The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Gatsby on February 15, 2021, 09:34:04 AM
-
* I have been completely on the side lines with Bitcoin and just enjoy learning from other here and there.
It does appear that more interest is picking up from the big companies and many "savvy" investors who have been long crypto critics.
As a thought exercise: What would be the conditions needed to change your mind and make you jump in?
-
I've been a skeptic ever since Mt. Gox in 2016. That's the exchange that got robbed outright, then declared bankruptcy. So, everyone holding bitcoin there got stiffed, total damage a few hundred million USD, by now probably in the billions with the appreciation.
Of course, the fraud perpetrated by Quadrigacx doesn't help, either. That's the one where the Canadian exchange operator faked his death in India and ran off with the keys, keeping the bitcoin. Total value also a few hundred million. (As an aside; he claimed to die of Chron's disease at age 30. He should've tried spontaneous combustion, alien abduction or just simply being raptured.)
And then there are the numerous, and for me always hilarious stories about people throwing out their old computers with hundreds (or thousands) of bitcoin stored on them. I haven't read any stories of recoveries, but I'm sure they exist.
The original critique of crypto is that there is an unlimited supply of cryptocurrencies. Anyone can do an ICO and there's no reason for bitcoin to become the standard. It could be usurped at anytime by a rival upstart and go to zero. I haven't found a suitable rebuttal to this argument yet, but I would appreciate if someone would provide.
The real reason I don't like crypto is that there's nothing similar to the Federal Deposit Insurance Corp. (FDIC) or the Security and Exchange Commission (SEC). The entire risk of ownership belongs to me. So, if any of the above happen, it's on me. The only way for me to mitigate this risk, is, well, by a system that I devise and implement. It's not a problem I'm interested in solving and until someone provides a simple, easy way to solve it, I'm not interested in crypto at any price.
-
As a thought exercise: What would be the conditions needed to change your mind and make you jump in?
Crypto investing would need to be become boring, like investing in unleveraged traditional currencies boring.
-
* I have been completely on the side lines with Bitcoin and just enjoy learning from other here and there.
It does appear that more interest is picking up from the big companies and many "savvy" investors who have been long crypto critics.
As a thought exercise: What would be the conditions needed to change your mind and make you jump in?
Here is the issue for me: There is no coupon. So there is no way to estimate what the future value might be.
-
One can't know the future, so I prefer to invest via an asset allocation that meets our situation/goals. Bitcoin is a currency, and currency investing has no place in an asset allocation that meets our situation/goals.
-
Nothing will make me change my mind. The philosophy underpinning cryptos is flawed, and as far as I know can’t be fixed. Also avoiding cryptos isn’t “wrong”.
-
Same here, nothing will change my mind to buy crypto. I don't feel like I'm missing out on the gains either. It's all hindsight. Would I have bought if I knew it would surge? Sure, but you could say the same for AAPL or AMZN. at least for stocks (index fund) I can estimate a future return in some range so I don't have to worry and comfortably live of my passive income.
-
So... had this "thought" experiment with a friend MANY MANY times. And yea, the only insight I have really changed is that Crypto is probably here to stay. At least till either regulation or the lack there of, destroys it.
As stated here, the value is basically zero. Let be honest, IF gold could be created from thin air like cryptos are, what would the value of gold be? Almost zero, and what value it has is due to industry uses.
Many Crypto "experts" I know make the same argument. Basically the very simplified version it comes down to is: "The Blockchain has use so therefor, crypto has value QED." Except.... Nope. the blockchain has value, the coin is worthless. But whatever, no arguments I have heard yet have changed my mind and I doubt they will.
Full disclosure: I own a small amount of Crypto. Akin to what I might play at a casino if I went to Vegas. I have already spun the wheel and actually come out way ahead. So even if what I own goes to zero, at this point it's house money.
-
I might put myself in the converted camp. For context, I own < 1 BTC so it's a trivial part of my portfolio. I've seen so many theories on why Bitcoin would be a valuable investment shrivel up and get exposed, and yet, here we are at close to $50k. Store of value? Hard to say that considering the price is all over the place. Digital gold? I guess, but that's probably premature because we've never had a true inflationary spike since the invention of Bitcoin to say it's a good inflation hedge. Negative correlation with stocks? 2020 exposed that as not really true. It's a risk asset and moved like other risk assets. It seems to be more correlated with stocks all the time.
