Public trust is destroyed by bubbles. That takes time to rebuild. In the meantime, it leaks into the political system.
I was in an Uber the day Bitcoin hit $19,000. My driver was proud he'd just taken out a second line on his house to buy. There is a non-negligible chance he, and people like him, will end up on the public balance sheet as a result of these wealth transfers.
2008 was a speculative bubble in real estate. When it burst, it came frighteningly close to taking down the entire US financial system. "No value destroyed" doesn't begin to describe what nearly happened.
The Great Depression did far more than wipe out the gains made in the stock market.
Well, a metric shit-ton of nonrenewable fuel took a one-time conversion into global-warming causing greenhouse gas. But let's all just paper over that little fact, eh?
No, you won't. Because you don't know the scam, you just think you know. It's not a coincidence that hundreds of Wall Street con men jumped into the crypto space in the past couple of years. You aren't going to outwit them. They know exactly how to operate their scams in a completely unregulated environment.
Note: I'm not saying they have to agree with it, but if you don't understand his point and are invested in cryptocurrencies you should really be asking yourself how much you really know.
So for a short:
Max loss: Unlimited. if BTC rises to $x, you have to pay $x
Max Gain: The current value of 1BTC. If BTC drops to zero. you pay nothing but were given the start value.
For a put option:
Max loss: The premium, as you don't have to exercise the option
Max Gain: strike price minus the premium.
Shorts have a fixed period and put options expire, so if the drop you predict doesn't happen in the time you predict, you can get wiped out even if the drop does happen later.
So In effect buffet is saying he believes it's going down, but either isn't confident about when or admits there is a chance he's wrong.
In the short term markets are voting machines, in the long term they are weighing machines. Therefore shorting bitcoin is fairly stupid, as you can easily get run over and margin called or financially ruined if speculative excess continues and increases even if irrational.
By going long, long term put options, unlike shorting a stock, on 5 year puts you a) cant get margin called and lose your shirt and
b) They are long term enough that the whole speculative mania is likely to die down over time. And if it doesn't he would only lose the option premium, not an undefined amount of money.
Finally, he considers assets that produce cash flows to be investments, while assets that don't (like gold, fine art, or bitcoin) to be speculation. And while there is nothing inherently wrong with speculation, he doesn't believe it is particularly enrichening either, and that purchasing productive assets is a far better use of his money.
As a student of history, he has read about and witnessed many speculative manias that have ramped speculative assets (as well as investment assets far beyong anby rational value of their cash flows), and presumably think this one is likely to go the same way.
Put option = The maximum loss is the paid premium.
Hmm, in that way you could see it as the market around cryptocurrencies lacking the financial complexity that could bring their volatility back down to more normal levels.
Buffett doesn't need complex financial markets because he does custom transactions directly with companies.
A Winklevoss could easily sell him a billion-dollar five-year put, but he wouldn't like the price.
For fun, let's try pricing a Bitcoin put option using the Black-Scholes-Merton model . This model is a simplified version of real-life options models, but our parameter uncertainty will dominate the model's anyway.
I'll use the $14,400 Coinbase price  for both our S and K inputs, i.e. we're pricing a European put struck at spot. Term is 5 years. This site  says Bitcoin's historic 252-day volatility is 5.21%. Sure. We want the 5-year 365-day volatility, i.e. 14.0% .
The real shit show in this example is the rates component. If we use this 57% number , the put is worthless. We're using a Bitcoin-dollar price for the stock and strike, so let's assume U.S. dollar funding (since Bitcoin does not natively support rates in the way modern currencies do). The 5-year Treasury yields 2.25% .
(Rho dominates tau, or in English, the rates component is about 2.5x more meaningful than the volatility component.)
Raising our rate to the call money rate  we get $792.84 with rates continuing to dominate volatility.
 sqrt([5 x 365] / 252) x 5.21
1. There's no way rates dominate vol for BTC.
2. Bitcoin vol is way higher than that. It's obviously higher than most stocks, and stocks are in the 20% range.
My quick calculation gives me an annualised vol of about 90% over the last year, and 140% over the last month.
That gives a put value between USD 8000 and 12000, in other words approaching the "infinite vol" limit (present value of strike).
EDIT to add: BSM takes annualised vol (or, to put it differently, vol enters only in the term sigma^2*T, and that product must be dimensionless, thus the unit of vol is 1/sqrt(year), or whatever unit you use for T). To compute it, take the average of squared log returns over a period (ie, take average of LN(P(t)/P(t-1))^2), annualise by multiplying with 365 if you have daily prices (or 252 if you have business daily prices), and take the square root of that.
I think the volatility input in this equation is way off.
I agree. One's ability to price a put on Bitcoin is probably anti-correlated with one's willingness to sell one.
The problem with a Winklevoss put is likely the credit risk, not the price
This must mean Buffett thinks crypto has a good chance of exploding in value! Buy Kodak! /s
Nobody wants to run a credit check every time they buy an option. That just turns the premium into a fancy loan.
If you buy an option on an American options exchange, it is cleared by the OCC . They are everyone's counterparty. There is a long chain of people who have to default for you not to get your money. (Basically, the financial system has to melt down in a nation-state ending way.)
I have no idea how Bitcoin options are being handled, but suffice it to say, counterparty risk dominates any other component.
Prior to the housing crash, multiple people figured out that CDOs were full of shit and bankers were committing massive fraud with mortgage bonds. Traders could purchase credit default swaps (CDSes) to capitalize on this risk and pay the premiums until the correction hit, at which point they'd cash in huge.
