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There they go again, again [pdf] (oaktreecapital.com)
49 points by cm2187 on July 28, 2017 | hide | past | favorite | 91 comments



Why do articles like this keep showing up on HN? So the guy called the burst of a previous bubble, guess what lots of people did but that is bound to happen when thousands of people are crying bubble every day for years. Inevitably when the market crashes there will be a lucky few who think they predicted it.

Next, even if he is some savant that can see bubbles coming how does that qualify him to make blanket statements about Bitcoin?


Agreed. I also believe we'll enter an economic crisis (smaller than the 2008 one) in 2018, in part because an economic crisis seems to happen every 10 years or so, and in part because the stock bubble is looking to burst sometime soon and it will bring other things down with it (because of the overall panic in the market, as it tends to happen).

There's a high chance I'm going to be wrong about the year, but if I do get it right, I'm going to refer to myself as "the man who called the 2018 economic crisis" around here afterward.


Well if he's an expert on investments then it qualifies him to make a statement on bitcoin as an investment. You don't have to agree, or believe him, but it's pretty easy to see that many people are throwing money at it in hopes that more people continue to throw money at it.


Sure but that can be said of any speculative trader going long on an asset. It doesn't make it a bubble.


Yeah but an equity investment has intrinsic value. Either through future earning to which as a shareholder you are entitled or to the residual value of the company if you shut it down now. You can trade it in a speculative way, and if it starts to trade at a level that cannot be justified by its intrinsic value, then we are in bubble territory too.


Of course, a bubble is something that popped so can only be defined post hoc. There's some good reasoning in this letter though.


>Why do articles like this keep showing up on HN?

Because it doesn't take many upvotes to push something to the front page. (I believe at the time of your comment, it had ~20 upvotes.)

To simplify, you have 2 competing philosophies about cryptocurrencies:

1) the idealists about BTC/Ethereum empowering decentralization

2) the skeptics that believe digital currencies are hype

Each side has a group of people submitting stories. And apparently, each side has enough critical mass (e.g. ~20 votes) to constantly push their opposing agendas to the front page.

E.g. for Ethereum... Whether it's a positive story ("Learn to Write Smart Contracts") or a negative story (schadenfreude about DAO meltdown), both will continue to make the front page for years. I refreshed HN front page an hour ago and it had 3 stories about bitcoin.

Or to look at it another way, BTC stories keep appearing because there are not enough upvotes for other stories unrelated to cryptocurrencies.


I think early momentum accounts for frontpaging too - 20 upvotes in 2 minutes raises faster than 20 up votes across 24h


Howard Marks is an incredibly well respected investor, and this memo makes a lot of good points.

That said, his underlying criticism of crypto boils down to the usual ad hominem / appeal to authority kinds of attacks. I was hoping for a well reasoned critique, but there is far better criticism of the actual technology and economics on HN.

But his point isn't just that crypto is junk, he assumes that his audience will take his word on that and devotes little effort to defending that position. What he is really doing is using crypto as an example of how overheated and risk-seeking the broader market is.

Personally I think he's right about the market, including crypto prices. (Though I'm guessing that a growing number of people are hedging their portfolios with crypto speculation, and the jury is out on how the asset class will fare in a broad-based correction.) I think he's wrong on his dismissal of the technology and asset class.


I agree that his attack on crypto currency is not well reasoned. He says himself he doesn't understand it. But the rest of the memo makes good points.


That's strictly editorializing on CNBC's part. Howard Marks is known for quite a few things and calling the tech bubble is nowhere near the top of the list.


Not only that but even with the dot-com bubble, the internet still exists and tech companies are still booming.

Yes there was short-term fall out from the dot-com craze, but it didn't fundamentally change anything.

Crypto is absolutely in a bubble. It will pop eventually. That doesn't mean it will become obsolete or invaluable. I believe the tech is here to stay. It may not be as lucrative for the get-rich-quick-sheep, but it will get used.


> Yes there was short-term fall out from the dot-com craze, but it didn't fundamentally change anything.

This guy is an investor, the memo has been sent to "Oaktree Clients". If one had invested in DrKoop, theGlobe.com or Pets.com, their fundamentals as far as disposable income or outlook on retirement might've shifted dramatically.

