Are Bitcoins for You?

Are Bitcoins for You?

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What are Bitcoins and should you get involved with the new currency that is all over the news and media.?

You've already probably heard something about Bitcoin over the last couple months (and if you haven't, you should probably pay some attention) and many are wondering exactly what is Bitcoin and is it for real. Since a Congressional hearing on the currency in November the value of a Bitcoin has soared from under $100 several months ago to over $1,000 today. 

So, what is a Bitcoin and is it something that you should consider getting involved with? Bitcoin is a new type of currency that takes advantage of peer-to-peer technology to facilitate transactions. Like many of the file sharing networks that sprang up around music, it uses connections between individual computers to transfer Bitcoins, or funds, eliminating the need for a central authority - no central bank, no bank, no credit card processor. So, how would a typical transaction work using Bitcoin? 

Anyone can create a Bitcoin by installing software and becoming a Bitcoin miner. A certain amount of work is required for the creation of every Bitcoin, and this amount is adjusted by the network so that the amount of Bitcoins in circulation is controlled and predictable. It's important to note that this is done automatically without the intervention of any central authority. Bitcoins are stored in a digital wallet, and when a transaction is created, the Bitcoins are given a unique digital signature. When you send money to pay for a good or service, the transaction is recorded in the network and the proper ledgers are automatically adjusted. These ledgers are all public, allowing anyone to review the transactions, although the personal information of the sender and receiver is not typically included in these transaction logs. As a result, every transaction is both encoded to ensure it cannot be tampered  and it anonymous, and made public, to ensure that it is executed in an open and transparent way. 

Several private markets have sprung up to allow users to convert Bitcoins to dollars, Euros, or other currencies. It is this conversion rate that has boomed since the hearings. 

So, what are the advantage of Bitcoins? 

  • Zero or low fees. Because there is no middleman, there are very little or no fees associated with transactions.
  • Fast international payments. Bitcoin transactions can be done in 10 minutes from any part of the world.
  • Identity protection. Because there is no credit card number or single number used to key a transaction, there is no chance of having your credentials stolen, like with a credit card.
  • Theft protection. Bitcoins are digitally signed too a user so there is no way to steal a Bitcoin.
  • Universal access. Anyone can pay or accept money via Bitcoin. The system is totally open and the documentation can be read and implemented by anyone.
  • No taxes. Since the transaction is entirely between two individuals, there is no record of the money transfer for tax purposes. Taxes would have to be levied in an entirely voluntary manner.

What are the disadvantages of Bitcoins? 

  • Because money can be sent anonymously, criminal networks and enterprises have begun to utilize the currency to facilitate payments.
  • Boom and Bust. Because no one really understands the value of a Bitcoin, there are wild price swings in the conversion rate of Bitcoins to dollars and other currencies.
  • Not widely accepted. At the moment, only a few merchants accept Bitcoins.
  • Bitcoins can be lost. If a hard drive crashes or a user misplaces their USB drive, the Bitcoins stores on there will be lost. Most experts advise users to store their Bitcoins on a computer device not connected to the Internet and use a backup.
  • No Buyer Protection. If a good is purchases using Bitcoins and the product or service is not delivered as promised, there is no mechanism to enforce refunding of the Bitcoins. Adding a third party escrow service would essentially mitigate the strength of Bitcoin, no middleman.

 Should You Buy Bitcoins?

 If you are just hearing about Bitcoins for the first time and have no desire to actively trade Bitcoins, then I would say know. While the value has shown spectacular growth in the past couple of years, the Bitcoin economy is highly volatile and values could crash any day. No one knows what the future of Bitcoins will be and whether they will eventually assume a widely accepted alternative form of payment, or if they will remain a fringe currency, used by drug dealers and money launderers to escape the spying eyes of law enforcement.

If you're interested in seeing what the future of currency may be about, then it might be worth it to purchase a few Bitcoins, understanding that the value may soar, or may drop like a rock. But it does seem that currency, like music, newspapers, books, and movies is not impervious to the impact of digital technology and the Internet.

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HSBC and Societe Generale Offer US Customers Interesting Debt-Side Structured Notes

HSBC and Societe Generale Offer US Customers Interesting Debt-Side Structured Notes

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I have written several previous articles on this website about Structured Notes. Structured Notes involve real risks. I continue to advocate that those Notes based entirely on equity or currency baskets should be avoided all together in favor of better instruments in the ETF and hedge fund spaces. Nevertheless, I continue to believe that those trying to put money away safely with a long horizon can pick up yield by placing some small part of their assets in debt-side Structured Notes.