So why do I own it at all? Basically, the Lindy effect. The longer it persists and overcomes flashes crashes, exchange hacks, and other black swan events, the more convinced I become that this story has taken on a life of it's own. And now that institutional money is gushing in, I think it's here to stay. I make no claims on how it performs as an investment, but I'm happy to have it a part of my portfolio, if nothing else because it keeps me engaged with projects in the crypto space and businesses that are popping up around the ecosystem. It's just harder to get excited about something unless you have some skin in the game. But I totally get the skepticism.
-
I would need to see a big jump in transactions actually using crypto. Not converting USD to Crypto then back again, would want to see something like 0.1% of all transactions in the US actually using crypto. Credit card companies have to incentivize people to try "tap to pay" and people still can't figure out how to use chip readers... we have a long way to go to get there. And until then it's just speculation.
-
Honestly, I think the idea of Bitcoin being used as an everyday means of small transactions is already over. Stripe said it best
https://stripe.com/blog/ending-bitcoin-support (https://stripe.com/blog/ending-bitcoin-support)
but I don't think that's part of most people's bull thesis at this point
-
Digital gold?
I've owned BTC, and mined ETH and XMR. But they're shitty currencies and certainly not digital gold. In particular, something like 70% of gold demand it to actually use it in jewelry or industrial production. The same can not be said for cryptos.
-
I've owned BTC, and mined ETH and XMR. But they're shitty currencies and certainly not digital gold. In particular, something like 70% of gold demand it to actually use it in jewelry or industrial production. The same can not be said for cryptos.
This isn't true about gold at all. The statistic you're citing regarding the jewelry and industrial use of gold is in regard to the gold market, but the gold market only represented about 2.53% of the total above ground global stock of gold. The amount of gold that gets used for jewelry and industrial uses pales in comparison to the amount of gold that exists above ground in the world.
https://www.goldbroker.com/news/above-ground-gold-stock-how-much-is-there-why-does-matter-546 (https://www.goldbroker.com/news/above-ground-gold-stock-how-much-is-there-why-does-matter-546)
-
The original critique of crypto is that there is an unlimited supply of cryptocurrencies. Anyone can do an ICO and there's no reason for bitcoin to become the standard. It could be usurped at anytime by a rival upstart and go to zero. I haven't found a suitable rebuttal to this argument yet, but I would appreciate if someone would provide.
At some point, the "Bitcoin" implementation of the blockchain has to be usurped by a rival upstart. "Bitcoin" literally cannot do what people expect it to. It can only handle, at most, 6 transactions per second worldwide. That is not enough for a currency. It's not even really enough for a globally-accepted cryptoasset.
Someone is going to ICO an exact duplicate of Bitcoin that solves the transaction limit problem, and it will easily overtake the original. Until someone does, the world can't use Bitcoin for buying things at a global scale. Imagine if Visa could only handle 6 transactions a second, that's only 518,000 a day. Visa normally handles 508,000,000 transactions a day. It's off by several orders of magnitude.
-
Regarding transaction scalability: Eli Ben-Sasson gave an excellent (and reasonably accessible) talk at Real World Cryptography 2021. This isn't applicable to BTC without the adoption of a new opcode, but seems promising from a technical perspective. Other interactive oracle proofs with similarly good performance (albeit often with more cryptographic assumptions) are proliferating rapidly in the academic literature at present.
https://www.youtube.com/watch?v=8vduDYBu8uQ (https://www.youtube.com/watch?v=8vduDYBu8uQ)
I've been pessimistic about Bitcoin long-term for some of the reasons above. The fact that you can create a clone with impunity and that governments have little incentive to let it continue to exist (see India). Also, once all the blocks are mined I'm a little wary of the cost of transactions skyrocketing. I'm also wary of regulation during a future downturn similar to that which required investors to sell gold in the 1930's. That said, if BTC (or some future token) survives these risks and enough people internationally accept it as an alternative to gold, there's a chance for an asymmetric upside given the restricted supply.
I'm interested to see where we end up in the general DeFi space, but less sure about any individual bets. Even if ETH ends up the primary driver of DeFi, it seems like there doesn't *have* to be a correlation between the overall size of the ecosystem and the cost of the underlying token.
-
The original critique of crypto is that there is an unlimited supply of cryptocurrencies. Anyone can do an ICO and there's no reason for bitcoin to become the standard. It could be usurped at anytime by a rival upstart and go to zero. I haven't found a suitable rebuttal to this argument yet, but I would appreciate if someone would provide.