But uh, here's the problem: The same bankers that were investing in mortgage fraud (all of them) were the ones that would sell you the CDSes and cash your premiums. If the housing market was truly built on fraud and corruption - and it was - and banks could collapse - and they did, requiring a bailout that the banks knew was coming - maybe the bank wouldn't be solvent enough to pay you on your bet that you so rightfully won. Your largest upside win is capped, and thus the entire trade could be easily net negative.
Option:. Purchase the right to sell the asset at a certain price & time. If the price is higher, then politely decline the option. The value of the option is zero, but you've already paid that upfront.
Future:. Purchase a promise to sell an asset at a certain price & time. If the price is higher, you are still committed to make the sale. Safe if you hold the underlying asset in escrow until the strike date.
The risk is that if the price of BTC is above 10k, then I'm out the money the put option cost me.
With buying puts or similar construction that involves optionality, if you can buy them at a nice price, you're not as dependent on the intermediate path taken by the price.
Buffett (with all due respect, and I have a lot of respect for him) doesn't understand Bitcoin, and doesn't add anything of value to the discussion. He's never been much of a technology investor, so this should surprise no one.
Just because you read the white paper and spend 20 hours a day refreshing news alerts for bitcoin doesn't make your investment a good one.
I agree this article doesn't add anything to the discussion. If anything, Bloomberg is making out by selling the proverbial shovels around here by fueling the hype machine.
Bitcoin seems to be the first investment for a lot of people. Supply-and-demand, cash flow and market psychology is probably something you are not that used to thinking about.
(hmm, seems like I said about the same thing as you did, read your comment too quickly)
And just to be clear - I support the development and experimenting around Bitcoin/Cryptocurrency. I really believe there are yet-to-be-seen uses for the blockchain technology that could have severe, lasting impacts (hopefully for good!).
What I have a major problem with is the money-grubbers pushing the technology as a get-rich-quick scheme. It overshadows any discussion around progress or development and is just another way for the rich to get richer.
(This coming from someone who holds quite a bit of Vanguard index funds and a small number of cryptocurrency in his portfolio.)
It's also unlike gold in virtually every other way - it has infinite and infinitely available substitutes, it doesn't have physical characteristics and it's very easy to steal.
Every time one says crypto is overvalued the reply looks like: “you don’t understand”, many times coming from somebody who barely understands what distributed and consensus mean. No pun intended.
Do you really think this community has never heard of the Dutch tulip mania?
Everybody already knows cryptocurrencies are volatile and risky, what does this add to the conversation?
Yes, let's talk again about how it's a Ponzi scheme, has no intrinsic value, can't buy coffee with it, it's only good for drugs and crime.
Then supporters will say you can't trust banks, fiat is going to zero, and spew conspiracy theories about the Federal Reserve.
Then someone will hype a random token, then a banker will call it all a fraud.
Every. Single. Person. on this thread knows all of this already. Is there nothing new to talk about?
Likely. Also likely that most believe it was something that it wasn’t (a wide-spread market bubble): https://en.wikipedia.org/wiki/Tulip_mania#Modern_views
EDIT: More specifically anything with as much hype as crypto (and tech to a lesser extent) is not really in the value investing camp in which Buffet is trading. Avoiding them entirely is a very useful heuristic for him.
I know people hate to hear this but unless you have a target price and a rational explanation as to why it's worth that much you're just gambling.
Here are the signs of asset bubbles. I've posted the signs I feel are most relevant to Bitcoin below.
> Rationalizing borrowing, lending and purchase decisions based on expected future price increases rather than the ability of the borrower to repay.
> Rationalizing asset prices by increasingly weaker arguments, such as "this time it's different" or "housing prices only go up."
> A high presence of marketing or media coverage related to the asset.
- I don't understand thing ABC, therefore I won't form an opinion on it (true fact, by his own admission... conservative and reasonable).
- Thing XYZ is generally acknowledged to be more complex and harder to understand than ABC (debatable, but I'd love to see someone show me how crypto is easier to understand than Google/Facebook/Amazon/Uber/etc.).
- Even though I don't understand ABC and won't form an opinion on it, I will form an opinion on XYZ which I understand even less (... wut? Why would anyone put stock in this statement, given the prior two statements?).
He is a major investor in Apple and was a relatively-early backer of BYD, the Chinese battery technology company.
That goes to show that he's aware of the limits of his expertise, and clearly he has an opinion on bitcoin, so presumably he considers them within his range of expertise.
Bitcoin's recent exponential growth screams "bubble" for anyone who knows what to watch for.
Gold 'lost' 70% of its value when priced in dollars, as the dollar regained immense value thanks to Volcker's policies breaking the inflation wave. That's a critical point you're leaving off (when priced in dollars).
The point being, you have to be a lot more precise about what gold gained or lost value vs. It performed differently when priced in different currencies vs the dollar. Most currencies did not see the kind of value gain the dollar did over that window.
This is one of the properties that makes it a store of value. If you buy gold in 1980, it will lock you in at the 1980 dollar value. It's the currency that is gaining or losing value, gold is storing your 1980 dollar value (which you used to buy the gold in 1980). You then try to get back out of your gold in 1999, you're attempting to swap a 1980 dollar that has been locked-in at that 1980 value for a 1999 dollar, when the two are not worth the same thing.
Gold also then went up several hundred percent as the Bush dollar dropped from ~2002 onward.
It stored your value. It's the dollar that gained (or lost) value. You're attempting to move back into the dollar afterward, when the dollar's value has shifted.
What you're describing is that, as an example, a mistake was made by locking in your value by buying gold at a weak 1980 dollar price, then the dollar gained significant value in subsequent years, and then you're again trying to move back out of gold and into the dollar later (ie exchanging gold for dollars) after the dollar has climbed (while your value in the gold was set at that weak 1980 dollar). Your loss is the difference between the two different values of the dollar at two points in time separated by decades.
