This is a crazy way for young people to think though and the opposite of how they should be thinking. If they don't have much wealth, they certainly shouldn't put it in something so incredibly risky as Bitcoin. They would be really hurt if/when BTC tanks. Someone who's rich wouldn't really notice 10% of their net worth gone.
> It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential.
The entire economy is definitely not as risky as BTC. The economy doens't see 50% swings in value week-to-week.
For instance, he took $2k and turned it into $12k in a few months. I told him, "Take 4k out and put it into an index fund." That way, he comes out ahead no matter how you slice it, even if he loses the rest of what he has in BTC. If what he has remaining in BTC goes up to $18K, I'd take another $4K out and move it into an index fund. Rinse and repeat.
It's not as risky if you run it that way.
I have a problem with the terms "investing" and "doing well" here.
Buying bitcoin is not investing. You are not funding any productive enterprises---not even indirectly as in buying stocks on the secondary market. You are giving someone money in return for a ledger entry. You expect someone to give you more money for that ledger entry at some time in the future, which is the problem with...
An "investment" in bitcoin isn't doing well, or doing poorly, or doing anything. A stock can do well, if the enterprise it represents is producing economic value and thus the stock represents an increasing value (and assuming the market recognizes the increase, which is another discussion). If you BTC is worth more today than it was yesterday, the only thing that has changed is the price (and the conversion of some more coal into heat and carbon dioxide) and prices don't have anything resembling inertia. The "doing well" can turn to "doing poorly" tomorrow with nothing more than a change of market opinion.
In order for someone to invest in crypto as diversification, on the order of 5-10%, they'd need to have $20-40k lying around.
Needless to say, outside of the tech bubble that situation is quite rare.
Things can get really bad if you are nearing retirement and lose even 15% of your portfolio in a downturn. On the other hand you can lose 100% and even have to declare bankruptcy at 25, and still have plenty of time to get your life back on track.
I am not saying that Bitcoin or anything like it is a good investment. I'm saying that it gets harder to take risks as you age, unless you've been very successful and/or lucky. But being either of those things probably required some risk taking in the first place.
Your "more attractive" investment has shown 5000% annual return for 1 year...the "risky" investment has shown 8-10% return ON AVERAGE for over 100 years.
What you are saying is that if I put my money into S&P 500 10 years before I was born, it would match the gains on the same investment in cryptocurrency from 1 year ago.
Salty nocoiners.
There may well be a point in the coming months or years that the market cap of current crypto deflates - maybe by 90% or more - but new cryptocurrency applications and tokens will certainly exist in 5, 10, 15, and 100 years.
There's more uncertainty in bitcoin today than there was in almost all available investments 20, 30, or 50 years ago.
Note that when savings accounts paid 10% interest, inflation was (I think) at 14%.
It depends more on how leveraged your wealth is than on how much you have.
> The entire economy is definitely not as risky as BTC. The economy doesn't see 50% swings in value week-to-week.
Price volatility != risk. A number of people lost everything they owned in 2008. Everything. In fact, I've heard it said that half of the world's wealth disappeared.
I dunno, seems like this sort of risk is the only way to get anywhere now.
https://millervalue.com/certitude-not-test-certainty/
Also a good read is Miller's letter on Bitcoin from 2015. He put 1% of his fund into Bitcoin (now 50% of his fund due to the meteoric rise in price): https://millervalue.com/a-value-investors-case-for-bitcoin/
https://finance.yahoo.com/quote/LMOPX/chart?p=LMOPX#eyJpbnRl...
2. I didn't say Bitcoin produces returns, and don't believe it will. It's a currency, not a business. Like I said, I don't have the wealth to get a significant share in anything that produces a return. It's a class of assets I just don't have access to yet (in my mind, and for many other reasons I haven't mentioned).
3. I would advise anyone to only invest in what they know. I wasn't recommending anyone invest in Bitcoin specifically, and in fact, I myself haven't bought any in 2018. I was only explaining why I did consider it a good investment in 2017, and why many people might have felt that way and still feel that way.
What role, and why is it uniquely well suited for that role?
Speaking for myself, back in 2013, I was excited by what I saw as its potential for micropayments on the internet. That is (and was) clearly wrong - it can't do the transaction volume, is too hard to safely acquire and use for most people, and is too volatile.
Its current role is "hype-y speculative security". I don't see a significant and long-lasting need for such a thing, or how bitcoin is uniquely qualified to be that thing.
> I would advise anyone to only invest in what they know.
What is it to "know" a thing? Put another way, what exactly makes it such that you "know" bitcoin? Put another way, what useful information is there to know about it? I understand the details of the whitepaper and the block-chain concept at a technical level, because I find them innovative and fascinating, but I think any translation of that technical with knowledge of its value as a security is illusory.
I'm honestly curious about this: I've gone from very bullish to very bearish over the last 5 years or so, while I've watched the population at large take an opposite course from indifferent and unaware to very bullish, and I'd really like to understand what I'm missing.
This is strictly speaking not true. Yes, the current implementation is not good for taking micropayments, but it never was designed for this. If you thought this, you misunderstood the scaling architecture of the paper. It was always likely an off-chain derivative was going to be necessary for that to be a thing (Lightning Network), even before the rise of and prediction of ASIC miners and explosion in general computing power making the original algorithm chosen look... not ideal. We just got here much faster than people originally predicted, which is about what you get when you try to predict computing power curves as a linear function rather than a step function.
Whether it's undervalued at $14k isn't for me to say and I don't think anyone can truly tell you in either direction. But BTC has scaled as promised, just not as people would have liked. Then again, that's not BTC's problem, that's people not understanding BTC from the beginning.