At some point, the "Bitcoin" implementation of the blockchain has to be usurped by a rival upstart. "Bitcoin" literally cannot do what people expect it to. It can only handle, at most, 6 transactions per second worldwide. That is not enough for a currency. It's not even really enough for a globally-accepted cryptoasset.
Someone is going to ICO an exact duplicate of Bitcoin that solves the transaction limit problem, and it will easily overtake the original. Until someone does, the world can't use Bitcoin for buying things at a global scale. Imagine if Visa could only handle 6 transactions a second, that's only 518,000 a day. Visa normally handles 508,000,000 transactions a day. It's off by several orders of magnitude.
Everything you said is either false or misleading.
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
-
A coworker/friend and I had a debate about BTC last night. We ended up where we started on the debate, me thinking it’s dumb to even gamble on it and him to think it’s worth a small gamble equivalent to something in Vegas. We looked up when the first commercial transaction of BTC, it was in 2011 and a guy ordered two Papa Johns pizzas for 10,000 BTC. That guy has to have the biggest FOMO of all time...
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
So you'll know you're wrong if Bitcoin continues to outperform all other assets for the next 10 years, just like it did the last 10 years of you being wrong?
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
So you'll know you're wrong if Bitcoin continues to outperform all other assets for the next 10 years, just like it did the last 10 years of you being wrong?
Ten years ago Bitcoin was a novelty, not an asset class. Where did you see ChpBstrd advocating against it, and "being wrong" for "the last 10 years"?
---
I believe there's a group of people who both believe in saving the environment, and believe in buying bitcoin as a store of wealth. I expect some tough questions are lurking between those two beliefs. About 2/3rds of Bitcoin is mined in China, where half of their electricity comes from burning coal. I wonder how people who like both Bitcoin and the environment will resolve the contradiction?
https://www.bbc.com/news/technology-56012952
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
So you'll know you're wrong if Bitcoin continues to outperform all other assets for the next 10 years, just like it did the last 10 years of you being wrong?
Ten years ago Bitcoin was a novelty, not an asset class. Where did you see ChpBstrd advocating against it, and "being wrong" for "the last 10 years"?
He's a long-time cynic of the best performing asset of the last 10 years, pretty hard to be any more wrong than that!
-
I'll feel wrong when the value of crypto doesn't fluctuate massively.
For something touted to be a currency, it cant go up/down so much on a regular basis and be taken seriously imo.
-
I feel like people have to drop the "currency" part of cryptocurrency. Just let it go...at least for bitcoin.
People aren't investing in it because they want to buy groceries with it. More people buy it because they worry about inflation and the decline in the dollar and central bank monetary policy.
Maybe it started out with the hope as an every day means of transacting, but not at this point. If your bull thesis is the masses paying their parking tickets with bitcoin, you'll always be on the sidelines.
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
So you'll know you're wrong if Bitcoin continues to outperform all other assets for the next 10 years, just like it did the last 10 years of you being wrong?
Ten years ago Bitcoin was a novelty, not an asset class. Where did you see ChpBstrd advocating against it, and "being wrong" for "the last 10 years"?
He's a long-time cynic of the best performing asset of the last 10 years, pretty hard to be any more wrong than that!
If someone is both wrong, and pretending they were right, that might be worse. For example, your first post about Bitcoin was 2 months ago.
Before that you were advocating people invest regularly in index funds. It sounds like you've been wrong for years as well, so it strikes me as hypocritical to call someone else out for it.
-
Long-time crypto skeptic here. I'll know I'm wrong if the following happens:
1) I can buy groceries at Kroger with cryptocurrency.
2) Crypto investments outperform stocks for the next 10 years (net of hackings, exchange collapses, splits, etc) OR reduce sequence of returns risks in portfolios when rebalanced annually. I.e. an 85% conventional, 15% cryptocurrency portfolio outperforms a 100% conventional portfolio.
#1 is sort of a solution looking for a problem.
#2 seems likely given the past several years of performance, but at some point the world always runs out of momentum traders and enthusiasts. The next 10y will be about whether or not value is created, not greater fool theory speculation. Right now, nobody is using cryptocurrency for rebalancing; and nearly 100% is held as speculative investment. That can't continue forever.
So you'll know you're wrong if Bitcoin continues to outperform all other assets for the next 10 years, just like it did the last 10 years of you being wrong?
