How is any cryptocurrency even considered an investment vehicle? I would classify myself as Boglehead and I believe in the fundamentals of investing in stocks because in all it's technicality (and given the buy-and-hold strategy), you are investing in a business by owning a part of it which naturally means that you will and do get the returns on it, both in terms of profits (dividends) and and value growth (appreciation of the stock value). And conventional wisdom of lending also applies to bonds.
That being said, again, why would cryptocurrency ever be considered as a good investment vehicle? Isn't it analogous to me investing my money in buying USD or the British Pound (or a well diversified currency ETF), something I don't see a lot of value in as well.
One answer to this question is that Ethereum will soon become a "real investment" because fees will accrue to ETH holders and the huge expense of electricity-intensive proof of work mining will be discontinued forever.
Here is how it'll work
- in 2021, an improvement to the Ethereum network known as EIP-1559 will launch, causing a portion of all new transaction fees to be burned/destroyed, which is effectively a "stock buyback" for ETH. This will be the first time that ETH holders receive any kind of "earnings per share". But, it's not enough:
- EIP-1559 alone is not enough for ETH to be a profitable investment from a cashflow perspective. The problem is that Ethereum's proof of work mining is extremely expensive, like Bitcoin's. Ethereum will run at a "net loss" until proof of work is discontinued.
- two days ago, the Ethereum v2 "beacon chain" launched after years of research and effort. This "beacon chain" is currently not used for any ethereum transactions and won't be for two years. Here is a 3rd party UI for exploring the beacon chain https://beaconcha.in/
- in 2022, the main ethereum blockchain will merge with the new ethereum v2 beacon chain and proof of work mining will go away forever. The new system, proof of stake, is dramatically less expensive. It's so cheap that it's effectively free.
- in 2022, with proof of stake fully live, ethereum's transaction fees will effectively accrue to ETH holders and there will be no material expenses to offset this income. The result is that ETH will become a real investment vehicle from a cashflow perspective.
>How is any cryptocurrency even considered an investment vehicle? [...] [Y]ou are investing in a business by owning a part of it which naturally means that you will and do get the returns on it[.]
That is how Ethereum works. Validators get returns from Ethereum by holding shares, i.e. ETH. Validators, after EIP-1559, will be paid with newly minted ETH and anything over the base burn fee. (Currently there is no mandatory burning of fees.)
To stake in ETH 2.0 a stand alone validator needs 32 ETH (~$20,000). It reminds me of Outback's business model of requiring managers to buy in as stake holders (https://hbr.org/2005/09/a-stake-in-the-business).
This is before all the crazy features that can be built on top of eth-as-programmatic-money, such as lending. https://defipulse.com/
But if nobody is using ethereum to actually buy stuff and only hoarding it to “invest,” how is that transaction fee cash flow going to add up to anything meaningful?
It sounds like investing in Visa...but an infinitely worse, less profitable version of Visa with 100000X smaller dividend payouts.
It's analogous to investing money in USD or GBP before those countries were given a license to print as many USD and GBP as they wanted.
Before then (1931 for the pound and 1933 for the dollar, though they maintained de-facto parity with gold until 1971), dollars and pounds were considered good investments. That's why we had bank runs: people thought their money would be safer under their mattress, and preferred to own physical currency rather than numbers in a bank's ledger. The only reason holding USD is a bad investment is because inflation is basically guaranteed: you know that a dollar will be worth less tomorrow than it will be today, because the authorities that control the dollar say so. Not so with Bitcoin: the total supply is fixed at 21M, forever, and there's no central authority with the power to change that.
Any fork or decision by anyone to change this 21M number means that for me (and most hardcore bitcoiners I know) the chain which sticks to Satoshi's 21M becomes the REAL bitcoin chain.
21M is non negotiable. If it doesn't have 21M, it simply isn't BTC.
This should actually scare "investor" speculators: if the number of mining pools gets much smaller, miners collude, or someone performs a DDOS attack some miners, fundamental assumptions of the currency go out the window.
You can 10x the world gold supply by capturing a single medium-sized metallic asteroid.
You also can't send gold over the internet or store it in a private key. Given that Bitcoin is otherwise quite similar, mutatis mutandis, it's not unreasonable to imagine that Bitcoin might displace gold to some degree as a reserve asset.
One of the ways I don't feel bad about not making millions in BTC even though I was aware of it long ago is the absolute certainty that I would have simply lost the paper wallet, had a hard-drive failure, etc, etc. There is just no way I would have held onto my keys for the 7 years that I was aware of it. I imagine that the breakage here for early investors is probably pretty high. I never did cash out on my dogecoin...
It’s not impossible to make copies of and secure private keys if you have a plan. (But even if you had bought some and preserved it, would you have had the tenacity/foresight to hold onto the BTC for 7+ years?)
> It’s not impossible to make copies of and secure private keys if you have a plan
I was 100% discussing my scenario. I would absolutely not have enacted a careful plan with multiple fall-backs. Which is it's own kind of self-indictment tbh, but one that I am at peace with. :D
Also, this holds for 99.99% of the populous. Even hardware wallets aren't a great solution and there you're paying a hundred dollars or so just to get one.
The supply of capital-B Bitcoin is 21M, but at any time, anyone can create Bitcoin2, which is an exact clone of Bitcoin but with a fresh chain. Any Bitcoin2 token has exactly the same utility as a Bitcoin token in principle - the only difference is that, for now at least, lots of people are mining Bitcoin and no one is mining Bitcoin2. If there comes a day when a lot of people think there should be 42M bitcoins, instead of 21, what would stop them from just starting a second chain? Granted, these "a lot of people" are not a "central authority", but is there really a difference when it comes to the question of bitcoin's total supply? As long as those people have enough compute they're willing to put to work mining Bitcoin2, there's nothing stopping them from creating more tokens that are just as useful as original Bitcoins.
And, of course, they could freely choose to make Bitcoin2 have a trillion tokens instead of 21M, or whatever number they want.
Similar things have already happened (Bitcoin Cash, Bitcoin Gold). The original is still standing tall. But if you think you can convince someone your Bitcoin is better, feel free to do a fork!
I think the main thing Bitcoin has going for it is name recognition. Would be better if we could leave proof-of-work in a flaming trash pile and migrate Bitcoin to Ethereum (and rename it Bitcoin)
yes but the beauty is that, due to the lack of a central authority, the game theory of the situation virtually ensures that no one would ever do that — that is, take bitcoin2 seriously
I don't know if I agree with that. Like take the example of a country whose currency collapses due to government mismanagement and its people decide that they would be better off with a cryptocurrency. I'm not sure how realistic this is, but it's at least a scenario that I see proposed from time to time. Those citizens face a trade-off when deciding between Bitcoin and Bitcoin2. Bitcoin has a lot of active miners, which is valuable, as it means their future transactions will be more secure. But Bitcoin is also very expensive, and difficult to acquire. Joining the bitcoin economy is entering into a game where other players (bitcoin early adopters) have a huge head start, and these newcomers have nothing. If they instead start a new chain, they will need to bring their own compute power, but will have an opportunity to have a meaningful share of the tokens, and therefore some amount of influence on steering the currency.
It's probably unlikely that an enfranchised bitcoin user would be incentivized to jump to a newborn chain, but I don't think it's the case that a new user is always incentivized to adopt the existing chain. As the price of bitcoin increases, and the remaining coins to be issued decreases, a new chain becomes more attractive for new users.
Well Bitcoin does have almost central authority - if Top 3 mining pools decide to change their software in literally any way, then everyone else will comply of will be left in the dust. It's not that hard for 3 people to agree on a common action plan.
The 21M can absolutely be changed. It's not a law of physics, it's just a line of code that can be changed. If enough people agree to it, it can be changed, they can even change the number of coins you get for successfully mining a block.
A deflationary asset class encourages hording, not spending or using in other ways. There's also no real limit to the number of crytocurrencies that might appear later (see: MySpace replaced by Facebook), unlike gold. As for inflation: safe government bonds have historically kept up with that over the long haul, so no big loss there.
My understanding has always been interest rates. Interest rates on savings accounts are supposed to be slightly lower than interest rates on loans with the bank taking a profit in the middle.
Home loans used to be much higher, in the 10-15% range and you could get 6-7% on your savings account.
With home loans in the 2-3% range, those margins aren't feasible anymore.
But that's probably an old understanding. I'm sure there's a lot more financial wizardry to it now.
I'm not an economist either but what you said makes sense. We instead nowadays have tons of various fees on our bank accounts so the return ends up being negative. And we're supposed to accept that this is fine and normal? Economy is booming? Give me a break.
This is why creative solutions like bitcoin, if not (necessarily) directly solving anything, do give pause for thought, and maybe shine some hope for a non-corrupt (immutable) system of money.
I need to read up on whether a deflationary currency/economy would really be an issue, or if it just wouldn't work with how things are currently set up.
Edit: And yes, it's a complex issue with no outright easy answers. Doesn't hurt to think about it though.
Rates have been declining for years (decades, really), but so has inflation. The spread hasn't actually changed that much.
> Imagine a society not based on consumerism and quarterly report increases. Gasp!
I have literally no idea what that would look like or how Bitcoin would play a role. I guess hodlers who bought early would be rich and normal people poor?
Hmm. Ignore the existing coins for a moment, let's just imagine that starting today everyone gets their salaries paid in bitcoin and that's the only currency you can use.
Assuming the value will slowly (and for the sake of argument steadily) increase, would consumption and innovation stifle to a halt and everyone turn into hodlers?
Saving money would become attractive yes, and loans would become expensive or unrealistic (depending on the rate of deflation).
And companies/businesses would value a steady and solid stream of revenue/profit over hysterically chasing constant growth.
That would result in a certain fork. We had already had that and it seems the majority has decided to stick with the initial rules even though the fork wasn't about supply but something that will give bitcoin more practicality.