It has a very prominent role in pseudonymously exchanging large sums of money near-instantaneously, securely, recorded in a global and publicly-auditable distributed ledger forever. There's a great number of use cases for this particular method of funds transfer, ones that I use today and many do and find a lot of value in it, even over other cryptocurrencies (for now). Would I prefer everyone take LTC and cut my fees down? Sure. 75% of BTCs problems go away if everyone would just activate Segwit too, but that hasn't happened either for whatever reason, so, it is what it is.
The number is going up and there's a fun tech-beats-banks narrative. I'm as bearish as you.
I don't understand your reasoning as to why this matters to the degree you think it does. Or why a minority share in an unproductive asset somehow becomes de facto better option over minority share in a productive asset.
>>why do you think that Bitcoin is undervalued
There's no way to know this. Or really, know that about any asset.
>>why should it produce solid future returns
No evidence it will.
>>why do you think it is a good investment for someone with (comparatively) little investable cash?
Ah, that's a different argument.
The total market cap of cryptocurrency is $726 billion with a 24h vol (as of 9:08 AM PT 1/10/2018) of $52 billion, with 33.8% dominance by BTC. Let's just go with the top two currencies, BTC and ETH, with $245b and $129b in market cap, respectively.
Can you find assets with similar volumes and market caps that are legal and easy to invest in that you would ignore in a balanced index fund approach to retirement? Probably not. Neither would a responsible financial adviser. Yet because it's BITCOIN, we're supposed to think it's stupid, dumb, valueless, etc (not saying you feel this way, just saying that's the stuff I hear) without just looking at the market signal that's being sent: A hell of a lot of money.
IMO, the real speculators are the ones blithely ignoring the three-quarters of a trillion US dollars being traded on cryptocurrencies and thinking it's a bunch of crap. They might be right. But that runs counter to sound investment strategy, which is to own the market and to cover all potential areas of growth, because as history shows, a vanishingly small number of equities/assets is responsible for a huge part of the return on investment of capital.
Since it's entirely global, the space could very well grow to $5-10tn before crashing down to $1-3tn. We're at $730bn now. The dot-com bubble, which was US focused, went up to $6.7tn before coming back down to $1.7tn.
I see it as a variation of a tontine. But instead of people increasing in value when a member dies, it does such when a member loses access to a coin. Once that coin is lost, it can never be sold, thus cannot drive down the price.
But the interesting thing about this is, AFAIK, there's no way to accurately determine if a coin has been lost permanently or not, so the the true value of all accessible coins will be completely disconnected from the market cap. So people using market cap as a valuation metric will always be considering at a wildly optimistic one.
For example:
Coin A purchased at $100.
Coin B purchased at $120.
Coin C purchased at $130.
Current bid price $150.
If access to Coin B is permanently lost, then one of two things happen, A) the market cap falls from $450 to $300 to reflect the reduced number of coins, or B) the market cap is maintained at $450, and the "real value" of each coin is $225. Because it's impossible to know which coins are lost, the valuation metric will always be B.
Essentially, the owner of Coin B lost 100% of their investment, and the paper value of his asset was invisibly transferred to the owners of the remaining coins.
My opinion is that cryptos will be undervalued until one of two things happens, A) coin management becomes more robust and they stop being lost permanently, B) people realize that investors realize that there's a very real risk of their investment going to $0 (without the market crashing) and begin to price in that risk (much like unsecured v. secured credit pricing).
A lot of that is simply that he now has too much money to be able to efficiently buy bits of companies. His early career was still based on value investing, but mainly consisted of regular stock purchases. Berkshire Hathaway still has decent-sized chunks of Coca Cola and various other companies on its books.
Not only does he invest in things that are undervalued but they also must provide value. Crypto currencies themselves do not provide value. The companies that make the hardware for mining provide value. Power generation companies that make the electricity for mining provide value. But a crypto currency provides no value by itself, it's just bits and bytes on a harddrive.
He would probably have never invested in Netflix, or Facebook, or Google. Yet any investor who did made a killing.
Now, I'm pretty sure everyone is aware at some point the music has to stop (at least I hope they do). A major correction will happen at some point. But no one knows when. It could be tomorrow, or it could be 3 years from now.
Buffett's strategy is to avoid losses -- not to worry about missing out on possible gains. He believes you avoid losses by investing in companies with a long, successful track record of doing the same thing for many years and that are likely to continue doing that same thing for many years into the future.
So, it's not that Buffett doesn't "get" technology, he just can't make intelligent guesses about what tech companies will be earning 10 years from now. He sticks to his circle of competence and it works.
Both lines of thinking clearly work for some people.. your investment style is tied pretty closely to your personality. There is no perfect solution, and everyone has to find their own way.
I would never put money in a railroad or an oil company, because I can't properly assess what drives the stock price and which unexpected issues might pop up. I can more easily do that with tech.
For example, if you are making x50-100 gains on tech investments, you are not rolling the dice full again but netting out some of that profit. Which is still a plenty and more profitable than traditional investment channels.
Sure it can't work for everyone and the market is very heated right now but we should not incorrectly assume that the tech industry didn't create enormous amounts of wealth.
But when he buys, he either buys all of a company, or enough of it to have some level of control over it, and that's only possible these days if you're wealthy as he is. The rest of us are pretty much just betting on horses.
I think I would agree with him about crypto if I was an older person who already had enough wealth to purchase a significant stake in a real business. For investors like that, the world is their oyster. For people who are young, familiar with technology and largely without any wealth, Bitcoin is much more attractive. It's risky, sure, but to many of us, the entire economy looks just as risky, and with lower growth potential. This statement would sound insane to someone like Buffett, but it's the reason why Bitcoin exists in the first place.
Edit: I'm not advising people make any investments in Bitcoin. Just providing a counterpoint. Invest in what you know.