Bitcoin will die, crypto currency will survive.
At least the terrible transaction speeds will mitigate a substantial amount of damage.
Just as in the dotcom boom - the concept of dotcom businesses won (and absurdly so), but pretty much everyone who invested in dotcom businesses lost.
I agree that crypto is in a bubble right now, but that doesn't mean it has zero value as a technology.
I realize the GP's tulip mention hit you as a provocation but provocations are what commenters here need to build the strength to resist.
Also, you broke the HN rule against calling names in arguments. Please don't do that either.
While it's true that we could be seeing over-inflated prices now or in the future, I FULLY believe that the value of bitcoin will always increase over the long term.
It's a principal of the technology it's deflationary.
That's not a bubble my friend.
because zealots say so.
The real revelation came when someone decided to purchase bitcoin from someone else, from that point on bitcoin had value and it always will.
But you go ahead and try to sell some rocks you picked up off of the ground to someone and then report back here and let me know you did.
If the bitcoin doesn't gain a widespread practical use, it may well be that the long term value it has is, say, $100 / BTC, wiping out 99% of the value, and failing in any purpose as an inflation hedge or censorship-resistant store of value.
Saying that it has value because it's being bought for ever increasing price is the "greater fool" value foundation, i.e. saying that it has value because someone else will value it even more later, which actually works really well (and can earn you a lot of money) until suddenly it doesn't.
Other than that, any long-term valuation will have to be based on actual, practical, specific uses of Bitcoin (for example, but not limited to, as a transactional currency). It's easy to imagine realistic uses of Bitcoin that will justify some value, e.g. $10 or maybe $100 per BTC. However, the scenarios where the use is so massively valuable to justify a long-term market cap that matches a price of $10k or $100k per BTC require BTC to have a massive, very very widespread use - so either it will gain this massive use as a transactional currency (or something else), or the price won't be sustained nearly as high.
You may disagree with his point of view, but to dismiss his input as absolutely irrelevant is out of touch, so is claiming he "doesn't add anything of value to the discussion": his opinion, by value of who he is and his experience, is value to the discussion in a field that is still about speculation and high risk investment.
I find it interesting how many people on here like to eat up the words of most mogul and take it as semi gospel, then balks when one of them goes against one of their pet love thing. This is not specific of cryptocurrencies, although due to their "get rich quick" attributes these tend to make it even stronger. Just goes to show how people are the same everywhere, even (hell, especially) the "more informed".
I don't personally believe in his point of view, I think while all current cryptocurrencies are going to fail or at least become a small sideshow especially the big names ones, the next wave will be smarter in what they try to be. Still, I value his input as much if not more as those of "self proclaimed cryptocurrency experts" who merely happened to have made one good bet. He made a ton more of those.
But apart from that, bitcoin and the concept of cryptocurrency are conceptually not that difficult. And even if they were, their value is not due to their technical novelty but due to their fundamental nature as financial instruments.
If Warren Buffet is warning against them, we do need to look at them and try to understand what is the problem he sees. As he knows more than most here about financial instruments.
The risks need not be technical in nature at all. For example, governments could fail to recognize cryptocurrencies as valid contracts thus voiding the benfit of legal systems. So, you own tokens of a house? Good luck enforcing that.
Another one is that courts could treat coins as chattels rather than legal tender / negotiable instruments. In that case cryptocoins that were stolen would thereafter be tainted and subsequent holders would be a risk for liability for trading stolen goods (even if they are other otherwise innocent third parties).
And Buffett has repeatedly said that it's a bad idea to invest in things you don't understand. He's also known for preferring longer-term investing to short-term speculation.
As for cryptocurrency values, of course they're all quite volatile. Anybody who reads HN is probably aware of this by now. Using them as a long-term store of value without actively managing a portfolio right now would be unwise.
Long-term, however, I expect distributed cryptocurrency will replace centralized fiat currency for most purposes. All it would take is an existing cryptocurrency that actually works well as a currency (not Bitcoin) combined with a financial crisis.
And personally, I don't really see what the "technology" brings to the party other than a specific bag of features. Kind of like Uber.
Aside from the amount of time it’s been in existence what is the difference between gold and something like bitcoin? Only ~4 of gold is used for industrial purposes the remainder is used for jewelery and stuff like bullion. Basically stores of value. It trades at a premium above its cost to extract, store and transport.
Though Thiel's de factor endorsement goes a long way...assuming his fund hasn't sold yet.
To those that do, some rich guy's opinion doesn't mean a lot. It's just another opinion floating in the infinite opinion space. Authority means nothing to them.
To all others: Sell!
1) What I initially found the best feature of BTC (the finite pool) has turned it into a digital gold, and unusable for real day to day transactions imo.
2) The blockchain is too slow, and too expensive.
Now maybe BTC does have a future as digital gold, but not as a medium for transactions in the legal space (imo)
It feels to me a fallacy to think because you understand the tech, you are magically a good investor in it.
Buffet is historically one of the most successful investors in assets, and that usually didn't require him to "technically" understand every detail of the inner working of the offered product.
It helps your investment
- if you are able to distinguish good code from bad (technical skill)
- if you understand whether a blockchain (or tangle or whatever) is appropriate for the coin's use case (technical skill)
- if you understand how fiat money works (financial skill)
- how hyped and bubbly markets work (financial skill)
So it's good to know both and if you do, you arrive at your own opinion / take, regardless of what Dimon, Thiel or Buffet say.
1) If you want to invest in cryptocurrencies, you should understand them. (true/false)
2) Most cryptocurrency investors don't understand cryptocurrencies. (true/false)
3) I understand cryptocurrencies. (true/false)
I would guess each question would have 80%+ true responses.
Crypto is a foolish long-term investment. Even in the short-term it's akin to gambling.