Being a decentralized application, certainly the core devs could attempt to make such a change but I guarantee that would cause a fork and the community would decide which fork they want to put their mining effort into.
The 'community' at large doesn't mine Bitcoin. A few gigantic mining farms mine bitcoin, and their self-interest could well change the bitcoin issuance. It's not as decentralised as you think.
Bitcoin, and to a slightly lesser extent Ethereum, are schelling points for crypto. There are good reasons for this. Both bitcoin and ethereum created something new and interesting. In a world where you are trying to pick the coin that everyone else is going to pick, which one will you pick? The Nth of its kind, or the one that created the kind to begin with? That’s why they account for a huge majority of total value of all crypto currencies.
Edit: obviously this is an oversimplification and there are other factors like quality of governance, quality of the underlying tech, and so on. But I believe the above is the crucial factor.
Anybody can easily create a coin, but if the coin has no market share or broad usage, it has no practical value.
We can make infinite coin types, with each coin type having an infinite number of tradable units; all that matters is adoption. Bitcoin is far more likely to be accepted than a coin you invent tomorrow.
You had it with 'we can make infinite coin types' - who cares about what is adopted today? People change platforms every few years. What happened to MySpace? What's happening to Facebook even now? Where did TikTok come from? There is turnover.
Yep, this is what people are not understanding. Too many engineers and not enough business owners on HN. The hardest part of starting a business is getting the network effects on your side, it isn't the tech.
Sure, but then why have a market for hundreds of coins? We dont have a public market for all the craigslist wannabes because they are not relevant at that level.
They are relevant because, for any given coin/chain, it seems to be pretty damn hard to hack the numbers. The only way to get some is to mine for a long time with expensive hardware, or to convince someone to give you some by giving them cash. Turns out enough people have enough interest in the things that they don't give them up very easily.
With cryptocurrency, you're right they're not an "investment" in the traditional sense. Right now more of a long-term gamble.
In my opinion the value is in the network and the ability to move money instantly (or at very least faster than traditional methods), securely, to anywhere in the world for a fraction of a cent. That ability alone is valuable and hasn't existed until now.
There are other arguments along the lines of deflationary vs. inflationary, anonymous vs. private, irreversibility of transactions (no charge-backs) that are good or bad depending on your views, but in general crypto represents a brand-new "investment" (or gamble if you like) for this generation.
The different cryptocurrencies that various teams are building follow different philosophies, but I think the space in general is pretty interesting.
> In my opinion the value is in the network and the ability to move money instantly (or at very least faster than traditional methods), securely, to anywhere in the world for a fraction of a cent. That ability alone is valuable and hasn't existed until now.
I spent some time working in a relatively-unknown but high volume clearing bank.
Banks can and do move billions instantly, and have done so for years through SWIFT and ACH. It takes literal seconds for a confirmation to pass through different clearing networks around the world.
Even today, we're seeing banks improve their correspondence networks with each other.
For example, you could have a Transferwise Account where you receive USD and convert to GBP.
If you wanted to move that to a Monzo account, you can do so instantly as Transferwise and Monzo have accounts either with each other or in the same institution.
The bank debits and credits each counterparty immediately.
At the end of the day, it nets its position, then sends its report to the central bank, netting positions between other participants.
Looking at crypto from the outside, I really don't see the added value based on existing infrastructure.
It seems more like a proof of concept rather than a viable long-term asset.
so why does it still take me 3+ business days to move money between banks? I assume it's just because they use that float to make money, but it still sucks. i for one like transactions clearing in a few seconds rather than a few days.
In fact what parent is saying is that fast transaction speeds are not something that are solely enabled by bitcoin. There is absolutely no technical reason why transfers have to take days between banks. That's just down to the banks in your country having a crappy infrastructure.
In fact, among the interesting properties of Bitcoin, I'd rate transaction speeds as the least relevant - chiefly because network throughput and transaction speed is actually pretty poor if you compare it to what is achievable with classical tech.
> There is absolutely no technical reason why transfers have to take days between banks. That's just down to the banks in your country having a crappy infrastructure
This is one of the reasons crypto is a great solution though. You don't have to rely on institutions for the infrastructure.
> There is absolutely no technical reason why transfers have to take days between banks. That's just down to the banks in your country having a crappy infrastructure.
I agree that there's no technical reason. For example, "crappy infrastructure" is an economic reason why fast bank transfers wouldn't work. I'm evaluating bitcoin as a political/economic tool.
That's not really a unique value proposition, as there are PayPal (and probably others) for many years already. And PayPal is free for private transfers, compared to BitCoin's ~$5/transaction.
SWIFT gpi can't compete with Ripple on a number of important issues. Ripple transfers don't pass through multiple banks and the actual value of the XRP is transferred, not just the data (of the SWIFT ledger).
> Banks can and do move billions instantly
We're not just talking about banks, and if I open my own bank tomorrow I can't use SWIFT the same day (the way I can with Ripple), I have no relationships with correspondent banks.
This is the added value to existing infrastructure.
I think what the grandparent post is trying to make clear is that there is no technical impediment to moving money instantly as some others have claimed here. It isn't that the amazing technology of blockchain has allowed us to achieve this for the first time. The reality is that this completely unregulated space is allowing people to sidestep a bunch of regulation and thus move money faster. If crypto becomes an issue the powers that be are going to do one of two things;
1) Regulate crypto such that it isn't an issue anymore and is in line with existing systems.
2) Improve the regulation such that the existing monetary systems move money more quickly/easily/whatever.
Crypto has an edge in neither of these situations.
the cost/speed of transaction value of Bitcoin is probably overstates vs existing alternatives. The real bitcoin advantage is that bitcoin transactions require no authority's approval in order to make the transaction. Meaning you can still make the transaction even your residing country decides you are an enemy of the state. Imagine having the power to control your finances as you wish even if you are a dissident in an authoritarian regime.
The "anywhere in the world" part is really huge. As of now, most cryptocurrencies aren't run by nation states, unlike traditional currencies. Cryptocurrencies have to potential to become a global currency that's fair to all.
I actually think that the nation states really missed out when they didn't mint their own cryptocurrency that has the same value as their physical money. If they controlled a currency completely, they could tax every transaction! Surprised they didn't jump on this.
Okey, calling it a "long-term gamble" only sounds fair to me.
Talking about value, isn't blockchain / crypto analogous to a medium that enables moving money quickly? If yes, internet would be similar in some sense (we have instant local money transfers these days) but we don't have anything that tracks internet as an investment.
Coming back to it, I can rationalize myself investing in a money transfer business that is build on blockchain (think Transferwise that uses a mix of technology and banking agreements) and generates some revenue for me. But if that middleman can be removed, I cannot suddenly start considering that piece of technology, an investment.
Any cryptocurrency can be used to move money quickly. So if you buy a cryptocurrency, you are automatically "investing" in that "business". You don't need Transferwise.
Bitcoin is the canonical example. The value investment argument for Bitcoin is that you think Bitcoin is (or will become) a good way to move money. You're buying a scarce piece of that utility.
===
Some cryptocurrencies additionally have other utilities. Example, ethereum can be used to write very slow, shitty software that runs on the blockchain. So far nobody has come up with a super amazing use case for this, but theoretically, if somebody did this would dramatically increase the demand for ethereum tokens - (b) above.
A better example would be something like https://handshake.org/ - a cryptocurrency that is trying to power a decentralized replacement for dns. Remains to be seen whether this can be done and will have adoption. These systems have all the problems of traditional startups, plus all the problems of low level protocol development, plus standardization problems, plus novel math.
However, I hope it's easy to see the value investment argument for something like handshake: dns is valuable, dns has problems, handshake is trying to solve those problems, by buying hns tokens I'm buying a part of this network, and if they succeed demand for those tokens goes up.
Thanks for the input. It does put things into some perspective but I am still wondering.
So something analogous to owning a part of the network, would it be correct to say that, for instance, governments own and auction telecom spectrums to businesses. They do make money out of that ownership through the initial auction price and then potentially tax you later. So a cryptocurrency could be looked at in a similar way in the future. When you later sell the currency you have owned for a while (given that it takes off well over the couple of years), you are basically transferring that "spectrum" ownership to another party.
That's right. Selling a piece of spectrum is a very good analogy.
Another easy analogy would be IP addresses. Early on in the internet huge chunks were just given out for free. Now they're valuable because they're scarce and the demand for them has skyrocketed as the internet grew.
You need spectrum to participate in the radio business (and other kinds of businesses). You need IP addresses to participate in the internet. Similarly you need HNS (as an example) to participate in the Handshake network.
And as with spectrum and IP addresses, there's only a fixed amount of HNS (or at least that is the expectation, the details vary in each cryptocurrency).
But there is another factor for cryptocurrencies. Anyone can create a new network and do an ICO and as long as the protocol is sound and audited, the new network can still enable money transfers the same way as a Bitcoin network. The collection of networks can potentially never become as scarce as, for instance, IPV4 range or the radio spectrum for telephony in the earlier analogy that I mentioned.
Anybody could create a new protocol that competes with IP (many did). So that part of your argument doesn't hold.
The reason that IP addresses are scarce is not because it's not possible to invent a new protocol, but because everyone else uses IP so only IP addresses are useful.
Spectrum might initially appear to be fundamentally scarce, but even then, people can invent other ways to communicate (and they did! copper wires! IP!).
These are all examples of networks - their value is proportional to their popularity. So yes, anybody can create a new cryptocurrency, but currencies are mainly valuable because of who you can use them with. Dollars are valuable because so many people accept them!
So if one cryptocurrency really gains traction, it will be hard for any other cryptocurrency to compete unless it offers something fundamentally new and different.
Even domain names follow the same pattern - in the last decade there has been a huge number of new domain extensions that have been approved for use; if you go to namecheap these days you have hundreds of options for your personal site.
