Author Topic: Bitcoin: How will you know if you are wrong? ( Thought Exercise)  (Read 2250 times)

swashbucklinstache

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Re: Bitcoin: How will you know if you are wrong? ( Thought Exercise)
« Reply #50 on: February 20, 2021, 06:46:03 PM »
I'm having trouble understanding a conclusion other than "all investments involve some degree of speculation, therefore every investment class is/are equally/entirely speculative" or a dislike of the insinuation the Bitcoin does not have inherent value, which is surely unfair of me though I've not said the latter, so I'm trying to dig into the details. Said another way, viewed probabilistic-ly, I'd argue that F stock involves a small amount of speculation but Bitcoin, or more generally Forex, is almost entirely speculation. And that's not an argument for or against owning either.

Yes, a little of the former (all investments are speculative). But it isn't the degree of speculation that is different. The degree of speculation is the same (you either are or you aren't speculating). It is the degree of risk that changes. There are either more or less unknowns for what future demand will look like and therefore there is either more or less risk for a given investment. It is the risk that people need to focus on by determining and evaluating those unknowns. Everything is equally speculative (you're making a guess as to what future demand will look like) and you either are or aren't speculating. Risk is what matters and it is risk that needs to be evaluated in relation to the possible reward.

A little of the latter as well. People don't understand the value that bitcoin provides, and so their evaluation of what bitcoin is as an investment is that it amounts to nothing more than the greater fool theory. Bitcoin does provide a benefit to the world and is used (demanded) for that benefit, therefore there is analysis (speculation) to be done as to what future demand will look like for that benefit (just like any investment).

I'd like to hear your opinion on why both stocks and bonds exist just to get the thinking out in the open. Let's be very specific, and talk about Ford stock and Ford bonds, and include why, in your opinion, they have different market-accepted prices.

Not sure what this has to do with anything discussed previously...

Ignore the above discussion / 'demand for service goes to 0' for the below paragraphs.

A point is that I don't need demand for VISA's services to rise at all to make money. I am indeed speculating that it doesn't drop significantly. I'd say that's different enough from a currency, dependent entirely on speculation of positive appreciation, that we should talk about them differently from a lens of speculation/demand.

More important is on your second statement, because of how currency demand works. I would in fact say that this demonstrates succinctly why not all speculation on future demand is the same. I would go a step further and say this is why we have different financial instruments entirely. Not so we can say one class of instrument has no speculation while others do, but to group them together based on their speculative properties.

It is still speculation no matter what way you slice it. Like you said, you're still speculating on what VISA's future demand will look like. You just have less risk involved (since you might even be able to speculate plateaued future demand and still make money).

To put it differently, I think a lot of people confuse the difference between what the speculation of an investment is (estimating what future demand is) versus what the risk of the investment is. What you're speculating on isn't really any different (what future demand is for a product/service). But there is a big difference between what the risk of investing in VISA is versus what the risk of investing in bitcoin is. VISA carries much less risk to it because VISA has captured an entrenched market for itself and so it is very easy to guess what future demand for their services will be. It has much less risk, but that also means it's upside is also fairly limited (it's pretty hard for VISA to dramatically increase demand for its services at this point). With bitcoin, determining what its likely future demand will be is very difficult and estimates can vary wildly. This means it carries much more risk, but that its upside is also much higher.


It is OK if investing in bitcoin is too risky for people or that their risk appetite is too low for the risk that bitcoin carries (despite its upside). If people's arguments were framed from a risk standpoint and discussing what unknowns there are for bitcoin's future, that would be a much more nuanced and thoughtful argument against it as opposed to the stock of bear arguments that have been had so far on these forums.
Okay, I think we're about entirely on the same page here! Thanks for talking it through, and no worries on the stocks/bonds as that was if you were headed another direction. I think a lot of this discussion is a result of the definition of speculation we're using. I'm thinking this while typing:
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While the risk associated with the investment is high, the investor is typically more concerned about generating a profit based on market value changes for that investment than on long-term investing.
"long-term" in context this was quoted from means "future income stream".

but I think your posts are using an (equally valid) definition more along the lines of Webster dictionary:
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The forming of a theory or conjecture without firm evidence {of the future, so of course not!}.
or, in others, something like "one's best guess about the future as the result of analysis."

So I think we can all agree that the latter is inherent in all investments, and then, as you say, it's a matter of us speculating {definition 2} on the future of demand for our investments. For Ford, if people will want to buy Ford cars. For Bitcoin, if people will want to buy Bitcoin's value. I agree completely with that, and maintain that Bitcoin is 100% speculative {definition 1}. So is investing in USD.

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People don't understand the value that bitcoin provides, and so their evaluation of what bitcoin is as an investment is that it amounts to nothing more than the greater fool theory. Bitcoin does provide a benefit to the world and is used (demanded) for that benefit, therefore there is analysis (speculation) to be done as to what future demand will look like for that benefit (just like any investment).
Here, I don't understand that value at all, mostly from pure ignorance. I don't see it functioning as a currency currently and am not informed enough to say if it will be able to in the future. I don't see that much value in a public ledger currency, though that's a pessimistic take on humanity more than anything else. These, though, are besides the point of the thread and on me to read about not you to have to explain to me should I find myself interested =).

I take the easy road: I am not one for speculative {definition one} investments in general except at market cap, so this is a fine end point for me, and explains my above answer to the titular question. I'm also happy to concede that this has been a very incorrect choice lately, both in Bitcoin and Apple/Amazons of the world. As you say, a risk decision, and I'd add that in the speculative world the blade of expertise is sharper and that cuts both ways. I'm not an expert so I shy away.

Thanks for the discussion.