from hearing about the technical intricacies, so you don't fall asleep.

Without further ado:

What is Bitcoin?

Bitcoin is a type of digital currency with a built-in payment network. The exchange rate as of this writing is $2,236.02 per BTC or Bitcoin currency. As recent as one year ago, it was worth about $500 apiece. That's more than 400% return!

Hold your horses, before you invest speculate. I wouldn't recommend anyone to invest in Bitcoin because of the wild swings in prices. There are legal and regulatory issues that need to be addressed that affects its volatility. 

For one thing, Bitcoin is not legal tender. It's  not recognized by law as a medium of payment that can meet a financial obligation. This means that you cannot require your landlord to accept your Bitcoins as late payment for your rent-- he can still legally kick you out so you fall flat on your face.

Should you do decide to gamble, make sure it's a small portion of your portfolio or be prepared to lose your shirt (along with your underwear).

The idea behind Bitcoin is that there's no central regulatory bank that can control the supply of money. Governments like that of China or the U.S., for example, can simply print money to devalue its currency to make exports more competitive-- which often causes inflation. Not so with Bitcoin, there's a special algorithm to prevent that from happening.

Just like gold, Bitcoins can be mined albeit electronically-- anyone with specialized equipment, software and knowhow can become a miner. The mining process involves the use of high-powered computers to solve mathematical puzzles as controlled by a special algorithm. Miners are issued a certain number of Bitcoins in exchange for the work done. It is this same process of solving mathematical problems that make the payment network more stable and secure.

Bitcoin peer-to-peer network

The Napster of money

Do you remember Napster? It was the music service that first popularized peer-to-peer file sharing protocol. Between 1999 and 2001, pretty much anyone can download MP3 music files for free. And millions did so, including myself who acted like a kid in a 24-7 candy store. The fun didn't last a long time as it was eventually shutdown after the company was sued by Metallica and Dr. Dre.

Unlike traditional client-server network architecture, peer-to-peer networks don't use centralized servers to host the resources. Instead, pretty much any node in the network can allocate resources to other nodes. For Bitcoin, there are many advantages to this setup, among them:
  • no central point of failure
  • no third-party involvement
  • minimal transaction fees.
It's no surprise that this is the network architecture of choice for Bitcoin given its decentralized nature. This means that a merchant in the U.S. doesn't have to deal with a shady bank in Somalia to accept payments from Somalis. No third-party involvement means that the transaction can occur instantaneously with minimal transaction fees.

Built-in payment network

What makes Bitcoin revolutionary is that it's both a currency and a payment network. Never in the history of mankind had a currency been interwoven with a payment network. A dollar or a peso is a currency, but neither are payment networks. Paypal and Visa are both payment networks, but neither are currencies.

Software that runs Bitcoin protocol is called a wallet (you can download an app for your smartphone). It allows the holder to move Bitcoins from one wallet to another instantaneously without the involvement of a third party. This essentially makes users to effectively become their own bank.

Other interesting facts

Bitcoin was supposedly designed by a certain Satoshi Nakamoto-- a man born on 5 April 1975 (which coincides with my wife's birthday).  Many believe this is just a pseudonym for a person or group of people who developed the protocol.

Bitcoin protocol is open source. Much like Wikipedia, anyone can view and modify the code. Subject to review by a panel of people, of course.

The first Bitcoin transaction was made in 2010. Somebody from the U.K. purchased 2 Papa John's pizzas for 10,000 BTC. If that person kept the coins, it would have been worth around $22,000,000 today!

Would you invest in Bitcoin? Please comment below.
Want to learn more about Bitcoin? Here's a very good book that I recommend.

Sunday, May 14, 2017

Rich Mom, Poor Dad: a tribute to my mom who saved us all

My mom came from a rich family in the northern Philippine town of Batac, Ilocos Norte. The same town where the late dictator Ferdinand Marcos, known for looting the country of billions of dollars, grew up. In fact, they were contemporaries. My mom told me stories about how Ferdinand's father, Mariano Marcos-- a budding candidate for the country's National Assembly, use to borrow money from my grandfather who was a U.S. Navy veteran with 'boatloads' of money that can potentially finance his campaign.

No, my mom didn't get rich because my grandfather stole from the U.S. Navy. Nor did she become rich because she happens to date a future billionaire dictator when they were younger. Ferdie wasn't her type anyway. For one thing, he was 13 years her senior. Another thing is that he was an accused murderer. In 1935, young Ferdie was charged with murder. He was accused of personally pulling the trigger that killed his father's political rival, Julio Nalundasan. The murder happened just a few days after his father lost the election to the latter. A charge that he was initially convicted of. But it was somehow overturned by the country's Supreme Court. Marcos was subsequently acquitted and eventually rose to power to rule the country for 21 years. He was eventually deposed but only after leading the nation to economic peril.

Her rich upbringing

Note that being rich is a relative term. When you can barely eat 3 square meals a day, like most poor Filipinos struggle to do, and then you suddenly find a large elaborately prepared food on the table, then that can instantly make you feel rich. My mom's family weren't filthy rich, but they were probably in the top 5% of the society that they lived in. In that sense of the word, she grew up rich.