Compared to market investors, relatively few of the people investing in cryptocurrencies understand the technical underpinnings. All it's going to take is a spate of high value hacks, another central service provider going down (MtGox v2) and thefts, or even an act of terrorism funded by Dogecoin... and you'll see a run. It may not be sustained, but I think this is an important difference from standard investment theory.
Poor souls that invested/going to invest and don't manage to jump of the ship before the bubble bursts.
Interesting to think what five year puts on a cryptocurrency would cost. Probably more than Buffett or anyone would want to pay.
I lived through dot.com and housing mania and I'm having serious deja moo right now. Deja moo is when you've seen this bull before. On a recent flight I saw a long format in-flight advertising video for DASH, an altcoin. I repeat: airline advertisements! If you still have doubts that we are in gibbering flapdoodle land, head over to YouTube:
We have celebrity endorsements and music videos. Run away.
I think the crash is going to look a lot like a bank run. There will be some piece of news that triggers it (exchange collapse, policy change, who knows) and then everyone will scramble to cash out. It will quickly become obvious that there is insufficient USD/EUR/etc. on hand to actually back the current market cap of the top ten coins. At that point exchanges will halt trading. Lawsuits will be filed. Exchanges will go into receivership. More lawsuits will be filed. Criminal charges may start getting filed. You get the picture.
Most of the crime and financial fraud that will happen in this bubble is happening now or will happen during the crash itself. Most financial fraud is driven by frantic attempts to cover one's ass. My guess is that top people at all the exchanges know they are in serious trouble and there are many frantic meetings going on debating what can possibly be done. Since a bubble is basically a naturally occurring emergent Ponzi scheme, the only way "out" is to get more dumb money in so smart money can exit... hence the airline advertisements and Facebook ads to buy coins. I am currently seeing a lot of the latter.
Sadly a lot of naive people will lose tons of money. People have been dumping their life savings and mortgaging their houses to get into this. It could have follow-on effects on the economy. Some of the big Bitcoin exchanges are privately insured, so I wonder if it could drag down a few insurance companies. The rest of the economy is fragile so it's not impossible that this could trigger a recession.
Cryptocurrency will not go away post-crash any more than the Internet went away post dot.com crash. We're just approaching the irrational exuberance peak of the new technology adoption hype cycle.
After the crash it will go back to being a semi-underground niche thing for a while. Valuations will return to sanity. Those exchanges and other businesses that do survive will gain a lot of experience and a reputation for stability. Ironically sometimes the best technical work gets done post-crash, so I wonder if after the crash we will finally see useful applications built on this tech beyond its core currency use case.
If you really believe in the long term promise of this technology, after the crash would be the time to buy in.
I really wish high schools would teach a class on finance, and if they did it should include a lesson on bubbles and a study of a few recent ones like dot.com and housing. People should be educated about what a bubble looks like and how to avoid getting ruined by one.
It wouldn't stop everyone. The allure of herd behavior and gambling is strong. But it would save a few folks from losing their life's savings.
One ad in isolation doesn't mean much. It's the whole picture. Bubbles have a certain look and feel.
I am 39 which is like 80 in programmer years. I've seen a lot of fads and bubbles in my lifetime. The downside of being older is that you're not quite able (for many reasons including lifestyle and family) to work like a 20 year old, but the upside is that you've had a chance to develop a ton of meta-meta pattern recognition. Your neural net has accumulated a lot of training data.
Like I said I've lived through two mega-bubbles: dot.com and housing. This looks exactly like the tail end of those.
Deja moo, man. Deja moo.
If I held a lot of Bitcoin I would start dollar cost averaging out, like yesterday. It's better to miss out on some of the last waves in a bubble than to get caught in the monster riptide when the crash comes.
Edit: if you do get caught in the crash, do this:
If you can't convert to USD/EUR/etc., take your Bitcoin or whatevercoin and transfer it out of an exchange and into a private wallet that you control. If the transaction fees are high just eat it. Better to get it out of an exchange that could collapse at any second. Then just sit on it. Be prepared to sit on it for years. It may eventually regain at least some of its former value. In the meantime buy popcorn and watch the show.
There will be many losing cryptocurrencies after the bubble bursts, but some will survive and thrive.
No one ever does.
also it's not reverse-ageism, it's just ageism.
If you invest money to advertise speculative instruments, then that pretty much means that you intend to sell those instruments after the ad-caused short-term rise in demand and thus price.
I was one of those who saw the housing bubble for what it was in 2003. Among people who saw it, the causes of the bubble and the bubble psychology among buyers was well-understood. I had zero clue as to when or how the housing bubble would end. It lasted far longer than I anticipated.
In other words, a smart investor can see when something is priced wrong. But only a foolish investor will tell you when or how the price will correct.
But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. The rest of us are pretty much just betting on horses.
I think I would agree with him about crypto if I was an older person who already had enough wealth to purchase a significant stake in a real business. For investors like that, the world is their oyster. For people who are young, familiar with technology and largely without any wealth, Bitcoin is much more attractive. It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential. This statement would sound insane to someone like Buffett, but it's the reason why Bitcoin exists in the first place.
Edit: I'm not advising people make any investments in Bitcoin. Just providing a counterpoint. Invest in what you know.
This is a crazy way for young people to think though and the opposite of how they should be thinking. If they don't have much wealth, they certainly shouldn't put it in something so incredibly risky as Bitcoin. They would be really hurt if/when BTC tanks. Someone who's rich wouldn't really notice 10% of their net worth gone.
> It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential.
The entire economy is definitely not as risky as BTC. The economy doens't see 50% swings in value week-to-week.