Ten years ago Bitcoin was a novelty, not an asset class. Where did you see ChpBstrd advocating against it, and "being wrong" for "the last 10 years"?
He's a long-time cynic of the best performing asset of the last 10 years, pretty hard to be any more wrong than that!
I was wrong about Pets.com and Yahoo.com too, but the FOMO didn't last too long. Markets can stay irrational longer than most people's FOMO can be held at bay.
Suppose we go to Vegas. I'm there to attempt mooching free drinks, but you drop $100,000 on a hand of blackjack. Maybe you win, and then parlay your winnings an improbable 10 times in a row and walk out a multi-millionaire. Was I wrong not to play?
A coworker/friend and I had a debate about BTC last night. We ended up where we started on the debate, me thinking it’s dumb to even gamble on it and him to think it’s worth a small gamble equivalent to something in Vegas.
I've heard this rationale before! Depending on what one considers a small gamble in Vegas, it might cost all of one's savings to buy each of the several thousand cryptocurrencies now in existence.
If we limit ourselves to cryptos that have >$1M "market cap" that's 1488 currencies. If a small gamble is $100, that's the value of a house in most of the US. Also, the "worth a small gamble" rationale requires a person to invest in each of the hundreds of new cryptocurrencies invented out of thin air each year, most being just copies of others with different names. When does one admit that at some point this is an exercise in moving cash from the pockets of gamblers to the pockets of software developers?
https://coinmarketcap.com/all/views/all/ (https://coinmarketcap.com/all/views/all/)
-
I can't believe I keep coming to the aid of bitcoiners, because I'm not that invested in this literally or emotionally...
but that's a lame argument. The title of this post is "Bitcoin: How will you know if you are wrong?". Emphasis on bitcoin. No one is talking about alt coins here. That's like saying there's nothing keeping me from making my own clothing apparel and slapping a brand on it called "Headed West" as an argument for why Nike is really worthless. Marketing / branding / everyone buying into a story has to account for something. There's too much sunk cost with everyone rowing in the same direction with bitcoin to abandon it for some random fork.
-
Suppose we go to Vegas. I'm there to attempt mooching free drinks, but you drop $100,000 on a hand of blackjack. Maybe you win, and then parlay your winnings an improbable 10 times in a row and walk out a multi-millionaire. Was I wrong not to play?
**Heads to Vegas**
**puts down entire bankroll of $100K on black jack hand**
** gets 8 - 8 to Dealer's 7**
"well shit."
:P
-
Suppose we go to Vegas. I'm there to attempt mooching free drinks, but you drop $100,000 on a hand of blackjack. Maybe you win, and then parlay your winnings an improbable 10 times in a row and walk out a multi-millionaire. Was I wrong not to play?
**Heads to Vegas**
**puts down entire bankroll of $100K on black jack hand**
** gets 8 - 8 to Dealer's 7**
"well shit."
:P
haha
better get your free drink first - and take a buck extra to tip your waitress!
-
I've owned BTC, and mined ETH and XMR. But they're shitty currencies and certainly not digital gold. In particular, something like 70% of gold demand it to actually use it in jewelry or industrial production. The same can not be said for cryptos.
This isn't true about gold at all. The statistic you're citing regarding the jewelry and industrial use of gold is in regard to the gold market, but the gold market only represented about 2.53% of the total above ground global stock of gold. The amount of gold that gets used for jewelry and industrial uses pales in comparison to the amount of gold that exists above ground in the world.
https://www.goldbroker.com/news/above-ground-gold-stock-how-much-is-there-why-does-matter-546 (https://www.goldbroker.com/news/above-ground-gold-stock-how-much-is-there-why-does-matter-546)
Wow, good to know.
-
He's a long-time cynic of the best performing asset of the last 10 years, pretty hard to be any more wrong than that!
What's the best performing asset class of the next ten years?
-
If I was still on the sidelines, it would be the fear of government trying to make it really hard to convert to fiat. The recent news of Bank of New York Mellon and Blackrock getting into crypto (the government/feds besties), bitcoin is now a government approved investment. That would have been my all clear in the United States. Politicians will not hurt their buddies.
The funny thing is probably all of you own crypto now indirectly thru index funds so saying you will never own it is not true.
-
The funny thing is probably all of you own crypto now indirectly thru index funds so saying you will never own it is not true.