My mom and her siblings weren't raised in a mansion, neither were they fed with a silver spoon, but they lived a very comfortable life. My grandpa who had thriving real-estate investments chose to continue to live modestly. After World War II was over, he was able to send all his 5 children to study in Manila when the dust finally settled. Three of her siblings eventually became physicians. Two eventually made their way to the states to practice lucrative careers. My mom learned her very first lessons in frugality from my grandfather.

My mother told me that her household was the first one in town to ever buy a refrigerator. A very expensive luxury at the time. Her 'rich' neighbors initially made fun of them thinking that it would be impractical to use one as they hardly have reliable electricity in the neighborhood. Soon enough when everything stabilized, they started buying their own to keep up with the Joneses. Back in the day, people get by without refrigerators by preserving meat by traditional methods-- removing the fat, applying salt, and letting it cure under the sun.

Grandpa's U.S. Navy stint

As a young lad, my grandpa was a U.S. Navy sailor. He was honorably discharged shortly after World War I. His total pay per month while in service was $17. At the time of his discharge, he was paid $145 in full and $38 per month in benefits, thereafter. If you factor in inflation, his veteran benefits would have been equivalent to a one-time payment of $2,300 and $600 monthly in today's money. I've found out about all these numbers by obtaining a copy of his service records from the National Personnel Records Center archives. If you earn that kind of money as a 26-year-old, you are considered rich.

(  For readers out there who think that first generation immigrants like me are just here in the states to enrich ourselves at the expense of robbing natural-born Americans of their jobs. Please be aware that some of us are descendants of people who actually fought for your freedom. Admittedly, losing WWI probably would not have cost you your freedom, but you get the point  ;)

Meeting my poor dad

Mom may have lived a very comfortable upbringing, but like everything else, it didn't last a very long time. At age 24, she was swept off her feet by my father, a struggling law student. They fell in love and got married, after a brief engagement. Dad eventually ended up impregnating her, not once but nine times! By the time the last baby came out of her womb, everything was 'perfect'-- it was me that came out last.

My father grew up as the only child of a widowed mother who barely graduated from elementary school. His sister met an unfortunate accident when she fell down the stairs and died later of a brain hemorrhage when they were both very young. He often recalls attending his elementary graduation wearing a girl's shoe as at the time he had no more workable good shoes but merely sandals. It was this lonely and miserable upbringing that my poor dad experienced that I believe led to his unstoppable desire to procreate.

Thriving careers

He managed to support himself first by doing the household chores for relatives in exchange for a meager salary. Eventually, he landed a job in Manila as a typist, messenger, and janitor for his congressman, Don Quintin Paredes, who ended up becoming the 5th Senate President of the Philippines. My father's employ in the law office paid off. He started obtaining his law degree. Over time, through sheer hard work and determination, he passed the bar exams, and he eventually became an associate lawyer in the firm.

Meanwhile, my mother became a government employee in the Manila Central Post Office (one of the heavily bombed buildings in the Battle of Manila during World War II) after a brief teaching sprint. There she worked for 4 decades, working her way through the ranks until she became the head of the registry section supervising close to a hundred employees.

They both may have had very good jobs, but those were not enough to support a fast growing family, especially if you're married to a womanizer. Not to discount my dad who is a great provider, but it was my mom who made the wise financial decisions.Without my mom, we would not have survived financially. Sadly, my poor dad's idea of investing is buying lotto tickets.

The real head of the household

It was the wisdom of my rich mom who had the foresight to invest in real-estate. It was her that pushed my dad to save up. It was her who pushed for paying for everything in cash even if it meant literally eating rice and beans for dinner. Mom and Dad bought rental properties in various places in Manila to the point that they had over 9 fully paid rental properties in their portfolio, including our primary residence, which was also partly rented out. Each property probably had 4 to 8 rental units for somewhere around 50 units in total. It was the income from these rentals that fed us. It was the income that paid our tuition fees.

It was the wisdom of my mom who pushed my father to start his own law practice. In the early 80s, my father was at the point of his career where he had most of the connections needed to start his own law firm. Working as an attorney in a lucrative patent and trademark industry, most of his clients were big companies from all over the world. So he rarely had to meet clients in person. At the peak of his career, he was making tens of thousands of U.S. dollars while living in a relatively low cost-of-living city of Manila. With the real-estate income already in place,  the income from the firm was used mainly for travel related expenses to different countries to attend related industry seminars and conventions.

On her deathbed

My mom died in 2007 of liver cancer. On her deathbed, my father tearfully confessed that he fathered another child out of wedlock, a 15-year-old boy. This was in addition to 2 other siblings we've all known, cared for, and accepted as part of this ever growing family of ours. Not sure if she felt any emotional pain at that point, she may have very well been desensitized to revelations such as this. One thing for sure, she will always have a special place in my heart.

Happy Mother's Day!