For instance, he took $2k and turned it into $12k in a few months. I told him, "Take 4k out and put it into an index fund." That way, he comes out ahead no matter how you slice it, even if he loses the rest of what he has in BTC. If what he has remaining in BTC goes up to $18K, I'd take another $4K out and move it into an index fund. Rinse and repeat.
It's not as risky if you run it that way.
I have a problem with the terms "investing" and "doing well" here.
Buying bitcoin is not investing. You are not funding any productive enterprises---not even indirectly as in buying stocks on the secondary market. You are giving someone money in return for a ledger entry. You expect someone to give you more money for that ledger entry at some time in the future, which is the problem with...
An "investment" in bitcoin isn't doing well, or doing poorly, or doing anything. A stock can do well, if the enterprise it represents is producing economic value and thus the stock represents an increasing value (and assuming the market recognizes the increase, which is another discussion). If you BTC is worth more today than it was yesterday, the only thing that has changed is the price (and the conversion of some more coal into heat and carbon dioxide) and prices don't have anything resembling inertia. The "doing well" can turn to "doing poorly" tomorrow with nothing more than a change of market opinion.
In order for someone to invest in crypto as diversification, on the order of 5-10%, they'd need to have $20-40k lying around.
Needless to say, outside of the tech bubble that situation is quite rare.
Things can get really bad if you are nearing retirement and lose even 15% of your portfolio in a downturn. On the other hand you can lose 100% and even have to declare bankruptcy at 25, and still have plenty of time to get your life back on track.
I am not saying that Bitcoin or anything like it is a good investment. I'm saying that it gets harder to take risks as you age, unless you've been very successful and/or lucky. But being either of those things probably required some risk taking in the first place.
Your "more attractive" investment has shown 5000% annual return for 1 year...the "risky" investment has shown 8-10% return ON AVERAGE for over 100 years.
What you are saying is that if I put my money into S&P 500 10 years before I was born, it would match the gains on the same investment in cryptocurrency from 1 year ago.
There may well be a point in the coming months or years that the market cap of current crypto deflates - maybe by 90% or more - but new cryptocurrency applications and tokens will certainly exist in 5, 10, 15, and 100 years.
There's more uncertainty in bitcoin today than there was in almost all available investments 20, 30, or 50 years ago.
Note that when savings accounts paid 10% interest, inflation was (I think) at 14%.
It depends more on how leveraged your wealth is than on how much you have.
> The entire economy is definitely not as risky as BTC. The economy doesn't see 50% swings in value week-to-week.
Price volatility != risk. A number of people lost everything they owned in 2008. Everything. In fact, I've heard it said that half of the world's wealth disappeared.
I dunno, seems like this sort of risk is the only way to get anywhere now.
Also a good read is Miller's letter on Bitcoin from 2015. He put 1% of his fund into Bitcoin (now 50% of his fund due to the meteoric rise in price): https://millervalue.com/a-value-investors-case-for-bitcoin/
2. I didn't say Bitcoin produces returns, and don't believe it will. It's a currency, not a business. Like I said, I don't have the wealth to get a significant share in anything that produces a return. It's a class of assets I just don't have access to yet (in my mind, and for many other reasons I haven't mentioned).
3. I would advise anyone to only invest in what they know. I wasn't recommending anyone invest in Bitcoin specifically, and in fact, I myself haven't bought any in 2018. I was only explaining why I did consider it a good investment in 2017, and why many people might have felt that way and still feel that way.
What role, and why is it uniquely well suited for that role?
Speaking for myself, back in 2013, I was excited by what I saw as its potential for micropayments on the internet. That is (and was) clearly wrong - it can't do the transaction volume, is too hard to safely acquire and use for most people, and is too volatile.
Its current role is "hype-y speculative security". I don't see a significant and long-lasting need for such a thing, or how bitcoin is uniquely qualified to be that thing.
> I would advise anyone to only invest in what they know.
What is it to "know" a thing? Put another way, what exactly makes it such that you "know" bitcoin? Put another way, what useful information is there to know about it? I understand the details of the whitepaper and the block-chain concept at a technical level, because I find them innovative and fascinating, but I think any translation of that technical with knowledge of its value as a security is illusory.
I'm honestly curious about this: I've gone from very bullish to very bearish over the last 5 years or so, while I've watched the population at large take an opposite course from indifferent and unaware to very bullish, and I'd really like to understand what I'm missing.
This is strictly speaking not true. Yes, the current implementation is not good for taking micropayments, but it never was designed for this. If you thought this, you misunderstood the scaling architecture of the paper. It was always likely an off-chain derivative was going to be necessary for that to be a thing (Lightning Network), even before the rise of and prediction of ASIC miners and explosion in general computing power making the original algorithm chosen look... not ideal. We just got here much faster than people originally predicted, which is about what you get when you try to predict computing power curves as a linear function rather than a step function.
Whether it's undervalued at $14k isn't for me to say and I don't think anyone can truly tell you in either direction. But BTC has scaled as promised, just not as people would have liked. Then again, that's not BTC's problem, that's people not understanding BTC from the beginning.
It has a very prominent role in pseudonymously exchanging large sums of money near-instantaneously, securely, recorded in a global and publicly-auditable distributed ledger forever. There's a great number of use cases for this particular method of funds transfer, ones that I use today and many do and find a lot of value in it, even over other cryptocurrencies (for now). Would I prefer everyone take LTC and cut my fees down? Sure. 75% of BTCs problems go away if everyone would just activate Segwit too, but that hasn't happened either for whatever reason, so, it is what it is.
The number is going up and there's a fun tech-beats-banks narrative. I'm as bearish as you.
I don't understand your reasoning as to why this matters to the degree you think it does. Or why a minority share in an unproductive asset somehow becomes de facto better option over minority share in a productive asset.