It's like trying to persuade someone whose retirement funds were all in Enron to take it easy, because electricity still exists.


>"Serious investing consists of buying things because the price is attractive relative to intrinsic value," he wrote. "Speculation, on the other hand, occurs when people buy something without any consideration of its underlying value or the appropriateness of its price."

So basically, every currency is a pyramid scheme.


No, not really. Most currencies have a value which can be tied to real-world value at the most reductionist via which governments accept it for tax and the stability of those governments.

Bitcoin is different, not just because of the lack of government backing but also because the way it is structured meant the earlier people got into it the more bitcoins they got. (Fundamentally because mining rewards reduce over time).

But that's irrelevant to fact you've missed the point of his quote, that most people buying other currencies are doing it with purpose (such as hedging) and considering their value, whereas people buying bitcoins are doing it for speculative reasons and aren't making a judgement on where they think the price of bitcoin ought to be.


I think the price of bitcoin is hugely, immensely overvalued (because you can buy things with it at even fewer stores now than a few years ago). That doesn't mean I don't think it will be twice as overvalued in the future.


I'm not sure it is overvalued, at least in the medium term.

Ransomware forces people to buy bitcoin while at the same time making the bitcoins spent unspendable (because spending them will get you caught).

If you controlled all bitcoin, the way to make money with ransomware is selling your legitimate coins to people who need to buy them to fulfil their ransoms.

Each ransom paid decreases the bitcoin in circulation which further puts pressure on the price. Eventually the pool of legitimate bitcoin will be tiny, but ransoms will still get paid, so the ransom demands will be smaller and smaller in bitcoin denomination. If we assume the ransoms that people are willing to pay is steady in dollar value then that will push the price of bitcoin up.

There is tremendous inflationary pressure on a fragile bitcoin eco-system. It can withstand high inflation because no-one has their salaries or bills in bitcoin.

Where does deflationary pressure come from? It will have bubble cycles that will bubble and pop but overall even as it gets less popular by users, the actual price can rise and rise if the currency circulates slower and slower. The last few bag-holders might have huge paper wealth before they realise there's no one left to actually buy their coins.

I don't think it's a legitimate investment though, it's still a pyramid scheme by it's nature (Satoshi still owns a large proportion of all coins) and even without that investing in bitcoin is investing in cyber-terrorism and funding criminals. (Unlike the "if you download MP3s you're funding terror" bullshit this one is actually closer to the truth).


I don't understand one thing in your argument:

> Ransomware forces people to buy bitcoin while at the same time making the bitcoins spent unspendable (because spending them will get you caught).

There must be a way to "launder" those bitcoins, because otherwise, as a criminal, why would I want to get ransom in coins that I can't later spend on anything?


A currency has value because you can force any shop keeper to accept it as payment against some good, and in certain cases you can convert it against gold. The minute commerce doesn't accept the currency for payments and the central bank won't convert it for gold, it has become worthless, irrespective of how hard it is to make copies of the bank note.

And keeping in mind very few people hold much currency. Usually you hold a deposit account, i.e. you lent to your bank. It is a low risk/low yield investment.


The US federal government requires every business to accept US currency in all denominations. Thats why when people drop a pile of pennies on the counter, the clerk doesn't tell them to go to hell. That, in and of itself creates legitimacy of green paper rectangles with numbers on them.

The concerning thing about bitcoin, and any cryptocurrency is that by nature, the larger it gets (as in total outstanding coins), the more difficult it is to create more currency through reconciliation. With traditional currencies, it's relatively easy to print money. Printing money is done mainly to keep an agreed upon healthy inflation rate of around 2%. Why this is important is when deflation happens, loans are no longer attractive because it's always better to wait because items increase in value relative to the currency. In other words, why would I borrow $1000 today when that same loan amount would buy $2000 worth of stuff next week. When people stop borrowing, it has nasty economic implications. (Money Multiplier effect and all that).

That's probably a horrible explanation by me, but the short version is crypto, since it's harder to create over time leads to a natural deflation that increases over time.

FWIW: I don't know a whole lot about crypto, but the things mentioned are concerning to me. I mean it might be a good time to follow the herd so to speak, as long as you know there will probably come a time when the herd runs off a cliff.