Yet the vast majority will still use .com, .net and .org, and those still remain the most valuable. :)
Think of it that way, payment processing is a valuable product, especially online. It's costly and challenging to take money from one person and send it to the other in a secure and trusted way. So companies come along to offer it as a service, like PayPal, Stripe, and you can think of CreditCard companies as well.
So you could imagine yourself investing in those correct?
Alright, now imagine I made an open source software that lets two people process a payment between each other? They can just install the software on their computer, and suddenly they can start transacting money with one another? For free! No need for PayPal or Visa anymore. So what's the catch?
The catch is that software can't actually move real physical money around, that requires trucks and truck drivers and safes, and all that. So it's not possible to move USD dollars with software alone.
What does PayPal do then?
PayPal enters into an agreement with your bank or credit card. When you send me 100$ through PayPal. PayPal and your bank agree that eventually 100$ will be moved from your bank to PayPal's bank account. That is done digitally, and both PayPal and your bank write that down in their system on their own ledger. Now PayPal assumes it will eventually have 100$, and it agrees with my bank to eventually deposit 97$ into my bank account. Similarly PayPal and my bank write that down.
Now eventually money will actually get moved physically, but it'll play catch up. You, me, PayPal, and our banks, we all trust each other, so we assume it will be moved for sure, and so even before that happens you might have sent me some item through the mail in exchange for that money.
Now back to my open source software alternative to PayPal. What if instead of this big dance, and eventual physical exchange of money. What if we made a currency that was fully digital? So when you processed a payment with my software, you arn't exchanging USD dollars, but something I shall call Bitcoin instead. That can easily be exchanged through software alone, no need to actually physically move anything.
Well, there's a few challenge to this. First, since the software is open source and we're each running it (no central service), how can we trust that you removed the amount you gave me from your account? And that I didn't add more than what you gave me to mine? That's where cryptography comes into play.
Okay, so now let's assume I figured out the tech, so my open source software can truly be used to exchange securely and without possible cheating some amount of a digital currency between two parties without any central coordinator. Now we have the problem of how do you get some of that currency in the first place before you can exchange it?
Well, my software also guarantees that there's only 1 million coins of it max. And as the author, I gave myself 100k coins. And I randomly distributed the rest amongst the first thousand users.
Now you were a lucky one, and you have 100 coin if it. So again, maybe I want to buy something from you, but you're in another country. So I tell you, I'll give you 100 of my crypto coin, exchanged through my open source software, and you'll send me by mail my item I buy from you.
Perfect, now we have a way to exchange a currency without having to physically move anything, it is fully handled by software and can be exchanged over the internet only.
So maybe you say, well what can you buy with my coins? Well, you started selling goods in exchange for them? And so did others. So maybe Joe Blo sells Video Games and accepts my coin in exchange for them. And you sell plants. So now you can use my coins to buy video games from Joe and he can use them to buy plants from you. And so on. So the coins are slowly starting to be worth real assets, as more and more people start to accept them in exchange for goods and services they'll be worth more and more.
What's cool about a fully digital currency is that exchanging it is super fast, easy and cheap. It's just really convenient. You might also believe it to be more trust worthy then the agreement between PayPal and our banks, if you think the tech is harder to cheat. And you might believe the software is more stable than some government backed currency at managing inflation. So you might actually find that my software and my currency is overall more convenient, more secure, more safe, and more stable as a currency to exchange and trade in, so maybe you just fully move to it and stop accepting USD in exchange for plants.
Now back to investment. Say you thought that this piece of software was amazing, and you believe that people will slowly stop using other payment processors in favour for it. Well, sell your stock in PayPal cause eventually everyone will move to using my software instead. Now you want a piece of that pie, but I don't sell stock, and I don't sell my software for money, it's free and open source. Except there'd still a way for you to profit from my software gaining in popularity. If you find a way to acquire some of its digital coins, for less than what people will be willing to exchange for them in the future, you can profit from it. Thus it becomes an investment vehicle.
Sorry for the length, hope that explains it though.
Buying Bitcoin is becoming similar to buying gold. It’s a Store of Value. Why is gold an investment? Because it’s scarce and we have, as a society, decided it’s an investment. There may be nuances here, but that’s the basic idea. Bitcoin is digital gold. Most other tokens are similar buying fiat currencies which can help if you local fiat currency is hyper-inflating. But then some tokens give access to de-fi which a whole other rabbit hole.
Yep, store of value is actually a useful function for many indivudals and companies, and we are betting on that storing of value will become more and more valueable as we progress.
Storing of value is not just "hoarding", useless activity. It is an important ingredient in making many of the business processes and just things work in general. It is a very impotant function. And thus if we have tools that make that function work well, - they will be valueable.
And as it turns out, there aren't that many things that work well as a store of value. It's not like you can take any thing or instrument or contract or whatever else, and make it work as a store of value. In some sense, the ability to act as a store of value is scarce in itself. We already have some instruments, like gold, properties, land, etc. Stocks and ETFs and such are also kinda a store of value, but have a lot problems (but also other functions besides just storing the value). So yes, we welcome another way to store value, this market is by no means saturated as it turns out. Gold has it's own problems.
If I am investing and seeking returns I will tolerate a certain level of risk and volatility, if they are justified by the returns I am getting.
If I want to store value, what I am looking to avoid at all costs is volatility and risk. That's why instituations are even accepting to lose a little bit of value in return for security by buying bonds from Northern European countries.
It's kind of in the definition of the word "storing": If you want to store water you won't put your bucket of water on to a race car, even though it might drive through a heavy rain.
Cryptocurrency isn't actually scarce though, it may be "scarce-like" but the scarcity is an artificial property that can be arbitrarily changed, unlike gold's scarcity which is an unalterable property of reality.
In all practical senses it is scarce. It is the protocol and consensus of the people using it that makes it scarce. If you disagree, go ahead just make your own BTC and see how "easy" it is to convince other people to use it instead of BTC or some other mainstream coin. (Some people even tried exactly that...)
You can't really know how easy it might be for me. For example, if my name was Vitalik Buterin or Elon Musk or even Donald Trump, I could trivially create my own cryptocurrency and a lot of people would use it.
Creating a new cryptocurrency doesn't make Bitcoin less scarce.
At worst your coin takes time and attention away from Bitcoin, and thus takes value. At best it outgrows Bitcoin, and grows the entire space.
But that's like saying you could build your own alternative to Facebook by whipping up some corporate partnerships and venture capital. Go ahead, we'll see which one wins in the long run.
It's easier for those with the funds, and connections to manipulate, and censor discussions about other forks - and some pro-Segwit people did exactly that with the 2017 hard fork, like on /r/bitcoin, bitcointalk, etc.
Bitcoin is scarce; the consensus mechanism makes it prohibitively difficult to change the supply. It's barely even possible to do widely desired protocol upgrades; anything more is simply out of the question. The scarcity is far more secure than any fiat currency.
I think it would actually be easier to increase the supply of gold via asteroid mining than to increase the Bitcoin supply. That doesn't require consensus and will probably happen someday.
> the consensus mechanism makes it prohibitively difficult to change
This is a cultural property of the community, not an intrinsic property of bitcoin. If Satoshi signed a PGP message with a compelling call to alter the scarcity it would likely happen; maybe you disagree, but the point is that it's very possible to change the scarcity because it's a distributed computer program.
The fact that it's a "cultural property of the community" doesn't make it easy to change.
Bitcoin is not just "a computer program", it is a program and a blockchain. The same program with a different blockchain is not Bitcoin (there are plenty of those out there). Adding more supply to the Bitcoin blockchain would require large numbers of people to work against their own interests, decimating the value of their own infrastructure investments and bitcoin holdings.
It would be much, much more difficult to change Bitcoin than e.g. the supply of dollars or euros which are considered scarce enough for most purposes by most of the world. And, I contend, even more difficult than changing the supply of gold via asteroid mining. I doubt that even the second coming of Satoshi would be enough to do it (and I also very much doubt that Satoshi is still alive, or that he would want to if he was, considering his known political/economic stances).
The point is that the scarcity can be trivially changed if certain people decide that it should, which isn't true for things that exist in the real world like gold. Norms shift over time and your suggestion that it's unlikely to change is your opinion based on cultural analysis, not something that can be proven to be true even in principle.
> It would be much, much more difficult to change than e.g. the supply of dollars or euros which are considered scarce enough by most of the world
This thread is about gold not fiat money, obviously the scarcity of fiat money can change, that's the whole point of fiat money.
> can be trivially changed if certain people decide that it should
This is simply not the case - see 2017 bitcoin cash fork or Segwit2X push. At the end of the day money is a human invention, meant to facilitate value exchange between humans. So it requires consensus between the users of the money, if some fraction want to change the rules they are free to.
We went for something we found in nature with properties that were pretty good for that, but with some downsides (not absolutely scarce, difficult to transport, easy to steal) to something created specifically for the purpose.
Technological advances can increase the gold supply. Asteroid mining, extracting it from sea water, mining lower quality deposits, etc.
There still has to be consensus on using gold as money, if there isn't it will lose its monetary premium to something that has better monetary properties.
> There still has to be consensus on using gold as money
This is a great point. The choice to value gold as currency over other rare metals is 'a cultural property of the community' and yet not 'trivial' to change, just as Bitcoin's consensus isn't.
You can't "prove" that Earth's gold supply won't increase with asteroid mining either. We can disagree on the relative difficulty of asteroid mining vs. changing Bitcoin's consensus rules, but you must at least concede that they are both possible.
Right... No matter how many people wish it to be so, the amount of gold on the planet cannot be arbitrarily increased, instead, you'd have to go to extremes likes mining astroids in space, a feat of engineering that is only possible in theory.
Mining asteroids is quite possible in practice. In fact we've already taken material from asteroids and returned it to Earth. The only question is how long it will take for the technology to advance enough for profitability; there are no fundamental issues preventing it. It really seems inevitable assuming no civilization-ending disasters. And it can increase Earth's gold supply arbitrarily up to many times the current supply. And it only takes one company to do it. Anyway, if our only disagreement is on the relative feasibility of changing Bitcoin consensus vs. asteroid mining, I'm happy to continue to disagree with you on that.