Indeed, this sounds like a pretty good way to get exposure to Bitcoin to me :)
-
I'll leave aside Bitcoin, and go with the broader Blockchain trend. I've seen numerous startups promise to revolutionize industries by using Blockchain. I've seen Blockchain gurus come out of the woodwork. I have yet to be convinced any of them actually understands what they're talking about.
I want to see a few of these people use the technology to actually provide value in the real world. While I see the hypothetical possibilities, I don't see it as a practical likelihood.
It would be nice to be wrong. I'm always a fan of entrepreneurs making life better with different uses of technology.
Similarly with Bitcoin, I'd like to see people actually use it to add value to the human experience.
-
Here's a rephrased question:
What is an invalid reason to "know if you are wrong"?
Answer:
If the price goes up or down in the future.
Examples:
In hindsight in late January, had it been "wrong" NOT to buy GameStop at $100/share in mid-January? In hindsight by mid February however, was it "right" not to buy GameStop at $100/share in mid-January? Does correctness zig zag?
If I go to a casino and bet my entire retirement on black at the roulette table, will that be a "right" or "wrong" decision only after we learn the result? Am I really brilliant if I win, and a dumbass if I lose?
Rationale:
Fundamentals analysis does not apply to investments with no internally generated returns or distributions, so past price changes are irrelevant to the odds of future changes in price. There is no such thing as "cheap" or "expensive" for investments that are based entirely upon the expectation others will pay more for it in the future (examples: precious metals, cryptocurrencies, art and collectibles). Whether such expectations are true is probably unknowable for most people, so these non-productive asset classes mostly represent gambling.
What we are really asking is: Are decisions "good" or "right" because of their outcomes, which can be mere chance, or because of their processes, which can be repeated if proven reliable? Which would you rather have - the opportunity to take chances or a repeatable decision process that is usually profitable? Who is smarter, the person who is capable of gambling or the person who is capable of creating fairly reliable decision processes?
Also, we don't get the benefit of hindsight when we're trying to make rational decisions in the present. If outcomes determine the goodness or badness of a decision, we might as well guess because there is no way to know in advance if we're being good decision makers. In this mindset, a decision to sell VTSAX and go all-in on Spank Coin (an actual crypto) as a retirement plan cannot be judged until the results are in.
IMO, one can make the "right" decision to bring an umbrella even if it doesn't rain, or to not buy lotto tickets even if one would have won, or to go on a bike ride even if it resulted in a crash. It's the process, not the luck, that makes the difference for most people in the long run.
-
Here's a rephrased question:
What is an invalid reason to "know if you are wrong"?
Answer:
If the price goes up or down in the future.
Examples:
In hindsight in late January, had it been "wrong" NOT to buy GameStop at $100/share in mid-January? In hindsight by mid February however, was it "right" not to buy GameStop at $100/share in mid-January? Does correctness zig zag?
If I go to a casino and bet my entire retirement on black at the roulette table, will that be a "right" or "wrong" decision only after we learn the result? Am I really brilliant if I win, and a dumbass if I lose?
Rationale:
Fundamentals analysis does not apply to investments with no internally generated returns or distributions, so past price changes are irrelevant to the odds of future changes in price. There is no such thing as "cheap" or "expensive" for investments that are based entirely upon the expectation others will pay more for it in the future (examples: precious metals, cryptocurrencies, art and collectibles). Whether such expectations are true is probably unknowable for most people, so these non-productive asset classes mostly represent gambling.
What we are really asking is: Are decisions "good" or "right" because of their outcomes, which can be mere chance, or because of their processes, which can be repeated if proven reliable? Which would you rather have - the opportunity to take chances or a repeatable decision process that is usually profitable? Who is smarter, the person who is capable of gambling or the person who is capable of creating fairly reliable decision processes?
Also, we don't get the benefit of hindsight when we're trying to make rational decisions in the present. If outcomes determine the goodness or badness of a decision, we might as well guess because there is no way to know in advance if we're being good decision makers. In this mindset, a decision to sell VTSAX and go all-in on Spank Coin (an actual crypto) as a retirement plan cannot be judged until the results are in.
IMO, one can make the "right" decision to bring an umbrella even if it doesn't rain, or to not buy lotto tickets even if one would have won, or to go on a bike ride even if it resulted in a crash. It's the process, not the luck, that makes the difference for most people in the long run.