> Thats why when people drop a pile of pennies on the counter, the clerk doesn't tell them to go to hell.

You actually can do that. It's only "legal tender for all debts", meaning that a restaurant would be required to accept the pennies after providing service, but my local bus line(that takes payment upfront) won't let you on if you try to give them pennies.

https://www.treasury.gov/resource-center/faqs/Currency/Pages...

And every ecommerce site out there doesn't allow USD, but only a derivative currency convertible to USD on-demand with complex rules attached.


Or more specifically if the restaurant didn't take the pennies and sued you for non payment the court would rule that you had offered payment as the tender was legal. It doesn't mean the restaurant will be willing to serve you next time.


And every ecommerce site out there doesn't allow USD, but only a derivative currency convertible to USD on-demand with complex rules attached.

Never heard of this. Care to elaborate? Are you just talking about PayPal?


That's also why Gas stations back in the day, would have signs saying that they didn't accept $50 and $100 dollar bills. It's legal tender, but that doesn't mean I have to take it.


I stand corrected on that. From the US Treasury. Still, the fact that the treasury requires acceptance for "all debts, public charges, taxes, and dues" gives it value as opposed to say grass blades.

"The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy."

https://www.treasury.gov/resource-center/faqs/Currency/Pages...


But most currency has a set (or slowly changing) value - a dollar is a dollar. Millions of people aren't going out and buying dollar bills in hopes that more people go out and buy dollar bills so that the value quadruples.


There are people who try to make money via currency trading, but it's very much speculation, not investment.


Government-issued currencies have an underlying value in that the government requires you to discharge your tax obligations in them. Everybody has to pay taxes. Since you have to have some, they make a fine currency as well. Moreover, because the government keeps printing currency, inflation encourages people to spend or invest it rather than hoard it. Bitcoin is deflationary, so it's better to hoard it rather than spend it.


some currencies have the full faith and credit of the worlds most powerful government backing them. some have banana republics. And some have some fat nerd assuring you its cryptographically secure when half of the investors had their money stolen through mt gox or a hard fork of their currency.


Early adopters of technologies, platforms and financial products tend to benefit more than later adopters. Is everything a pyramid scheme?

(Assuming the product or platform succeeds rather than fails)


In a way, this is true which makes currencies having bad monetary policy a danger to the economy. But well managed government currencies are designed to curtail the "ponzi" aspect to them. They do this by insuring the currency loses value with time which prevents hoarding and by varying the supply and interest rates to make sure the currency is never too strong a competitor to real business investment. You don't want create a too compelling intrinsically valueless alternative to investment into real production and real economic activity because this jams the real investment markets.

Currencies that are not designed to lose value over time can never be stable.

Intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted, real returns compared to real productive investment will always be unstable and fluctuate increasingly wildly as they get more popular. This is a result of physical limits of production. As people hoard worthless tokens, their price increases which causes more people to hoard them instead of investing in real businesses with real production capacity.

This eventually causes production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a drop in things available to buy with these tokens.

Eventually there will be people who want to buy real things with their stock of tokens. The tokens will be chasing fewer goods which means prices for stuff will rise (tokens will lose value). This might happen suddenly when people with large stockpiles of tokens notice that value is dropping and that there are tons of other tokens waiting on the sideline to make it drop even further. Hoarders might rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This drop will bring the tokens closer to their natural intrinsic value of zero. The cycle can then start again, such is aggregate economics.

The 1920s and 1930s suffered from this type of cycle but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough. It's important for the world's sake to not let deflationary currencies become too popular.

When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when a lot of people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).


Someone is looking to buy low.

Joking aside, I think what's happening in the cryptocurrency world is what has happened in the financial world before, just on a much more accelerated and aggressive pace. Cryptocurrencies have value as commodities or even a securities through ICOs just like many things in the real world, too. I don't think they are that fundamentally different.

People just tend to think of them as being different because they are digital assets and not something you can touch, even though people "buy gold" all the time that they also never get to touch. And don't get me started on fractional reserve banking's "virtual money"...