As longer term interest rates have picked up in the second half of 2013, we have seen major US banks – particularly Chase, Citibank, Morgan Stanley and Goldman Sachs – come to market with interesting debt-side Structured Notes after having been unable to fund these notes in 2012 and 2013.  US subsidiaries of HSBC and SocGen, two major European banks, have now come to the US market with their own notes.

HSBC’s Structured Note is a 15 year note paying as much as 10% APY (on quarterly payment dates) based on the difference between the 30 year and the 5 year Constant Maturity Swap (CMS) rate note and is very similar to the recent Citibank offering that I wrote about earlier.  This Note, however, is slightly more favorable than the Citibank offering in two respects.  First, the HSBC note is only callable at the first anniversary of its issue and at the eighth, not quarterly after the first year like the Citibank Note.   Second, the Note offers 4.25x the 30 year CMS over the 5 year CMS, whereas the Citibank Note only offers 4x.  Since HSBC and Citibank have similar credit ratings, this Note is arguably more attractive.  I, however, recommend avoiding this Note for the same reason that I told readers to avoid the Citibank Note – the spread between the 30 year and 5 year is too narrow and unpredictable historically to rely on it for the next 15 year period.   (I am more comfortable with the spread between the 30 year and the 2, as was offered by Chase, a better credit rating, in October.)  Those interested in this Note, however, can learn more about it by referencing CUSIP No. 40432XNT4 or ISIN No. US40432XNT45.

Societe Generale’s Structured Note is also based on another much used equation by investment banks these days.   Their offering, also 15 years, pays a fixed 7.75% APY, provided that the 6 month LIBOR rate stays between 0 and 5% and the S&P 500 does not fall by more than 25% from its value on the pricing date.  This Note, called a "hybrid" note because of the two separate contingencies, is similar Note issued by Chase in September (discussed here), but the comparison is not favorable.  While the Chase note only offered 7.50%, Chase has a much stronger credit rating. I also view the S&P knock-out provision in the Societe Generale Note as a real risk on a 15 year note, especially for a Note priced after a tremendous rally in the stock market. Those interested, however, can find this note under CUSIP No. 83368WGG0 or ISIN No. US83368WGG06.

As tempting as Structured Notes are, especially with interest rates looking likely to remain at low levels for a prolonged period, investors would be well advised to take a balanced approach and wait for those with the best terms and highest credit ratings (Chase and Goldman Sachs) and not to chase questionable offerings such as these from subsidiaries of European banks.

Image: patrisyu at FreeDigitalPhotos.net

Ten Tools To Help You Get the Most Out of Your Savings

Ten Tools To Help You Get the Most Out of Your Savings

Below is my list of financial software tools that I find to be the most useful in helping grow and manage your savings. I've focused on tools for those in their twenties or thirties but these tools could benefit any age group.

Following up on my previous article on ten things recent college grads need to know about savings, this article is designed to help those starting out to optimize the funds that they have (while the article is focused on those in their twenties, everyone could benefit from the majority of these tools). The 21st century has brought with it the advent of user-friendly financial software that is sophisticated enough to be useful yet not overly complicated. The number of companies in this arena increases daily and there are surely more services available than the ones that I’ve listed below. That being said, those that I have chosen are some of the most affordable (ideally free) and efficient programs I've found.