>>why do you think that Bitcoin is undervalued
There's no way to know this. Or really, know that about any asset.
>>why should it produce solid future returns
No evidence it will.
>>why do you think it is a good investment for someone with (comparatively) little investable cash?
Ah, that's a different argument.
The total market cap of cryptocurrency is $726 billion with a 24h vol (as of 9:08 AM PT 1/10/2018) of $52 billion, with 33.8% dominance by BTC. Let's just go with the top two currencies, BTC and ETH, with $245b and $129b in market cap, respectively.
Can you find assets with similar volumes and market caps that are legal and easy to invest in that you would ignore in a balanced index fund approach to retirement? Probably not. Neither would a responsible financial adviser. Yet because it's BITCOIN, we're supposed to think it's stupid, dumb, valueless, etc (not saying you feel this way, just saying that's the stuff I hear) without just looking at the market signal that's being sent: A hell of a lot of money.
IMO, the real speculators are the ones blithely ignoring the three-quarters of a trillion US dollars being traded on cryptocurrencies and thinking it's a bunch of crap. They might be right. But that runs counter to sound investment strategy, which is to own the market and to cover all potential areas of growth, because as history shows, a vanishingly small number of equities/assets is responsible for a huge part of the return on investment of capital.
Since it's entirely global, the space could very well grow to $5-10tn before crashing down to $1-3tn. We're at $730bn now. The dot-com bubble, which was US focused, went up to $6.7tn before coming back down to $1.7tn.
I see it as a variation of a tontine. But instead of people increasing in value when a member dies, it does such when a member loses access to a coin. Once that coin is lost, it can never be sold, thus cannot drive down the price.
But the interesting thing about this is, AFAIK, there's no way to accurately determine if a coin has been lost permanently or not, so the the true value of all accessible coins will be completely disconnected from the market cap. So people using market cap as a valuation metric will always be considering at a wildly optimistic one.
Coin A purchased at $100.
Coin B purchased at $120.
Coin C purchased at $130.
Current bid price $150.
If access to Coin B is permanently lost, then one of two things happen, A) the market cap falls from $450 to $300 to reflect the reduced number of coins, or B) the market cap is maintained at $450, and the "real value" of each coin is $225. Because it's impossible to know which coins are lost, the valuation metric will always be B.
Essentially, the owner of Coin B lost 100% of their investment, and the paper value of his asset was invisibly transferred to the owners of the remaining coins.
My opinion is that cryptos will be undervalued until one of two things happens, A) coin management becomes more robust and they stop being lost permanently, B) people realize that investors realize that there's a very real risk of their investment going to $0 (without the market crashing) and begin to price in that risk (much like unsecured v. secured credit pricing).
A lot of that is simply that he now has too much money to be able to efficiently buy bits of companies. His early career was still based on value investing, but mainly consisted of regular stock purchases. Berkshire Hathaway still has decent-sized chunks of Coca Cola and various other companies on its books.
Not only does he invest in things that are undervalued but they also must provide value. Crypto currencies themselves do not provide value. The companies that make the hardware for mining provide value. Power generation companies that make the electricity for mining provide value. But a crypto currency provides no value by itself, it's just bits and bytes on a harddrive.
He would probably have never invested in Netflix, or Facebook, or Google. Yet any investor who did made a killing.
Now, I'm pretty sure everyone is aware at some point the music has to stop (at least I hope they do). A major correction will happen at some point. But no one knows when. It could be tomorrow, or it could be 3 years from now.
Buffett's strategy is to avoid losses -- not to worry about missing out on possible gains. He believes you avoid losses by investing in companies with a long, successful track record of doing the same thing for many years and that are likely to continue doing that same thing for many years into the future.
So, it's not that Buffett doesn't "get" technology, he just can't make intelligent guesses about what tech companies will be earning 10 years from now. He sticks to his circle of competence and it works.
Both lines of thinking clearly work for some people.. your investment style is tied pretty closely to your personality. There is no perfect solution, and everyone has to find their own way.
I would never put money in a railroad or an oil company, because I can't properly assess what drives the stock price and which unexpected issues might pop up. I can more easily do that with tech.
For example, if you are making x50-100 gains on tech investments, you are not rolling the dice full again but netting out some of that profit. Which is still a plenty and more profitable than traditional investment channels.
Sure it can't work for everyone and the market is very heated right now but we should not incorrectly assume that the tech industry didn't create enormous amounts of wealth.
Bitcoin continues to evolve, and will find more use cases with 2nd layer scaling solutions like Lightning.
Ethereum continues to experiment with proof of stake and sharding solutions.
Both will explore ways to increase privacy, hopefully in ways that do not impair scaleability.
Those two are the only ones I am reasonably sure will still list near the top, 10 years from now.
The same could be true in the future of crypto, although national borders may not be the defining trait, but rather the relative properties of a currency and preferences of the sender or recipient. There are enough nuances between crytpocurrencies that there is room for more than a handful.
Different coins' hash algos are a good hedge against weaknesses in SHA256. I would think that we'd have found the weakness by now, but who knows?
There's no reason involved here, you're just guessing.
SyntaxError. What are you saying here?
It sound like you are mocking someone's bad English rather than really confused. That's not cool. Please don't do that here.
If you really are confused, re-read (expecting somewhat mangled English from a non-native), and it should become clear.
Sure, right now bitcoin is not a good day-to-day currency because of high transaction fees and slow verification speeds. But there are new altcoins that have solved both of these, that exist right now!