Pretty much everything in this world doesn't have inherit value. It's the value we assign to it in a marketplace that makes things valuable. I remember an older discussion on HN about this, with Bitcoin being more like tulips and gold not being like that because it has "inherit value." No it doesn't. Gold is like tulips, too, except it lasts longer, so it's a better (key word) "store of value" because of it.

Think about how things were in let's say the 1600's. Why did kings store their wealth in gold? Because they thought other kings regarded gold (and not some random rock or mineral) as valuable. Bitcoin is the same. It's valuable because people who hold it believe others think it's valuable, too.

Same for the USD, or the Venezuelan bolivar. People still believe the USD has value right now, but in 50 years it could be another bolivar if everyone starts believing that the US will never repay its $100 trillion debt (or whatever it will be then). Then nobody will think the USD has any value. FIAT has no more inherit value than anything else. It only has value as long as everyone agrees it has value (and even that changes on a micro-time frame, as people compare it to other currencies or gold on any given day).


I made this point to someone a while back on Reddit, and added that it couldn't work as a currency because it is inherently deflationary. This was back when the aggregate value of Bitcoin was $100M.

Meanwhile I have a relative that was an underemployed anarchist who now has his own plane purchased w/ Bitcoin proceeds.


> Meanwhile I have a relative that was an underemployed anarchist who now has his own plane purchased w/ Bitcoin proceeds.

That's basically just survivorship bias. I know someone┬╣ that won the lottery and is now a milionair. That doesn't make lotteries a sound investment.

This is why I also believe Bitcoin is an unintentional pyramid scheme. Its real value is way too low. It's too difficult and dangerous to actually use it for payments. So its only use now is speculation, and that only works as long as other people are willing to buy bitcoin for more money than it was worth in the past. Typical pyramid scheme.

┬╣) not really, but it illustrates the point.


The block chain could eventually fork to become inflationary.


Most people understand that crypto is in a bubble, but that doesn't mean that extreme value won't be attained. There was a dotcom bubble because of speculation, but it was merely a timing issue. It took another 5-6 years before companies started extracting the value to match the speculation and the bubble just couldn't stay in tact long enough. If you could invest in "The Internet" as a concept back in 1999 you would be rich today because the value has skyrocketed way past that bubble. If you think Bitcoin is going to last 20 years then it doesn't matter if we are in a bubble, you should buy some. Maybe it goes down for a while, but if it's around in 20 years it is almost certainly going to be worth way more than it is today.


There may have been a dotcom bubble, but internet companies didn't go away after it popped.

The bubble was fueled by an understanding that the internet was a fundamental shift in the future of the global economy, without it being around long enough to actually do so.

I can see parallels in crypto-currencies, and I think even if there is a bubble, it won't spell the death of crypto.


Meta-comment:

I really dislike judging a person's argument based on correct predictions said person made before. It's turning the "argumentum ad hominem" inside out, giving credibility to an argument because someone specific said it.


In philosophy, it's called an "aristoteles dixit" (Aristotle said), based on the fact that it was often considered proof enough in middle age if an argument was defended by Aristotle.

As a meta-meta-comment, this is one of the things I like the most about HN : we don't see any avatar and nicknames are not obvious, so we consider arguments before considering who made them.


Meta-reply:

'[C]orrect predictions [someone] made before' = data.

Instead of discounting it, I would rather count it more heavily, esp. in a complex domain where a full principled evaluation of the evidence is beyond most people. There's a reason you can't read a review paper and then get a PhD in whatever topic. Having to establish everything in a logical chain from first principles every time you want to opine is inefficient, to say the least. Previous performance matters. It's not all that matters, but nobody is claiming that.


Yep, the Meredith Whitney effect. She made a correct call on large financial institutions facing trouble in 2007-2008, and then predicted a large number of municipal bond defaults. That second prediction is still waiting for the reality to catch up.


I think crypto is in a massive speculative bubble right now, especially ethereum, but as long as criminals can use bitcoin to make transactions, it's going to have some value.


Bitcoin is first and foremost a money-laundering method, especially from ransomware hackers.

EDIT: some recent news on that ($4B money laundered): https://arstechnica.com/tech-policy/2017/07/officials-arrest...


With a global ledger where every transaction is recorded, blockchain is the worst choice for money laundering. If you have seen the BTC-e founder case, you would understand what I mean.