  1. Mint.com: Perhaps the most well-known of the bunch and the first that I encountered, Mint is a fantastic tool for those looking to streamline their budgets. Mint allows you to link all your bank accounts, credit cards, loans, investments and more, so that you can easily keep track of your income and spending. Each expenditure is categorized so you can observe any trends.,The site also allows you to enter your budget for each category, so you get accurate picture of your spending habits. Mint will even analyze your accounts and find ways for you to save money, including alerting you when you have a payment due or have incurred a bank fee. For young savers fresh out of college, Mint is a tool that emphasizes accountability and fiscal responsibility.
  2. Ready for Zero: With Geezeo no longer taking on new customers and Wesabe down for the count, RFZ does exactly what its name implies – helps you pay down your debt. The software gives you informative infographics on all your outstanding debt that allows you to visualize progress. It also provides payment reminders as well as general suggestions on the best way to pay off  debt. If you’re willing to pay a little extra ($75 per year) for a Plus account, you’ll get automatic paycheck alignment, credit score improvement planning, and a lot of other goodies.
  3. Planwithvoyant: How can you prepare for an uncertain future? Voyant Inc. has you covered with software designed to help you forecast the impact of uncertain events. It’s a pretty user friendly interface even for those without finance backgrounds, and Planwithvoyant makes it easy for you to set up a financial plan.  The goal here is always to get the highest expected return with the lowest amount of variability and risk;to that end, Voyant lets you test a variety of different scenarios’ effects on your financial condition, such aspregnancy, retirement, etc. They’ll also give you suggestions on how to mitigate some of that risk through different investment strategies. Voyant also has a listing of financial advisors whom you can ask for advice and a (what type of forum?) forum to boot, making it a good jumping off point for young investors who don’t want to deal with more sophisticated investment technology.
  4. LearnVest: This may be a female-focused financial advisory site, but don’t let that fool you, it has value for both genders. LV is a little pricey, but you do get some bang for your buck. In addition to a real-life financial advisor you communicate with vie email and phone, they give you nifty infographics and cool diagrams so you can see where your money is  and where it’s going. LV also emphasizes   financial education, offering a wealth of articles on the subject andvirtual bootcamps for those who are into that kind of thing.
  5. Shoeboxed: So you’ve got that nice company card to expense all your work and travel expenses and rack up points. The only thing is, even in the digital age, keeping track of all those receipts can be a serious pain in the neck. That’s where Shoeboxed comes in: quite simply they take all your receipts and keep track of them for you in one place. Neat huh? There is a free version and multiple free trials, but for a little more money you can save yourself a lot of hassle. However, if you’re absolutely insistent on doing a lot of the tedious work yourself in which case it will always be free.
  6. Portfolio Monkey: This is not the sexiest program, but it is incredibly effective as an investment evaluator. Using historical data, Portfolio Monkey will analyze your current portfolio allocation and make suggestions. Specifically, it’ll offer different stocks that have a low correlation with your current portfolio (diversification lowers your risk) and high expected returns. The app then lets you run various simulations based on different hypothetical investing scenarios and allows you to compare your portfolios to others. While this site may require a little more sophistication than others, it is certainly a valuable, free tool to have in your arsenal.
  7. Buxfer: Don’t worry, just because you’re out of college doesn’t mean you still can’t have roommates. Unless you’re making buku bucks or live where housing is cheap, chances are you have a roommate or two (yes, besides your cat).  Yeah yeah it lets you do all that budgeting and financial planning stuff, but Buxfer is also great for sharing expenses. Whether you’re trying to figure out rent and utilities with your roommates, collect on IOUs, or hinting to your significant other it’s time he/she paid for dinner, this app is an easy way to reduce tension in your life.
  8. Pocketsmith: Yes, another app to help you keep track of bills! The good thing about Pocketsmith, in addition to its smooth interface, is its long term planning options. It can be easy to fall into the trap of living month to month, with all these new expenses coming in that you didn’t have before. Pocketsmith helps keep you on track with your monthly and annual spending compared to your actual income, allowing you to start building a savings that lasts more than two months. For those that like to have concrete goals or those that have trouble holding themselves accountable, this is the platform for you. The calendar-based viewing allows you to see with a quick glance how you’re doing from week to week.
  9. FINRA: Wait a minute….that’s not software, that’s just the government!? Actually FINRA isn’t the government, it’s a private corporation that is regulated by the SEC, but still they’ve got some nice free tools. Between their Broker Check and Risk/Scam Meter you can save yourself a lot of grief and avoid financial predators. For those of you who aren’t interested in combatting fraud and doing background checks on your potential financial advisors, these tools are not for you. Bernie Madoff eat your heart out!
  10. Credit Karma: Finally, acredit score that’s actually free! Hopefully none of you got caught up in FreeCreditScore.com, because Credit Karma will give you that score for virtually free (you do have to give up the last four digits of your social; they’re not mind readers). They give you a report grade based on a variety of factors, compare you to other similar users (in terms of age, state, etc.), and suggest ways to improve your score and lower your overall debt. There is a slight conflict of interest in that different credit card companies can advertise on the app, but it’s fairly obvious and, because it’s free, you know they had to pay the bills somehow.

Use this list as a nice jumping off point for your path to a higher level of financial responsibility. I’m sure many of you have different programs that you use already that aren’t listed, so feel free to leave suggestions in the comments. Happy saving!