The real win for cryptocurrencies, in my opinion, is that it's public-key internet money, while debit cards are private-key internet money. With debit cards, you have to give someone your private key (16 digit combo+exp date+security code) in order to transact. Giving away your private key is prone to fraud, and the fraud-protection mechanism is to give a centralized authority access to everything you've ever purchased, and they look for anything "suspicious". On the other hand, with public-key money, when you give someone funds, there's no risk of them exposing you to fraud or unwanted transactions afterwards. Even though I understood the public-key mechanism for bitcoin early on, I didn't realize the full implications for the financial system until recently.
Gold is just about the only thing around that acts somewhat like money but isn't premised on much of anything except social constructed value. Though even there, there are jewelry and electronic uses.
I could believe that we could could get something else like gold that would be bootstrapped into having a relatively stable purely social constructed value. But as you point out, there isn't just one altcoin that has solved (some of) the problems of bitcoins, there are lots.
There are huge incentives to issue new altcoins and for speculators to buy new altcoins in hopes of being the winner. And those speculators and creators are all hoping for this huge volatility (albeit in one direction) while what's strongly preferred for a medium of exchange is value stability.
I don't see how we get there from here. What process or trends out there look convergent and stabilizing to you?
You've got it half right. In most countries, private individuals and organizations are also required to accept the state currency for at least some purposes. In the USA, for example, creditors are required to accept US banknotes in payment of debts. This places US dollars firmly at the core of the US financial system. This doesn't create any legal obligation for US businesses to accept dollars, but it does create a very strong incentive for them to accept dollars in some form. That's the currency in which their finances will almost certainly need to be conducted if they want to have access to things like banking.
That creates a situation where the US dollar isn't just valuable insofar as you can use it to pay your taxes. It is, de facto but also very nearly de jure, backed by virtually the entire United States economy.
Bitcoin, on the other hand, really is backed by nothing but its own popularity. And the problem there is, it's really not that popular. It does have a lot of users worldwide, and those users can communicate over the Internet, but the same is true of Esperanto.
That said, daily, local, transactions were likely done either using simpler copper tokens or basically a verbal or written IOU.
No, at least not always.
IIRC, in Ancient Greece the money was the precious metal itself and its value of a coin was reckoned based on its weight and purity. The stamp was just an indicator of purity. The very largest amounts of money were measured using weight units (e.g. talents).
It would have been impossible for it to be otherwise, since there were so many competing coin standards (e.g. a drachma in one city could be made to a very different standard to another, with standard weights possibly varying by as much as 50% or something).
I believe there was an episode of Connections that I saw as a kid where he explains why gold was used as currency. I'm searching for it and will link if I find it.
This is becoming standard in the USA. I am glad to know that this is how they work.
Most places using chips for payment is a continuation of the magnetic strip and pin, only that now the chip can attempt to verify that the payment terminal and bank connection is functioning correctly before accepting the pin and approving the transaction details the terminal is sending to the bank.
In the end the transactions are basically ledger entries, be them manual or digital.
A chip can't be copied like a mag strip can, so it is safe from the classic skimmers. Also a pin is worthless on its own.
I have however read about a kind of mitm attack that was demoed in the UK. It involved a device sitting between the card and the terminal, and it made the chip think the terminal was doing a signature payment, while the terminal thought the chip had validated the pin.
However the concept is more generic than that. Banks could easily supply customers with their own smart cards to do this. Indeed chipped credit cards could be used for this. Although as others have noted, these chipped credit cards still have the classic card numbers printed on them which act as the private key. My local banks also supply chipped credit cards, however you can disable transactions with just the numbers via a checkbox on the bank's website. Surprisingly some banks already disable it by default, so you have to go out of your way to enable transactions with just the numbers.
Not that I think bitcoin and others are truly deflationary, as the presence of derivatives and fractional reserve deposits means that overall they could still be inflationary, in the same way that M0 could experience deflation while M2 experiences inflation.
I think crypto is in a huge bubble, and I think ICOs are dumb and will eventually die off or be killed off, but saying that there are 1000+ cryptocurrencies is pretty misleading. It would be like saying that due to the various stock exchanges we have millions of fiat currencies. It's only true given a particular definition of cryptocurrency.
Outside of ICOs, there are probably only a couple dozen cryptocurrencies that are not piggybacking off of some other cryptocurrency's smart contract infrastructure.
Think disagreement between miners, changes to algorithms, forks of blockchains. Gold does not have the same risk.
One nitpick: I think the SEC ruled ICOs to be comparable to certificates from what I understood. This is quite different to stocks. I could be wrong.
Any of them solve the fact that you have a eternal database fully replicated across hundreds of thousands of machines which could, by design, grow to infinite size? How about the fact that every one of those machines have to verify the integrity of every transaction ever made? Any of those could scale to handle even hundreds of transactions per second?
How about any that solve the absolute piss-awful amount of energy wasted by PoW? Any of those not pre-mined scams designed to enrich the people who "invented" the coin? Any of those useful for anything outside of paying for murder, fentanyl, or unlocking cryptoransomware?
What real-world problem, exactly, does any of this solve anyway? All of the problems we have in the financial world are political and social problems. You gotta solve those before you can start throwing tech at it...
Blockchain, on the other hand, is awesome and will continue to be a key piece of tech for things like voting and records where trust can be shared amongst all the users.
These inflammatory questions have legitimate answers, and the fact you ask them in this forum mean you haven't done any honest work to find them and would rather just post it on Hacker News and look intelligent.
Yes, Yes, Yes. I hope this is a helpful answer.
Currencies have certain values as currency. This includes factors like limited supply, having some level of enforcement of its use as a currency, ease of use, and also factors such as if it has other applications.
Take a gold coin. Low ease of use, but high limited supply and gold has numerous other uses. Depending upon the actual coin, and the ability to authenticate, it could be worth only its weight as gold, or it could be worth more because of rarity.
Take a dollar. High ease of use, mostly limit supply, has the US government backing it, has almost no other use.