Gold’s scarcity is certainly not unalterable. Gold can be destroyed, increasing its scarcity. Plus we already have the technology to create gold out of other elements in a particle accelerator, decreasing its scarcity. That process happens to be prohibitively expensive, but there is no guarantee it remains so. The scarcity of cryptocurrencies and gold both depend on the actions of other people.
Yes, it's possible to destroy or transmute gold, but as you already stated, it's prohibitively expensive thus with respect to scarcity it might as well be impossible. Yes, that might change in the future but there is no reason to believe that it will.
No. Your belief that the bitcoin community will never choose to alter the supply of bitcoins is not the same thing as the properties of physics which constrain the practical transmutation of gold.
Any change to bitcoin's supply algorithm requires a hard fork of the blockchain. People have done it before but those forks are considered worthless by the community.
You're right that it is a community belief. If enough people were convinced that supply should be increased, they could fork the blockchain and move to the new chain. The change in supply would alter the price appropriately.
But that's no different to the community belief that it has any value to begin with. If everybody was convinced that gold was worthless (outside of its practical industrial uses), it would cease to be a store of value too.
As long as you waited 4 years between storing value in Bitcoin and removing it you _always_ got more value out, no matter what point in time in Bitcoin's entire history you stored it.
And not just a little bit more value..
Is an index fund a store of value? Would you recommend someone store their value there if they wanted it back out in less than 4 years? Gold? Property? Or would you suggest those stores of value are only suitable for longer time frames? How much more value does someone who stored it in Bitcoin 10 years ago have now?
Gold is a physical thing that is scarce and has real uses other than being treated as 'money'. We have only mined a cube with 28 meter sides of gold from the dawn of time! It's useful- that's why it has value.
If it wasn't useful (pretty for jewelry and an essential industry product) then it would be fairly worthless.
You say crypto is scarce? The scarcity is artificial, and you can create an infinite number of crypto currencies...
They already have created an infinite number of them. Nobody is buying them. BTC and a couple of others have the property of being valueable (which is decided in consensus by the users in the real world), while also being scarce. Nobody cares if some shitcoin on the bottom of coinmarketcap is not scarce. It is irrelevant.
> BTC and a couple of others have the property of being valueable
I'm not sure this is a rock-solid argument. Ponzi schemes also have value (until they don't). MLM's are often massively valuable, too. But most people would acknowledge they're little more than scams to the huge majority of people "invested" in them.
A store of value is just one aspect to what makes money, money. It also has to be a medium of exchange and a standard of value. Bitcoin's value changes so wildly that it cannot be a standard (right now) and no one uses it to buy things.
Everyone is investing in bitcoin on the promise that its going to be so much more useful than dollars, in the hopes that they will make a lot of... dollars? Do you see the contradiction? If they think it's going to be so much better than dollars what are they going to do with their long term investment dollars if, in the long run, bitcoin surpasses them?
Don't use economics terms to explain the usefulness of bitcoin when economics itself disagrees.
Your logic stumbles when you consider gold. "no one uses it" either to "buy things", and yet it is valueable and has been so for eons. Store of value is a very important function in itself.
The gold standard was abandoned precisely because it was inferior. It was pretty useful up until early 20th century as a medium of exchange too. People used to use gold coins to buy things, didn't they?
Bitcoin 100%, because of the optionality and network effects.
I don't believe you can separate the value of Bitcoin and it's usefulness because the more valuable Bitcoin is, the more useful it becomes.
The more people who hold Bitcoin, the more scarce it becomes and therefore the more valuable it becomes. In 20 years, Bitcoin could go to 0, or become a widely used currency and skyrocket in value.
Once the number of Bitcoin holders reaches equilibrium then the value would remain stable, but we are definitely not at that point yet.
For the simple reason that it exist in the physical space and can't disappear, unless the laws that regulate our existence change, which is quite improbable
Gold will also work and retain a value even if society suddenly shuts down and reset to a "sticks and stones" state
Bitcoin advocates have this weird tendency to completely ignore decades of game theory
> Everyone is investing in bitcoin on the promise that its going to be so much more useful than dollars
I doubt this is true in every case, maybe even most cases. Though this sentiment does seem to become more rigid toward the core of the crypto community, a huge swath of other investors are playing price action. There are tons of technical traders in crypto, and they tend to care much more about MA deviations, gaps, pennants, and candlestick forms than what's going to replace USD.
You can also think of it as a play by (people who don't have as many concerns about the dollar) off the fears of (people who are afraid about the future of the dollar).
IMO there is a lot of room in a speculative ecosystem for non-value, non-traditional-economics, and even hugely irrational viewpoints. They can all meet with success by using their own sets of strategies.
I recommend you read some of Stephen Deihl's thoughts on the subject[0].
You're not alone if you feel that cryptocurrency doesn't make sense as an investment vehicle, but the HN community will make you feel crazy for not seeing what a great thinking this is an incredible new opportunity and "things are different this time!"
There is no better indication of a bubble then people telling you that you're the crazy one for questioning it. I remember people telling me I was crazy for not buying a house in 2007, and crazy for not trading tech stocks in 1999.
> There is no better indication of a bubble then people telling you that you're the crazy one for questioning it. I remember people telling me I was crazy for not buying a house in 2007, and crazy for not trading tech stocks in 1999.
I'm not sure that's a good indicator with so many counter examples: the internet, large touch screen phones, Cloud in the earlier days, etc.
We truly have no idea what the future if Cryptocurrencies are.
Bitcoin has been around for about a decade now. It didn’t take anywhere near that long for the internet, large touch screen phones, the cloud, etc. to really catch on.
And for every technological advance met with skepticism that eventually succeeded, there are orders of magnitude more that crashed and burned (e.g., the segway, 3D televisions, HD DVD, and countless others)
> Bitcoin has been around for about a decade now. It didn’t take anywhere near that long for the internet
That's not true, as is obvious with only basic fact checking. Apart from it not being obvious what you mean by "internet" (does ARPANET count?), the internet proper saw its first commercial access providers appear in 1989[1] and it certainly was nowhere near popular in 1999 as it is now. In fact, I would say the change from that period is almost fundamental. Remember, 56k modems were popular back then and a very small part of the world's population had internet access.
My point is, this certainly fits into the larger picture of where Bitcoin is right now. It's vastly more popular then 10 years ago, because now my plumber and barber ask me about it, it is regularly talked about in the news and there are almost no countries without laws enacted as a response to it.
> the internet proper saw its first commercial access providers appear in 1989[1] and it certainly was nowhere near popular in 1999 as it is now
The internet had 248 Million users in 1999 [1] Bitcoin has, estimating very liberally ~28M users worldwide [2].
> It's vastly more popular then 10 years ago, because now my plumber and barber ask me about it, it is regularly talked about in the news and there are almost no countries without laws enacted as a response to it.
Nobody's disputing that. As in my previous examples, we've all heard of 3D televisions, segways, HD DVD's, 8-track, beta max, Theranos, Juicero, and tons of other laughably bad ideas. That doesn't indicate success.
That is what risk is.... not knowing. If you want high reward from an investment, you need to take high risks, which means you will invest without knowing something.
That's not necessarily a good idea. You don't need to take on higher risk for a higher return. It's usually better to leverage risk-adjusted returns rather than chase high total returns with commensurate risk.
You can take on more risk that if you have the appetite, but if that's the case you could also just use levered beta (e.g. 3x levered S&P 500). This would significantly improve your portfolio while still being fundamentally much easier to understand than a novel asset.
If your portfolio has a decent risk adjusted return and very low volatility and beta exposure, it's safer to just leverage it up to the same risk as the S&P 500. This reduces the chance of you blowing up your capital in the long run.
I would argue there are very few investment goals for which extreme risk is sound (especially if it's unhedged!).
That's also ignoring the cost of capital, as leveraging risk adjusted returns has to take that into account. You don't get the same rate of return if you use margin, say, in order to leverage.
If you use a 3x or other leveraged fund, then you run into tracking issues (look at https://www.etf.com/etfanalytics/etf-comparison/SPXL-vs-SPY) where you see tracking break down), you can lose everything (remember XIV?), and you have other potential issues.
So it's not as simple as leveraging up a low-risk portfolio to assume a given risk/return ratio. There's also diversification to keep in mind.
That is a good point, but that all applies to riskier investments as well. Whether or not that specific example will beat out something like cryptocurrencies does depend on margin and transaction costs, this is true.
> You don't need to take on higher risk for a higher return
The lower the risk of an instrument, the more it will be saturated with investors, the more thinly per-investor share of profit will be spread. Therefore there is no such thing as "low risk, high returns", unless it is a scam. There is no unexploited profit opportunity that is risk free, if one thinks they have found one, they must have just missed accounting for the hidden risks.
I didn't say "low risk, high returns." It is a spectrum. What you've said in your first two sentences sounds fine as a textbook principle. But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis. Very often you can then leverage this up to a higher absolute return than SPY while keeping lower volatility and beta overall.
> There is no unexploited profit opportunity that is risk free
This is essentially encapsulated by a Sharpe ratio (among other things). On the contrary, it is not especially difficult to produce a relatively high Sharpe ratio, accounting for transaction and margin costs, if you don't have a large amount of money to invest (large means single digit billions or more). This is especially, but not exclusively, the case if you don't care to compound your returns.
> But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis.
Sure, there are asymmetries in real life and information takes a while to dissipate to all agents, but unless you're a robo-trader doing high frequency temporal arbitrage, I don't buy for a second that you can beat the market on a continuous basis. You might think you do, but that would be just some hot-hand fallacy.
> This is essentially encapsulated by a Sharpe ratio (among other things).