It's because the individual didn't have a network to launder the money through, that's why he started the BTC-e exchange - however I suppose he was sloppy, especially since they were able to connect his real name to an account because he posted about it online, connected to some crypto-asset. It's similar to the mafia, however the mafia evolved to launder money through networks of families and starting 'cash' businesses that they could disguise funds coming in - at least until the businesses became 'legitimate.' This trusted network basically would have started to develop through strong arming.

Late edit: For crypto-assets, the network of 'trusted' people is formed simply by the early adopters - most of which those are people who are purchasing or spending resources mining for speculation purposes. Then you have these people who are all aligned to increase adoption. Strong arming can come later, when people in positions of power (or who have control) are manipulated (whether through bribery/lobbying, etc) or other tactics to have them tie the crypto-assets value into a nation's real currency's value, essentially legitimizing it by force and potentially forcing everyone to buy at the then going rate. Imagine if a company on the stock market told you you're buying their stock for $y price, even though you don't believe or know it doesn't have any value, and they forced everyone to do that; this is war, a battle anyhow, with capitalism and finance involved instead of capitalism and physical military force/mass bloodshed - massively different in their subtleties, and where the first can quickly gain global adoption and tap into global speculative greed and money when tied to a crypto-asset.


Why is this getting downvoted?


Because it's a blanket statement that demonstrates the commenters failure to understand what Bitcoin actually is. Sure its used for those things but that isn't it's first and foremost use.


Even if Bitcoin's first and foremost use were money laundering, it is not very well suited for that with its public ledger.

Anybody who needed proof for that just got it with the btc-e founder case.


Good question. I'd say because people want to believe it's not.


Unproven statement. I could have written it also and replaced bitcoin with cash.

Bitcoin probably handles much less than 1% of the world-wide money laundering business at its current market cap.


You got it backwards: it is not about what percent of money laundering is done with Bitcoin, it is about what percent of Bitcoin is used for money laundering. I've just posted link (few comments above) about $4B laundering scheme discovered, that's 9% of global Bitcoin market cap (currently $46B).

And you can assume that this Russian arrested wasn't the only one doing it, so actual proportion is probably bigger.


You'll probably need to research backed-up numbers to confirm that. Yes, I do believe the same too (most bitcoin activity is used for illicit activity) but we don't really have the numbers yet and I am not sure if it is possible to do it.


Crazy how this comment section fixates on bitcoin which was the subject of maybe 2 pages out of a 23 page report.

His points on flagrant debt purchases (Argentina's), levered tech funds (Softbank's) and passive etf investing were quite good. ETFs, while a macro good, has underlying securities being purchased regardless of price.


It's not a binary thing. I would say perhaps 90% of bitcoin's current market value is speculation. But bitcoin does have some use cases, and as such it does have intrinsic value. The question is, how much?


Here's an entertaining list of bitcoin "deaths":

https://99bitcoins.com/obituary-stats/


IMHO his thoughts on bitcoin apply more fully to all the other alt-coins, including (especially?) ethereum. Bitcoin has value because of its popularity and has been used successfully for years on dark web markets and legitimate markets like the Microsoft store. Its value may fluctuate, but it is surely valuable to many people in the world.

On the other hand, most alt-coins (Monero is an exception) are the products of people who want to get rich via scamming.


Why the exceptions? Ethereum is a scam but Monero isn't? They're all the same.


The most important metric when comparing cryptocurrency is "real world" usefulness. Bitcoin is obviously useful because it's popular and widely accepted.

Monero is useful because it the most traded highly secretive coin. The development team only wants to provide untraceable currency, no more and no less. They even have actively tried(https://bitsonline.com/fluffypony-speaks-troll-monero-market...) to keep Monero's price low while other alt-coins were spiking because they hate the direction that the Ethereum ecosystem is taking and spreading to all of cryptocurrency. (i.e. the get-rich-quick mentality)

I don't think Ethereum is a complete scam. Vitalek is very smart and wants to change the world. The problem is, he created a nest for scammers with his smart contracts. Theoretically, smart contracts create trustless transactions. In reality, this becomes a wild west for anyone with an ounce of swindling talent to con people out of money, or just lose it because of poor coding practices. I would link some articles but there are SO MANY that its common knowledge by now.