Crypto has value as well. Harder to use in many situations, but easier in some. It has greater ability to remove the identity of the user and their funds, which is something most other electronic payment systems don't have. It doesn't have much backing it except the crypto algorithms (which most don't understand), but it does appear to have a limited supply.
I think crypto currencies do have intrinsic value.
But there is a problem. Years ago this intrinsic value wasn't known. As we slowly worked out what value crypto provides, its price has gone up. This has attracted some people who place value in it not as a currency, but as an asset that rises in price. As more people see it as an asset to invest in instead of a currency, it further drives up the price. At the same time, the intrinsic value of crypto is still being discovered.
So the question becomes, for any given crypto-currency, is the discovered intrinsic value + increase in value from being used as an investment greater than, less than, or roughly equal to the future intrinsic value.
If the intrinsic value that will be discovered ends up being far less than the current price inflation driven by using it as an investment asset, we will eventually see a correct/crash. When, and how far it goes before then, is something I'm not at all comfortable predicting, even if that was the case.
But I will say, when people with no tech interests are coming to me asking about bitcoin and investing in it, it makes me think it is over-hyped.
There is also the possibility of value in just possessing it, but I personally think this is near 0 for crypto (unlike foreign currency where some people pay a little just to have a framed collection of bills on our wall even if those bills have no value).
This is true. However, most traditional currencies started out as something that was an abstraction for value, but was backed by something of tangible value (e.g. gold standard). This isn't true anymore, we aren't on the gold standard, but if nothing else that lack of transition from tangible to "imaginary" value never happening with bitcoin is part of what fuels the uncertainty and skepticism.
Bitcoin will likely continue to succeed even with its lack of "intrinsic" value and no backing by a traditional organization/govt simply because it was first. I don't think any of the alt-coins that don't also bring something else to the table are going to succeed long term though.
I don't disagree that there are a variety of wins for crypto systems, I'm just a moderate skeptic of most of the specific systems I know anything about (obviously, being software systems, many of the things I view as problems can be coded away).
Just because that's how it works now doesn't mean it has to always work that way. There's no reason why the "private key" couldn't be different for each transaction.
I just wired money from my brokerage account to my checking account at a different institution. It happened in thirty minutes and I was charged no fees. Digital cash has been the bulk of cash for many, many years.
It is absolutely possible. Sweden is close to achieving it . The hurdle isn't technological. People like physical cash. Consider the shitstorm that would erupt in America if the Treasury announced it would stop printing and minting physical currency.
> it's still a very interesting technological development
Also, I've never had a wire settle in under 24 hours. It's typically 2 - 7 days depending on destination and currency.
They're probably doing an ACH  transfer, which is net settled . They take longer but are cheaper than wires. Fedwires, once transmitted from the sending institution, take seconds to be received . They're real-time gross settled , i.e. faster but costlier ; many institutions waive (i.e. eat) these fees for clients with more than ~$50,000.
 Why? Because they're immediate and irrevocable. The first part means the bank has to use actual funds on hand, versus hoping a countervailing transfer cancels out the work or letting a profitable (relatively speaking) investment pay out. The second part means mistakes are more resource-consuming.
It may be the leader in consumer hype of technological development, but dear deity so much of the actual daily operations seems almost third world.
Maybe they're just trying to avoid being faster than Bitcoin.
While this may be the case in some wire transfers into Coinbase/GDAX, this is certainly not the case in all cases. I've made three wire transfers of differing amount within the past three months and in each case the funds were deposited into my Coinbase account within 36 hours. Two close associates of mine have had similar experiences depositing via wire transfer in the mid- and late-December, 2017 time frame.
Granted, I have not deeply investigated all of the "my wire transfer has been pending for multiple [days/weeks/months] and still hasn't been deposited" complaints I've read on Reddit or the Coinbase forums, so it could be that I'm an unusual case vs. the norm.
A true digital cash transaction would only need communication between the two parties involved, rather than a working connection to a third entity.
What cryptos do you believe have solved these problems?
The code was forked to create the Steem blogging platform, and now EOS is in development to essentially back Ethereum-like smart contracts with the DPoS model.
Ethereum is trusted, and Vitalik is a great project leader. If they can solve distributed smart contracts with his new plans, that would be huge. For now, it seems like the middle ground is where it's at.
NEO, for example uses dBFT consensus (which is a type of dPoS), and trades off availability for consistency (the opposite of Bitcoin). It has a block time of about 20 seconds and can do thousands of transactions per second.
IOTA, uses a block DAG (which it calls Tangle) instead of a chain, and uses a novel PoW mechanism to validate transactions that allows for parallelism, and it's throughput grows with the size of the network. (I don't know what you mean by "isn't even real cryptography.")
There is a huge amount of research in this area, and some of the ideas coming out are really interesting (from a distributed consensus perspective.)
(/me worked on paxos-based consensus systems for a decade.)
But all the speculation right now cares about none of that. They only care about optimizing how quickly people can be convinced to throw money at the coin. They don't need to do the math right, they just need it to sound right. IOTA is a prime example.
IOTA does cryptography like a literal cargo cult does aviation. They just went through the motions without understanding what they're doing. They rolled their own hash function, in ternary for some dumb reason. It turned out to be vulnerable to attacks known for decades the moment a cryptographer looked at it. The spin they've come up with after that indicates that they don't fundamentally understand why not to roll your own crypto, especially not a hash function.
They are amateurs, screwing around. Any research you've read in distributed consensus, I guarantee you that the IOTA team doesn't understand it.
The fact that you included IOTA in your list undermines the credibility of your entire list, and makes me at least think that you haven't applied your expertise in consensus systems to looking at what these coins actually do.
More information: https://www.media.mit.edu/posts/iota-response/