You're conflating two things. Sharpe ratio is about a profit opportunity with regards to its well established degree of risk. Unexploited opportunity is when you asymmetrically discover a new return opportunity upon what was already priced.
In both cases it comes down to the belief that "I am smarter than other investors, and can profit from an angle they haven't thought". I will not assert a strong efficient market hypothesis, but in overwhelming majority of the cases, no, you're not.
Like I said, run through a basic risk parity strategy holding SPY and an uncorrelated ETF. Calculate the beta, volatility and return over 10 - 20 years. It does beat the market continuously on a risk adjusted basis. With leverage it also beats on total returns with lower volatility and beta.
Beating the market is not mysterious, it's just difficult to do it by a lot or at scale. Just because well performing portfolios are well known doesn't mean they cease being effective in principle, the way you seem to think would happen. These days a risk parity portfolio isn't enough to solicit funds from savvy investors because it's well known and they won't pay management/performance fees if that's all you're offering. But it's been a staple since Dalio developed it 30 years ago for good reason.
You can find code for running through the kinds of things I'm talking about, as well as more in-depth discussion here: https://qoppac.blogspot.com.
Yes, but you can choose how much risk to take on using your leverage weight. You don't have to accept the baseline risk of the inherently riskier asset. It's easier to start with a less risky portfolio and weight it accordingly than it is to derisk a portfolio which is intrinsically riskier.
> but the HN community will make you feel crazy for not seeing what a great thinking this is an incredible new opportunity and "things are different this time!"
The HN community is strongly hostile to crypto. Few people here like the downvotes when they speak positively about crypto, although I keep taking them!
As a store of value it's better than gold in some ways, because you don't need to physically store it. But unlike gold, which can appreciate in value indefinitely, Bitcoin is mathematically capped in how much it can appreciate in value because the expected value of mining and purchasing need to go to par.
>But unlike gold, which can appreciate in value indefinitely, Bitcoin is mathematically capped in how much it can appreciate in value because the expected value of mining and purchasing need to go to par.
I don't think you're using the term "appreciate in value" correctly. I think what you meant to say is that gold can be mined infinitely (on earth, in space) and therefore has potentially infinite supply, whereas the total supply of bitcoins is capped at 21 million.
"The Politics of Bitcoin: Software as Right-Wing Extremism"... just wow.
Is it crazy to consider that crypto companies might simply provide better tools than a lot of banks, therefore driving worldwide adoption?
Your argument here makes it sound like people are using crypto for practical applications on a scale approaching banks. If that was the case I would be far less skeptical, but, aside form a few enthusiasts that make crypto transactions to make a point that "people use these" I don't know of anyone that uses crypto for practical, everyday financial transactions.
Can you provide me some evidence that people are using crypto at a large scale, and that that scales in increasing in a way that it is anywhere near competing with banking services? It seems that even after a decade of enthusiasm people are still mostly "investing" in it.
The price of the house structure itself decreases with time. The price of the land the house sits on might increase, depending on where it is.
Land prices in very, very few areas have increased sufficiently to match a risk adjusted return (or even the nominal return) of a broad market index fund, such as VOO or VTI. Especially considering the liabilities and ongoing maintenance costs with owning housing structures.
The labor adjusted return is far better too, you spend minutes and a few clicks investing in an index fund, versus hours and days on real estate.
*with the caveat that those very few areas also hold a large percentage of the population, since land prices are correlated with population density and zoning regulations (i.e. see Hong Kong for ex.)
One thing to not forget is the amount of leverage provided for you in the housing market is disproportionate compared to the leverage you would get in stocks (20% down is 5x leverage, and there are some options to get in on a house with even less than that).
If you look at the real rate of return on everything (paper from 2017, analyzing the period between 1870 and 2015 in several developed countries), they claim the return on property is around 8% per year, which is comparable to stocks but with a lower variance.
A caveat though is that housing outperformed equity slightly 1870-1950, and equity has outperformed 1950-today. Housing is also a very locale-specific thing, since there is no global private 'housing' market you can invest in.
Absolutely right about the advantages of leverage. And with real estate, you can do a 1031 tax exchange and continue growing your wealth tax free indefinitely as long as you can pay the property taxes. Although, residential real estate offers a pittance in returns compared to commercial.
But I think almost everyone who doesn't have an interest in doing the grunt work of real estate investing would be better served sticking their money in an index fund ETF rather than real estate. It's drastically less work, less worry. Extremely low cost broad market index funds and ETFs are relatively new too, I'd be interested in seeing an analysis of performance after they went mainstream.
I consider it a deep out of the money call option. There's a small but real chance that Bitcoin (or another crypto) essentially replaces the US dollar as the world's reserves currency.
Bitcoin's total capitalization today is $200 billion. The total value of the dollar is harder to measure and depends on what you count as money or just money-like. But M3 is $20 trillion, and add in short-term T-bills and money markets and it's substantially higher. So in this scenario, it's possible for BTC to rise from $20,000 to $1,000,000+ or higher.
Given that, I think it's prudent to allocate 1-2% of your overall net worth to crypto exposure. Especially because we expect it to out-perform in high-inflation/low-growth environments, which is the worst environment for traditional 60/40 portfolios.
It shouldn't be considered an investment vehicle if we follow Benjamin Graham's philosophy (father of value investment, Warren Buffet's mentor).
I'd say it should be called a speculative vehicle. The word speculative carries a negative connotation, so financial companies won't make money off of bitcoin trades, so hence the name investment vehicle. It's as manipulative as the name almond milk, which is not really milk.
> I believe in the fundamentals of investing in stocks because in all it's technicality (and given the buy-and-hold strategy), you are investing in a business by owning a part of it which naturally means that you will and do get the returns on it, both in terms of profits (dividends) and and value growth (appreciation of the stock value). And conventional wisdom of lending also applies to bonds.
Except that is not technically true. Unless buying stocks purely for dividends, you are investing in a secondary market of shares and the "value" you're talking about is the expected value the other secondary market participants will appraise the stock for, independent of the company's operations. There is only a directional correlation because there is a tacit assumption between the investors to equivocate between the two. If you look at the historical trends of P/E of S&P composite price index, prices have gone way more up than the actual earnings.[1] so there is an element of wishful self-deception here.
Consider this; bitcoin might one day build enough track record to prove itself a good enough investment for a large amount of people, and then the stock market will have to seriously compete with this non-derivative instrument for investment money of those people, which will reduce the price of stocks in aggregate, independent of the "value" of underlying company performances.
If you take that into account, crypto-or-not a currency is simply another instrument which we bet for the future expected value for gains. In fact, while the value of traditional currencies are backed by their purchasing power performance in a given market, crypto currencies theoretically don't have that limit because it has unlimited supranational reach.
Mind you, US stock markets have at most one century of roughly-comparable historical data, and that is just not enough sample size to make 30-50 year assumptions (speaking for retirement buy-and-hold strategies).
I see Bitcoin as a hedge against the USD and EUR as I feel the currencies will be in trouble in the coming years.
I see Bitcoin as a store of value. Keeping some of my assets in Bitcoin keeps some of my assets out of the hands of governments and banks and will not be affected by devaluation. There's no risk of a bail-in [0] for example.
I don't invest all my assets in Bitcoin, currently perhaps 10% of my net worth. I do feel Bitcoin will rise to 100.000 USD in the next few years and possibly even 1.000.000 USD in 10+ years, my aim is to gain a total of at least 3 BTC or so in the next year. I just hope Bitcoin doesn't rise too quick in value in that time period, since I can only afford to buy for maybe 1.000 USD per month.
I might sell a bit of my Bitcoin assets after my total Bitcoin asset value reach around 500.000 USD, since at that point I should be able to take things slow. At that point I would diversify a bit more into ETFs or stocks.
Perhaps this video [1] by Raoul Pal can give you some insight in my point of view, as I agree with him on most points.
I have a lot of respect for Raul Pal, but when he talks about crypto you start to see his limits in understanding. He still thinks governments can't ban crypto if they wanted, he is very wrong about that. He also thinks that governments would allow a crypto to rival a state currency.
The most likely success story for crypto is it will be only for banks while regular people will be banned from owning it. There is simply no way a government will allow irreversibly hackable assets in the wild. There are no limits to the damage entities can do with anonymous GDP-scale wealth.
But if you look at his video, he does say governments might attempt to ban crypto, but it would be hard to totally ban, since other governments might adopt cryptos. For an effective ban all world governments have to work together on this, and that's quite unlikely to happen.
Actually Iran is using cryptos right now to circumvent some bans from the US government. Certainly Iran would not be in favour for banning crypto.
As Raoul Pal mentions, this is the state of game theory. One country might ban, another might adopt. If you can't spend (or exchange for fiat) the cryptos in your own country, you might move to another country.
I don't believe Bitcoin will be banned ... at least not while Bitcoin is still a relatively small asset class. Especially since institutional investors are now entering the crypto markets. And perhaps at some point, if enough institutional investors have entered the crypto markets, governments might hesitate to ban crypto, as it could destroy a lot of wealth in pension funds, etc...
He gives the gold ban as an example of "failure" for governments to ban it. He thinks the technology behind bitcoin is somehow so advanced that it is even better protected from governments than gold is.
Those are his main points. And I think they are both wrong. The gold example is from ancient times without KYC/AML and absolute surveillance. There is nothing substantial you could possibly do nowadays without proper invoicing and inventory tracking. Regulators will notice instantly.
The tech behind bitcoin isn't really that advanced and hiding from the government was never a focus. The tech used by regulators has evolved significantly from the times of previous "defeats". People don't realise how much work goes into tracing payments worldwide. Remember FATCA took only two years to deploy worldwide along with a roadmap to tighten control over the next decade.
A good way to get high returns is to simply use a low-cost, tax-efficient combination of stock and bond index funds. After taxes and fees, the results compound in your favor. I have no interest in gambling on even higher returns - those are plenty for me. If you want to maximize your chances of getting rich as well as getting poor, yes, you can put it all on Bitcoin, or Tesla, or 32 at the roulette wheel, but I'm more interested in growing a nest egg than taking those risks.