Check out Monero community member Riccardo Spagni's comments(https://www.youtube.com/watch?v=zJbxaFHGk2M) about Consensus 2017, a crypto conference during which he was bombarded by talks of ethereum ICO's that had no actual products to show for.



OK, we get it. People have been calling Bitcoin a pyramid scheme for years now. Not exactly breaking new ground with that assertion, and he's not making any new arguments to back up that assertion.


Pyramid schemes can be long running and successful, like Herbalife. Seriously, that is a pyramid scheme but it has gone on for quite some time and is successful. Others are Amway and other multi-level marketing products.


So, do you imply that people buying bitcoins then try to sell them to their friends and family? People keep buying, then selling, then buying again, then selling again bitcoins. This hardly qualifies as a pyramid scheme, this is speculation.


It is a speculative bubble: http://www.investopedia.com/terms/s/speculativebubble.asp

Pyramid scheme is implied because people try to get others to adopt bitcoin, may not friends and family but it is promoted to others as a way to get rich. Have you seen the various cryptocurrency sub-reddits? They often read like mass delusions or pump-and-dump schemes.

The only real value of Bitcoin that I have seen is the highly illegal darknet marketplaces, but outside of that I haven't seen much.


I see your point, but then most financial investments could be considered pyramid schemes as people always are vocals about how their investment is great, partly for the feeling of being convinced to be a good investor, partly because value raises if other people are buying. The definition of "pyramid scheme" has to be stricter than that if it has to have any meaning :)

Regarding intrinsic value, there's one thing I hope from bitcoin (or any other crypto that could achieve that) : replacing my bank account. Banking services have got so bad with years, it's really time to disrupt them. Granted, we're far from there yet, and it may never happen. That's why it's a risky investment, with possible high reward (or high loses) and why ... it can't be used as a bank account (because of the volatility). Still going in the right direction, IMO.


I think that Bitcoin is an investment and not a currency. I think it is misnamed.

Currencies are actually designed to slightly depreciate over time in order to get people to spend them on buying things or buying investments. That is done completely on purpose. Not too fast depreciation but not too slow either.

Bitcoin isn't depreciating, rather appreciating because of its design -- a limited supply.


Yeah, indeed, I often made this remark myself. This doesn't mean it won't change (core developers could decide to change the rules about limited supply), but this is unlikely. What is more likely is that something like the USDTether crypto, or an other crypto tethered to a fiat, will take the lead.

What I often say, too, is that it's probably the only way it could have work. When bitcoin was very young and it was considered a currency, people didn't care. It's only when exchanges appeared and bitcoin started to get very volatile that it gained traction. Maybe having speculators getting rich and broke with bitcoin was the only way to bring cryptocurrencies to mainstream focus : during those frenetic times, everybody has heard about cryptos, and there's not a single day now without a news about a big actor (either administrations or corporate) trying something around cryptos or blockchains. Maybe we needed all of that to get the yet to be born crypto that can be used by everyone. Should bitcoin have stayed that weird internet currency nobody used, it would have died long time ago.


I would also be twisted and bitter if I didn't get in early


the report is kinda bulshitty. Look, why don't you just make a prediction such as "investors should do xyz". Otherwise, what's the point? Move forward but with caution? what does that even mean? What do I do with cash I have ?


Totally agree, digital currencies are not real. Of course that doesn't mean they cannot have an effect on reality, just as a psychopath can run around and shoot people because of his unreal delusions.


It's not BTC but rather the absurd ICO bubble - the majority of these companies are selling worthless tokens in exchange for Ethereum. It's like penny stocks but even less regulated!


Instead of reading this value-empty article, here is the report: https://www.oaktreecapital.com/docs/default-source/memos/the...

In my opinion, the report shows a lack of understanding of the fundamentals and inner-working of both bitcoin and other digital currencies. It is hard for me to take a report so seriously when the author shows incompetency in the underlined topic.

The report main argument against crypto-currencies is: "But they are not real!" repeated multiple times through the report.

Well, define "real". What does it mean to be real? Is the dollar real because you can hold a 1 dollar bill in your hand? If so, is the value of the dollar equal to value of paper; or the amount written on it?