> If you want to hedge against inflation, I suggest TIPS and maybe a bit of gold.
I need to read up on TIPS, haven't heard about that before. Yes, gold is a decent option as well. However I view Bitcoin as digital gold and it has a few nice properties that gold doesn't have (of course gold has some good properties that Bitcoin doesn't have). One of the aspects of Bitcoin that I appreciate the most, is that it's very easy to carry around with me, for example when travelling on an airplane to another country. The same is not true for gold.
> I would also point out that the market expectation clearly isn't aligned with currencies being 'in trouble' - very low inflation in general right now.
Inflation is actually really high, but its mostly hidden in rising prices for stocks and real estate.
> Inflation is actually really high, but its mostly hidden in rising prices for stocks and real estate.
Sort of. There's inflationary forces (fiscal / stimulatory policy) battling deflationary forces (mainly technological innovation), mainly netting out to a low inflation rate at the moment, as defined by the CPI.
Assets that are not affected by the deflationary forces (such as land, and some types of housing), do tend to increase in value, though some of that is increase is just due to interest rates being so low (since for most consumers the house payment is more important than the absolute price; when interest goes down, prices normally go up).
It would be interesting to do a graph of interest-normalized house/asset prices over time.
I think part of the confusion is the word “currency”, which implies it’s something like USD.
Ethereum’s ETH token, for example, is an asset that will appreciate if demand of the Ethereum network increases for real-world business applications (not just financial payments). That makes it much more like investing in a limited resource (ex: oil) that will go up in value.
It’s still speculating, but most stock investments are close enough to speculation that you can’t really tell the difference.
Stocks are shares in profitable companies. They have risks, sure, but they also have expected returns based on sound fundamentals and a long history of generating income.
Exactly my point. They add certain value to the economy and have fundamentals. From my understanding, I don't even consider Gold (a limited resource) a long-term investment.
Gold is a good portfolio asset for reducing overall risk in a long term investment strategy. You can beat the market over time with less risk by holding the S&P 500 and gold and weighting each according to respective volatility. This also has a lower beta exposure than just holding stocks.
Gold (and commodities more generally) have fundamentals - just different ones from equities. You can't take advantage of the universe of sound investment opportunities if you restrict your attention to equities.
We have fairly little data on gold as a freely available modern asset class (around 50 years), but yes, in small amounts it can limit volatility and potentially even increase returns (or at least: risk-adjusted returns). That said, over the long haul, independently, it has tended to roughly track inflation. I'm not against it, just see it as something of limited utility to an ordinary investor.
Using minimum variance optimization with gold and spy produces a portfolio that is often 50% or more of gold. This beats the risk adjusted return of spy by a reasonable margin.
So I guess the point I'm making is that often a lot of gold makes sense too.
You could say the same about Ethereum's ETH. It's a capital asset that when staked to validate blocks generates an expected return. You can discount those expected returns to the present like you would with any business.
Investing in profitable companies by itself does not generate above average returns. Only 1 of the original companies of the Dow Jones is still in it today, G.E. and it's performance as investment has been below average the past 20 years.
> Only 1 of the original companies of the Dow Jones is still in it today
Small companies become bigger, driving returns. That's why you don't just buy the DJIA but rather index the whole market. Of course there will be turnover - the point isn't to lock into any one stock - don't look for the needle, buy the haystack (i.e. a broader-market index).
If you want to include crypto in the haystack, sure, fine, whatever, but at market weights, it's going to be a very small portion of the investable market of stocks, bonds, cash and other asset classes. At some point, it's enough to just keep it simple and broad. A fraction of percent of this or that won't make or break a diversified portfolio.
That depends on how good you are at finding needles :)
The thing not many people seem to talk about is that the 20th century had unprecedented growth in terms of population around the world (which has slowed significantly in the last few decades, although the effects usually lag by quite a bit - when the children enter the workforce and such). We're making up for some of it with technological progress, but ultimately what impact that makes is up to everyone to think about individually (look at Japan as a potential leading indicator of what demographic change can do).
Statistically, everyone trading across all different asset classes evens out, so ... sure, if you're consistently good at finding needles, power to you. Most people aren't. Many people however think they are. I prefer not to worry about it either way.
Sure, not always. To clarify: I mean stocks are shares in companies, which generally generate profits. Yes, some companies may not, or may even go under, but none of this is an issue if you hold a diversified set of stock and bond indexes for the long haul (I'm talking about equities as an asset class, not any one stock). Stocks are stakes in companies - bonds pay a risk premium - crypto, gold, etc... don't generate income, which by definition makes them speculative.
I know what it means but have no idea how profitable it is or whether those profits are guaranteed or fleeting. Best I can tell it's like any service (business, not investment): depending on demand and competition, you can make money for a time, then stop at some point. So far that has never been an issue for people investing in the global stock market (i.e. the global stock market persists even as individual stocks, sectors, industries, even whole countries have crashed in the past).
This is easy. You made an analogy to stocks and ignored the entire universe of investments and other asset classes.
Doesn't that tell you all you need to know?
There is a decade old meme of getting stock market gurus to comment about crypto and their sycophants repeating their predictably abysmal view of something outside of their wheelhouse.
Commodities traders never had an issue and volatility is also not an issue in that market. There are no “permabulls” in commodities outside of a few rare metals, and trading in those markets primarily factors in seasonal and cyclical supply and demand.
Buy and hold works ok in some crypto assets. But the permabulls that never traded anything else, and the stock market investors that keep a stock certificate their grandma gave them 20 years ago should just not be in this market.
You are conflating “good” investment vehicle with “valid” investment vehicle, where its a mixture of whether being a permabull works alongside whether enough institutions that you respect have said positive things. make your own choices about what you want to trade.
I want to believe it's an investment myself, but haven't been able to-- and by sitting it out we've of course lost a lot of money in forgone gains.
Where I get stuck, and maybe someone could help me here-- generally, you don't have to try to hard to imagine a future with cryptocurrency being more useful then it is today. That is, it is more valuable. BUT, why should that mean that its price should be higher? It's like looking at the pithy saying, "price is not value" in reverse.
the value of something like bitcoin is generally going to be related to the value of the network. if you can envision it being more useful in the future, consider what the function is, and what it means for the value of the network as a whole.
some examples to explain what i'm saying, not necessarily what i think will happen per se
bitcoin replaces, or at least augments, gold as a "store of value inflation hedge" - in theory it should be a great inflation hedge. there are a limited number of bitcoin, 21 million max, but we keep printing trillions and trillions of new dollars. gold also doesn't do anything productive, it just sits there and acts as a hedge on inflation.
in this scenario, the market cap of gold is something like 8 trillion. if bitcoin takes some of this job, it's market cap must get a lot bigger. functionally, we have 8 trillion "dollars" of wealth that are currently stored in gold. if we wanted to "store" 8 trillion "dollars" of wealth in bitcoin, we can't currently. the entire market cap of bitcoin is only a few hundred billion. For it to be an inflation hedge on the scale of gold, the price has to rise tremendously.
this same calculation can be done for whatever potential usefulness you come up with. Like if you think it can replace the USD as a reserve currency for setting international oil trades, the market cap of bitcoin has to get exponentially bigger just to handle the scale of those markets.
now, i don't think it's likely to become the world's reserve currency, certainly not anytime soon, but if it were you can see where it would have to have more value to be able to do so. I do think it is a great inflation hedge, and I think lots of money managers are going to start recommending to client to put 1-3-5% of their portfolios into bitcoin as a hedge. That's happening right now. IF that goes mainstream, the market cap of bitcoin HAS to go up significantly to handle all that new demand, given that the supply is capped.
Is Bitcoin not infinitely divisible though? So it would just be inflated by dividing infinitely. It's the same as having infinite amount the other way.
how is that the same? having more spots after the decimal is not the same as having more in front. cut an apple in half you don't have 2 apples, you have 2 halves. 21 million total bitcoin and breaking them apart is not the same as printing 5 trillion more dollars.
Are you disagreeing with the fundamental economics argument of supply and demand? More demand assuming a constant (forecasted) supply means the price will be higher.
Different cryptocurrencies are not fungible. New altcoins don't increase the supply of Bitcoin. It's not like they siphon much demand from Bitcoin either. Someone discovering a huge new source of Platinum doesn't fundamentally effect supply/demand of gold.
You logic is correct. Gold is not an investment, it is a hedge. Gold does no useful work and produced no measurable output. It's "purpose" is simply that society has assigned it a value that most people will agree to exchange for other forms of value. In exactly the same way, crypto or any fiat currency is not an investment.
>Gold does no useful work and produced no measurable output
What? Gold us physically useful and relatively scarce, THAT is why it has value.
You are acting like people just got together and said "hey, let's take this useful hunk of garbage and assign it some value to see how rich we all are".
>You are acting like people just got together and said "hey, let's take this useful hunk of garbage and assign it some value to see how rich we all are".
Correct. Gold's value in an industrial sense is no different from any other relatively scarce material. This is precisely why gold is not an investment. Its value is simply a group of people assigning a value to something driven in part by scarcity.
A cryptocurrency cannot be put into any traditional bracket of commodity, currency, stock etc. It's a new breed in itself. It has features of a currency, a commodity, a stock and much more.
Yes it can. Why can't it? It's something people want because it's value increases, and there's a limited number of it. People don't know what value to assign to it, so its price violently fluctuates.
I have no idea where this thinking comes from that it's novel other than people are sold on the hype of the concept without thinking about the concept from a different angle.
If we did "Bitcoin by hand" and threw out increasingly large numbers, and whoever could figure out its factors would be awarded a ticket, and lets say there's only 100 million tickets, what would be the difference?
That it can't be counterfeited? That the central bank can't print more tickets? That's it? Wow, OK. You know, the counterfeiting issue isn't one that modern economies face in significant portion anymore. And if you wanted to prevent the printing of money, you could just ask your local representative to advocate for the US to go back to the gold standard.
Except it doesn't work anymore. So why would it work in software?
So is it a jack of all trades and master of none sort of thing? I still see it as a speculation tool and it's grabbing a lot of momentum. But I don't see what's so fundamentally useful about the technology unless you're interested in laundering money and/or buying illegal stuff.
The fundamentally useful thing about Bitcoin is it's proof-of-work shared ledger that allows transactions to be conducted and verified between individuals (through the shared network) independent of any third party or broker.
It is the electronic equivalent of handing someone a physical coin.
It is genuinely pretty neat.
Any actual meaningful application of this use has yet to be realized.
I dont understand it either. To me yes BTC supply is limited, but there are lots of cryptos so BTC is nothing special. The secret could be if lots of important and smart people are invested in BTC you have to trust that it will keep being special, and better than other cryptos. It sounds sketchy to me, but the network effect is real so there might be something in it.
It seems lots of well known financial people are getting on board right now. It seems like a ponzi to me but those people aren't dumb.
No definitely ponzi. Maybe a central authority is in the definition for ponzi, but I think this is exactly Ponzi without a CA. The whole thing isn't fraud or manipulation because again there is no one single owner, though looking at all the junk on social media there is definitely lots of both.
So...not a Ponzi Scheme, by the definition you linked to
> Ponzi used funds from new investors to pay fake “returns” to earlier investors
> they use money from new investors to pay earlier investors and may steal some of the money for themselves
There is no "Ponzi," no "they," no one "paying" anyone directly, no "stealing." It's about as far from a Ponzi Scheme as you can imagine. It's The Wizard of Lies without de Niro.
If I go online and post "Apple stock is great!" and it makes someone buy AAPL, and I profit off that as a shareholder, is that a Ponzi scheme? No?
Well BTC is that but without even the business to hold stock in. How could you possibly argue that was a Ponzi Scheme unless, say, you didn't know what that was before you googled it...
If you are using blockchain tokens to run an application, then you are essentially paying A large network of computer operators for their combined processing capacity. This means their electricity, maintenance cost, etc. instead of investing in servers that will be old by the end of the year. So purchasing cryptocurrency is in fact a very real investment. Think of it like an airline purchasing jet fuel three months ahead of time.
It really just comes down to the idea that blockchain networks are cheaper, more secure, more reliable and more scalable than traditional server arrangements. That’s not just my opinion; most of the top tech companies are ploughing huge amounts of money into it. market investors will do what they always do, but all I know is that I would rather have a crypto wallet with some stored value than an old, inefficient server sitting in the corner.
I mean if you're literally talking about the difference between 'buying physical servers' and 'buying Bitcoin' ... well, it seems to me you're missing out on a range of other options, like: investing in companies developing new hardware, for starters. Personally, I just lease what I need at going rates, which get ever cheaper. And by cheaper I mean: in dollar terms - so to keep up with that, I don't see the need to hold highly volatile Bitcoins when I can just hold inflation-adjusted Treasury bonds.
Bitcoin is probably not the best case study for this aspect of the conversation, but I suppose you have a fair enough point. Although to be clear, I am thinking of the assets more like commodities than speculative stocks or equities. I do not mean to suggest that traditional servers are going to go away or become obsolete any time soon, but after you get past the cryptocurrency hype in the headlines there really is a huge amount of potential for the technology. This is definitely what long-term investors are considering and why this is even a topic here.
My main issue is conflating the potential for an approach to technology with something like, say, Bitcoin specifically. Yes, many blockchain applications exist, but that doesn't translate into profits from investing in cryptocurrencies.
I've always liked the saying 'sell pickaxes to the miners' - rather than investing in the virtual gold, why not sell things to those who want to go find it? The real winners will likely be the companies who facilitate things (much like active trading platforms make money while the options traders on them often lose money overall).
When you buy into a Crypto you're investing into the technology itself.
If you believe that more and more payments will be handled through it, its value will go up, thus making it a good investment.
If you take Bitcoin, there's a small pool of total Bitcoin and that's guaranteed by the technology. Each new coin costs real money to mine, due to needing physical compute resource to do so, and it gets harder and harder overtime. That means as more and more people transact in Bitcoin, the demand for Bitcoins will go up, thus your Bitcoins are going to be worth more.
Similarly for Ethereum2, there's not a fixed maximum, but there are set rates and limits that affect how much new Ether per year will be added. So there's some guarantees that there's a restricted supply. So again, if you believe that more and more people will rely on its network to transact, the demand for Ether will go up, thus its value.
Can I try and convince you why that's not a good idea?
Let's say you and I agree that a day's wages is worth 30 or so units of my currency--well pick any value, it doesn't matter for this example. And yet the currency keeps growing in value week over week. Should I not be paying you less and less over time? If the currency increases in value 7% in a month, should I not decrease your pay proportionally?
And are you really going to negotiate that day-to-day, week-to-week, month-to-month, year-to-year? What if the value drops significantly in the middle of the day? What do I pay you at the end of the week?
After all, the value of the currency is going up. I didn't decide the value of your labor was going up. It's staying the same.
> If the currency increases in value 7% in a month, should I not decrease your pay proportionally?
The problem you're describing is really nothing new. It sounds like you're just very used to thinking in USD. People all over the world do hedges to control for exactly this risk.
If you want to tether wages to USD, you can use USDC instead of BTC. Also you can pay those wages with such low transaction costs that you could pay by the day instead of by the week or month, using current technology.
Pretty soon the transaction costs will be low enough that you can pay those wages continuously. Eliminating the idea of a "pay day" is a great social good IMO.
On the other side, the receiving party can spend their funds in "USD" with a crypto-backed credit card that draws against their USDC balance.
I don't know what that has to do with crypto though? That's how all currency works.
> And are you really going to negotiate that day-to-day, week-to-week, month-to-month, year-to-year? What if the value drops significantly in the middle of the day? What do I pay you at the end of the week?
Whatever we agree on. My current pay is mostly company stock, and that has a big fluctuation, yet tons of people seem fine to pay in stock and be paid in stock.
> When you buy into a Crypto you're investing into the technology itself.
This argument of technology + limited supply is fallacious. If the technology is so useful the coin can just be cloned with more supply. The technology itself doesn't force me to participate in a limited supply market in order to get the benefits.
> The technology itself doesn't force me to participate in a limited supply market in order to get the benefits
I'm not sure what you mean here. The technology does indeed force you, that's part of it. If you want to trade in its currency, you can't cheat it and make more coins for it, the network consensus will catch you and prevent you to cheat.
If the tech fails to deliver this property, nobody would trust its currency, and nobody would use it for transacting.
All investment is speculative, you hope that the asset you acquire with your money is worth more in the future.
With Crypto, you hope that the coins you acquire from it are worth more in the future.
Same thing.
Energy requirements of Bitcoin are a technical limitation, but as proof of stake is trying, that might just be a matter of time till it's minimized. Similarly, physical settlements today is also costly, moving real physical dollar bills across borders obviously comes with its own energy expenditure. So I don't know which one is wasting more.
It's not the same thing. When I invest in Apple, I'm in investing in a company, its people, and a product I use daily for work and pleasure. What does Bitcoin provide beyond the speculative nature of it? It's certainly not for making purchases when its value swings double digit percentages.
Aside:
If I issue equity in my company, I'd do it directly on a decentralized network like Ethereum > IPO. I'd prefer to not have an underwriter like goldman sachs take 3%+ & manipulate retail investors.
I think your phrasing of "demand for fees" is kinda weird. Since it really comes down to "demand for validators" or "demand for compute resources on the ETH network."
ETH's fundamental value is that it's the only form of payment accepted to use the eth network. It can and does have secondary value as a medium of exchange but that's what's at the bottom and the reason you need ETH opposed to something else.
I'll explain it to you in one sentence:
There IS NOTHING else.
There's only 4 main assets classes:
1) Equity valuations are at all time highs by nearly every objective measure out there
2) Fixed income is really vulnerable to the onslaught of inflation that looks ever more likely with all the MMT that's been going on.
3) Real Estate is a possibility but not scalable and not tax efficient and takes a great deal of skill and time to execute properly. (not counting REITs and other real estate ETFs)
4) All that leaves is commodities: Gold and Bitcoin.
This is not a comment on crypto as such, it's more a comment on how markets work.
By the time you know what you're buying, it's priced in. When everyone agrees that some opportunity is amazing, they also agree the vehicle that provides it (shares, bonds, coins, whatever) has got to be expensive. At least more expensive than when it was just ideas.
It's not about ROI anymore. It's mostly about which asset can capture most of the newly printed fiat money now and in the future.
New fiat currency is constantly being created and all assets are competing for the biggest possible chunk of that new money.
The reason why crypto is doing well comes down to a contrast between monetary abundance and scarcity. Some people in this world have access to an essentially infinite supply of fiat currency at 0 risk... So fiat currency is not worth anything to these people; so if these people start buying some scarce resource, they will quickly realize that it will drive up the price of that resource ad infinitum. The only other variable is how hard people HODL the asset.
If enough of these people buy up the same scarce resource, the growth of that scarce resource will outpace that of all other scarce resources.
Imagine your bought the rights to a tree that would later be turned into thousands of $100 bills.
Bitcoin is a speculative bet that it will become a popular global currency. The idea is eventually you will be able to use the bitcoin as currency once it scales up.
Investing is buying things that gain value over time.
Bitcoin was originally worthless, now it's ~19k a coin. Anybody that bought or mined a large amount of coins back in the day and held on to them, is now rich, so a pretty good investment. The same forces that acted on bitcoin and brought it from worthless to 19k are still acting on it now.
Doesn't seem like it's very difficult to understand why bitcoin is considered an investment vehicle.