The author main argument is very weak; and in my opinion shows a lack of understanding of how markets work.

In the very long run, everyone will die, the Sun will run out of fuel, and the universe might crunch. We could also be in a simulation.

What matters is the normal distribution of volatility of such assets; for day to day usage. And their trend, for longer term investment. People assume the US dollar is a stable currency because we have yet to experience a black swan event that disrupt that.


Why does someone need a deeper understanding of intrinsic value if the shallow understanding does reflect a Ponzi-like scheme? Not having a deep understand doesn't negate what exists at a shallow understanding; "it's the colour red," "actually, it's rose coloured."

Edit: And if the Ponzi-like scheme is what the problem is, why isn't then the community solving for that? The easy answer is that then adoption is difficult, because if you have a Ponzi-like scheme it is much easier to attract VC money, likely the money of bad actors more easily, etc. Yes, that hyper-incentive of the Ponzi-like scheme does get people working together, more quickly, whereas having a normal or no incentive (the incentive being the value of a public ledger) then it will grow at an intrinsic pace.


My understanding of a ponzi-scheme is that you subscribe with an initial capital with a regular currency; and then you expect regular payouts in that same currency. The regular payouts pay a lot comparing to what the market pays for no-risk assets.

I don't think bitcoin fits that definition.


Hence why I generally try to say Ponzi-like scheme. It doesn't fit exactly. The bad actor in a Ponzi scheme, the single issuer would be the stock broker, however in the case of a crypto-asset would be the crypto-asset itself, e.g. Bitcoin, Ethereum's Ether. And then there are the owners of those assets who are doing the promoting to get people to adopt it and hoping people will pay X amount more for it than they paid. This is too shallow of an explanation anyhow. I believe I have left longer comments relating to it on HN, though they may not fully describe all of the problems with it.


For skeptics like this, I've had success bringing up the history of paper money and point out how it took ~250yrs for the idea that money was the medium of exchange to take over (1705 with John Law to Nixon taking the US off the gold standard). Initially, paper money wasn't seen as "real" and we didn't even have an idea of what a reserve requirement was let alone how FDIC-like insurance would be REALLY useful for stability. I'm skeptical myself of if cryptocurrencies are really the "next version" of what is money, but a proper historical context lends credibility to taking them seriously.

Paper money initially was -- like cryptocurrencies are today -- inefficient, had interop problems and highly volatile. The main difference is the rate of experimentation/iteration today is so much faster and we have a complex understanding of economics already which we can use as a guide. Also, back then some of the experimentation was being run at national economy scales. Cryptocurrencies are great in that we can experiment with the idea without reaching/requiring a potentially economy-collapsing scale during the early iterations.

I doubt I'll live to see the if they turn out to be the "next version" vs an interesting experiment -- I can't imagine a wholly new definition of what is money taking root in under 2 generation.


I thought, in this century, economists no longer differentiate between money, bonds, gold and stocks. They are all "assets". What they look for, instead, is the distribution of return of these assets. (that is volatility)


So basically he says "In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme)". Perhaps means he wasn't sure unlike the clickbaity article title which sounded like he was sure.

I can't speak for what he means but my interpretation of what real means to him is this - When you buy a stock for a software company you believe in the software, the target segment they are targeting and maybe yourself a customer. So two things define the real-ness of the business - working software and a dedicated user base.

Let's look at crypto currencies from the same lens. Sure the software is great and holds potential for the future. And sure one might say output is as good as the dollar. But, currently there is no sustainable market. There is no urgent need for people to acquire bitcoin other than say speculation purposes.

One might argue they will catch on in the Average Joe with time. But the biggest hurdle is Average Joe likes to see and feel the money. How will one explain them what really a bitcoin is without getting too technical? The problem here is one from the Silicon Valley show. Richard builds a better platform for data management. It doesn't sell because it doesn't make sense to average people at all. So better product doesn't equal to superior returns. It just means superior product. So the biggest problem in front of bitcoin or other crypto currencies is to take it mainstream.