There are certainly good arguments for why may or may not be a poor investment vehicle or not the right one for a particular strategy, but arguments of whether it is one are moot.
Bitcoin has only two core benefits, store of value, and unconditional point to point transactions. The key investment question is will people value these features more or less in the future.
Why in the world would I want that? I can remove write permissions from an SQLite database and rsync it to any VPS in the world for pennies on the dollar. The ledger concept is weird to me. No one is asking for it.
And you certainly don't "own" it by owning Bitcoin. You can go download the software and own it.
No, you don't own it but it is a very simple way to understand why you'd want it as an investment.
As for why would you want that? Ledgers are a fundamental part of how many things work. Blockchain is an evolution of the ledger. It literally makes things faster, cheaper, more secure.
Bitcoin's blockchain will disrupt (evolve) something. The leading use case is a store of value. If that is to be adopted then bitcoin's value will be in the trillions.
> It literally makes things faster, cheaper, more secure.
How? I'm pretty sure if this was true, everyone would be using it for database work now, except no one does. So these claims are baseless.
> Bitcoin's blockchain will disrupt (evolve) something. The leading use case is a store of value. If that is to be adopted then bitcoin's value will be in the trillions.
Evolve what? You don't even seem to be sure and are just guessing that it's novel and surely has some value, but you don't know why. Trillions? Where do you get this number from? Do you somehow take the size of an existing market and assign a value per consumer? Where is the rigor behind your claims?
>How? I'm pretty sure if this was true, everyone would be using it for database work now, except no one does. So these claims are baseless.
Business are doing exactly that. They are using private blockchains to improve their existing architecture and enable new features. There is also an entire 'altcoin' market around this.
> So these claims are baseless.
I'm not going to give you a report in HN comments. You should DYOR.
> Evolve what? You don't even seem to be sure and are just guessing that it's novel and surely has some value, but you don't know why?
I'm not the deciding factor in what bitcoin becomes and won't try to guess what its use cases will be. We didn't know why/what the Internet was going to be used for and then it grew and evolved into what it is today.
> Trillions? Where do you get this number from?
Bitcoin's leading use case is a store of value, sometimes referred to as 'digital gold'. It has several improvements to the store of value use case. Gold's market cap is ~$9 trillion. Bitcoin already has a $350mm market cap so trillion+ is likely in the next several years.
Most of what I stated are just facts, you can argue against them all you want. You don't understand why blockchain technology is so important.
> I would classify myself as Boglehead and I believe in the fundamentals of investing in stocks
If you are a boglehead, just stick to no-load, low fee diversified funds. It's the smart way to go for most people. If cryptos are worth investing in, eventually you'll get cryptocurrency exposure via the funds you own or maybe a dedicated crypto fund through vanguard or whomever. I wouldn't take any investment advice on a social media platform.
If you think of an investment vehicle as something that creates useful infrastructure in society and collects fees to pay dividends, then no. But then, look again, we are way past that. We are pulling Gold from the grounds to hide it again in the ground. We are trading weather futures. And people are buying apartments no to rent them or use them; but just to close them and leave them empty.
In this sea of non-sense economic reality, Bitcoin actually makes lots of sense.
It's more analagous to buying some gold for your investment portfolio than buying a fiat currency that has its inflation under control by a central government.
BTC isn't very good as a currency but acts as a deflationary asset over time (i.e. there is a fixed amount that can exist).
I, personally, hold BTC as part of my portfolio simply because of it's ensured existence and massive upside potential.
I wouldn't put a terrible amount of my net worth into it, but a small fraction may serve you well in the future.
Short story. Had the chance to invest 300k in 2012 (~$10 per coin). Didn't pull the trigger. Too much net worth. However, I should have used ~10k (maybe a little more). Wouldn't be nearly as worried about $ as I am today if I was just a little more conservative on investing up front.
I basically agree with this but I just want to add that if everyone decides to increase the total amount of bitcoins or change the inflation controls in some way, that can be done.
The cool thing about bitcoin is that this is a shared decision made by everyone.
Ok, technically, it is made by the groups contributing the majority of compute power to the network. And technically, central governments can be representative of everyone and therefor enable that same shared decision making but that's kind of a bigger discussion.
The point is, changing the network to "add more" BTC is probably much more likely than breakthrough replicator technology that can turn hydrogen atoms into gold atoms.
Even if you accepted it as a diversifier, all cryptos combined still have a relatively small market cap, so I don't really see the point in adding them to a stock/fixed-income portfolio. It's a bit like frontier markets: sure, they're possible to invest in, but expensive, small and won't make a big difference at market weights.
> Isn't it analogous to me investing my money in buying USD or the British Pound
It would be, if those were hard (non-inflationary) monies.
In a hypothetical future equilibrium where Bitcoin is a world reserve asset, buying Bitcoin is approximately isomorphic to buying spoos or other wide-market indices.
How is any negative-yielding bond even considered an investment vehicle? I would classify myself as a Boglehead and I believe in the fundamentals of investing in bonds because it all its technicality (and given the buy-and-hold strategy), you are indirectly lending to a government by buying its bonds, which naturally means that you will and do get returns on it, both in terms of the interest (coupon payments) and value growth (further decline in those bond yields).
That being said, again, why would negative yield bonds ever be considered a good investment vehicle? Isn't it analogous to me investing in my money in a depreciating car, which will only lose value unless the car happens to have a random spurt of high demand that lets me unload it at a profit?
Pretty sure 90% of retail crypto investors are just FOMOing, but more and more people are excited by the technology and looking for creative applications. DeFi has been interesting to watch.
Bitcoin’s ambition is to become the new gold: something that has been ingrained in human culture as “money” for so long that people accept it as such by habit.
It shouldn't be called an investment. Investment supposed to be spent on the production of new value. Bitcoin, despite its good intentions, is a pyramid scheme — its price grows only because of newcomers. I wrote a blog post about why it's a bad "investment" — https://dandanua.github.io/posts/why-i-wouldnt-recommend-usi...
Since there is a limited supply of Bitcoin, people are buying Bitcoin now with the hope that there will be more demand for the limited supply in the future. There is a hope that Bitcoin becomes "useful", thus driving demand. Since supply is fixed, demand causes an increase in value.
So, it's a speculative "investment". I suppose whether it's an "investment" depends on your definition of "investment".
Yes, there is need for a central authority, Charles Ponzi for example. They actively and consciously channel the funds from new, defrauded investors, to that authority.
BTC is not a Ponzi Scheme ; Satoshi is not steering the profits from a pump-and-dump. Passively profiting off new investors buying BTC does not make a Ponzi Scheme.
Market manipulation is not a Ponzi Scheme. A Pyramid Scheme is not a Ponzi Scheme. "Ponzi Scheme" has a real definition.
It's not a Pyramid Scheme either, there is no central authority. The benefits of a Pyramid scheme are specifically not investments, but instead explicitly payments for recruiting. Pyramid Scheme also has a real meaning.
I neither can understand why it is considered as investment but I guess scarcity and how it can be exchanged anonymously and cheaply for large sums makes it lucrative. Especially if you want to avoid governments for some reason.
1) Low correlation to other markets. Any 60/40 portfolio that moved just 1% of it's allocation to Bitcoin would have produced a higher sharpe ratio (higher return, less volatility) over past 5 years.
2) Many crypto protocols are already capital assets that generate income streams. These income streams can be discounted to the present just like the income streams of companies.
Examples:
- Ethereum (ETH): It has multiple use cases such as collateral and gas for execution (think oil) both of which contribute to it's value as usage grows, but it's also a capital asset that can be staked and used to validate transactions to generate an income stream. This is not much different than real estate or farm land being used as a productive asset to generate returns.
- MakerDAO: Protocol that generates a stablecoin (DAI) backed by debt based collateral (think mortgages against homes). The interest from minting DAI is repaid to unlock the collateral and burns (think stock buybacks) MKR.
- Yearn.finance: Protocol that takes stablecoin (crypto pegged to USD) assets and generates returns across decentralized money markets. Returns have been averaging between 10%-35% APR depending on the pool and strategy.
Finally consider the current macro environment. Stocks generate a stream of future income based in USD and fiat currencies. In 2020, the central banks of the major currencies have not only increased currency supply by over 50% (FED balance sheet in march was 4.3T, today 7.2T) but worked with top level governments to hand out the new printed money directly to consumers which is now money that will be hard to pull back out of the economy and they did it while GDP and economic activity has been stifled.
So a larger amount of currency backed by a smaller amount of economic activity is a depreciating asset. If the return on equity of your profitable companies is smaller rate than the depreciation of the currency you have a negative real return.
In order to prevent this companies may start to transact in a currency that has a deterministic monetary policy and can not be changed by the whims of a select few bureaucrats. As the most stable and longest running crypto network, Bitcoin stands to be such an asset. See Micro strategy (MSTR) and Square (SQ) moving treasury reserves into Bitcoin.
The way you value Bitcoin is you estimate the amount of global GDP (140 Trillion) that will shift to transacting in it and then divide that by the velocity of money or how often it changes hands. This will tell you how large a marketcap it will have in order to support that level of economic activity.
So for example if 1% of global GDP is transacted in Bitcoin and it's velocity becomes something like USD (1.5x) or the Euro, let call it a velocity of 2 then: 140 * 1% / 2 = $700 Billion marketcap.
How is any cryptocurrency even considered an investment vehicle? I would classify myself as Boglehead and I believe in the fundamentals of investing in stocks because in all it's technicality (and given the buy-and-hold strategy), you are investing in a business by owning a part of it which naturally means that you will and do get the returns on it, both in terms of profits (dividends) and and value growth (appreciation of the stock value). And conventional wisdom of lending also applies to bonds.
That being said, again, why would cryptocurrency ever be considered as a good investment vehicle? Isn't it analogous to me investing my money in buying USD or the British Pound (or a well diversified currency ETF), something I don't see a lot of value in as well.