And certainly fights like the BTC Cash vs Bitcoin Core doesn't help. I mean sure many people weren't happy with the unlimited printing of dollars by Feds in 2008 but at least it dint threaten to break down the economy completely because one side dint want to give in to the other and float their own currency. Stability is important and unfortunately crypto currencies are not there yet.


I'm a regular reader of Howard's memos, which are usually pretty on point and thought provoking (the rest of this memo generally fits that description, thought mostly just says things are expensive.) In this case, however, I'm pretty disappointed in the lack of nuance in his argument about cryptocurrency. This is the guy who advocates "second-level thinking" to beat the market and/or peers, and is usually very focused on the details of a situation.

Beyond the weak backup of his main arguments, I felt the most striking issue was his contrast between cryptocurrency and gold:

   What will happen to Bitcoin's price and liquidity in a crisis if people decide they'd rather hold dollars (or gold)?
The irony is that many aspects of Bitcoin were inspired by the limited quantity of gold (there is only so much gold, with increasing cost to produce it as you reach that limit). Gold has been around a lot longer, but cryptocurrencies could gain similar acceptance if their security, usability and everyday utility increase.

Gold and dollars are not immune to the concerns he raises about liquidity and price. When you're starving, a bar of gold doesn't help very much.

I think his arguments about a bubble in cryptocurrency have some validity, but not without caveat and nuance - they are more of truisms as written. Of course emerging asset classes and technologies will overshoot. But that doesn't take away from the fundamental realization that, at least for now, cryptocurrencies provide value to those who use them. This might be for money laundering/black market activity as people below have pointed out, but its still valuable for them. The value might also be for easy cross-border money transfer and risk mitigation when dealing with government manipulation of currencies (see Venezuela and Argentina.)

Either way, I'm not sure cryptocurrency is really that useful of a place for a firm like Oaktree to be investing in, because they are credit guys, not macro guys. That said, former credit guy Mike Novogratz invested heavily in cryptocurrency and seems to have done well thus far: https://www.coindesk.com/hedge-fund-founder-invests-10-net-w...


There is another point about the utility of the currency or token. If some of my customers pay me in Bitcoin and that is more convenient than paying me in USD we have something. This is the case when you have overseas customers and you are not based in US: if the customers do a wire transfer the bank exchanges the USD to my local currency in a less favorably way than if they send the payment in Bitcoin abd I exchange it locally.


Read that report earlier this week. The one section that stood out to me was the excerpt from the 1997 shareholder letter. The list of technology's elite companies is no-more. Yahoo!, AltaVista, America Online, Excite, Netscape, GeoCities, @Home and Prodigy. They're all gone, or have been absorbed into other companies.


One thing that makes the dollar more "real" is that you are required to pay taxes in it. This creates an automatic demand for dollars. Even if you make your money in bitcoin in US, you need some dollars to pay your taxes or risk being thrown in jail. There is no such "intrinsic" value for bitcoin.


There is utility in Bitcoins ability to transfer value worldwide, without middlemen, only requiring a cheap smartphone.

Strictly speaking nothing has "intrinsic" value, but Bitcoin can be valued because it has many qualities of "good" money like being transportable and durable, doing some of them theorically better than current monies.


That's not a definition for real. Requiring to pay taxes by US dollar makes it more in demand. So it creates some demand for the dollar. It is the same way by which bitcoin or any other asset gain value.


That's why I put it in quotes. However, calling it "some demand" severly understates the significance of this fact. It's not just some demand, it means it's absolutely vital for vast majority of people and businesses in US. Which won't be the case for bc unless it becomes legal tender


So? Does that mean investors should unload their Apple stock because iphones are not vital?


Except the demand for one is created by gun point


I bet the other Howard Marks would be more supportive of bitcoin if he were still with us...


Heh. I was thinking exactly that same thing. RIP Mr Nice!


I'd never heard of the investor.. I immediately thought "why are people asking him about investments, and didn't he die?"


I think it's a pump-and-dump that's gotten out of hand.


If you actually read the latest memo from Howard Marks, he tried to understand Bitcoin but couldn't make sense of it:

https://www.oaktreecapital.com/insights/howard-marks-memos

Then he makes the perplexing argument, "But they're not real." And he calls it a fad and possibly a pyramid scheme.

But obviously if you don't understand something, you shouldn't invest in it.




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