I want to add a few things here that I believe this fundamental analysis gets wrong and I see a lot of people often cite this hypothesis for a rationale for their investments. I wanted to dispute the following hypothesis:
---
The idea that "productive" investments are "valid" because they produce returns (or dividends) and are thus a "better" investments because of this compared with investments based on "the expectation that others will pay more in the future" (another wording for the term demand).
---
The reason why this analysis is flawed and what it misses is that every investment is based on demand. Let's say you're investing into a company (let's just use VISA to stick with the financial industry) and you're investing in them because they're a productive company that pays out a dividend. If you think that's somehow different from simple demand based investing (like commodity, real estate, bitcoin, etc), then you're missing the entire concept behind investing in the first place.
VISA, a financial services company, isn't in business (and thus doesn't pay a dividend) if there isn't continued demand for their services (payments). If somehow, VISA as a company is disrupted in the payments industry by some new technology or another company, then VISA stops earning a profit and thus stops paying a dividend and if that continues, they'll cease to be a company. And all while that is taking place (because of decreased demand for their services) their stock price is going down. No matter what your investment is, there is no decoupling the speculation on what future demand is for that investment from the outcome (gain/loss) of your investment.
All that remains is the risk involved with determining the degree of accuracy at which you can predict future demand. Well establish market participants usually have fairly stable demand and so there is lower risk in predicting future demand, but there is also likely lower upside with such an investment. Furthermore, usually when there is more uncertainty as to what future demand will look like, there is more risk in such an investment, but also greater upside. As investors, it simply comes down determining your risk appetite and making a personal judgement on what you feel future demand will be for any given service. If you don't feel like analyzing every market or you don't have the expertise in a particular market, then that's where index investing is helpful since you can help spread that risk across the demand in multiple markets.
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
-
Here's a rephrased question:
What is an invalid reason to "know if you are wrong"?
Answer:
If the price goes up or down in the future.
Examples:
In hindsight in late January, had it been "wrong" NOT to buy GameStop at $100/share in mid-January? In hindsight by mid February however, was it "right" not to buy GameStop at $100/share in mid-January? Does correctness zig zag?
If I go to a casino and bet my entire retirement on black at the roulette table, will that be a "right" or "wrong" decision only after we learn the result? Am I really brilliant if I win, and a dumbass if I lose?
Rationale:
Fundamentals analysis does not apply to investments with no internally generated returns or distributions, so past price changes are irrelevant to the odds of future changes in price. There is no such thing as "cheap" or "expensive" for investments that are based entirely upon the expectation others will pay more for it in the future (examples: precious metals, cryptocurrencies, art and collectibles). Whether such expectations are true is probably unknowable for most people, so these non-productive asset classes mostly represent gambling.
What we are really asking is: Are decisions "good" or "right" because of their outcomes, which can be mere chance, or because of their processes, which can be repeated if proven reliable? Which would you rather have - the opportunity to take chances or a repeatable decision process that is usually profitable? Who is smarter, the person who is capable of gambling or the person who is capable of creating fairly reliable decision processes?
Also, we don't get the benefit of hindsight when we're trying to make rational decisions in the present. If outcomes determine the goodness or badness of a decision, we might as well guess because there is no way to know in advance if we're being good decision makers. In this mindset, a decision to sell VTSAX and go all-in on Spank Coin (an actual crypto) as a retirement plan cannot be judged until the results are in.
IMO, one can make the "right" decision to bring an umbrella even if it doesn't rain, or to not buy lotto tickets even if one would have won, or to go on a bike ride even if it resulted in a crash. It's the process, not the luck, that makes the difference for most people in the long run.
I want to add a few things here that I believe this fundamental analysis gets wrong and I see a lot of people often cite this hypothesis for a rationale for their investments. I wanted to dispute the following hypothesis:
---
The idea that "productive" investments are "valid" because they produce returns (or dividends) and are thus a "better" investments because of this compared with investments based on "the expectation that others will pay more in the future" (another wording for the term demand).
---
The reason why this analysis is flawed and what it misses is that every investment is based on demand. Let's say you're investing into a company (let's just use VISA to stick with the financial industry) and you're investing in them because they're a productive company that pays out a dividend. If you think that's somehow different from simple demand based investing (like commodity, real estate, bitcoin, etc), then you're missing the entire concept behind investing in the first place.
VISA, a financial services company, isn't in business (and thus doesn't pay a dividend) if there isn't continued demand for their services (payments). If somehow, VISA as a company is disrupted in the payments industry by some new technology or another company, then VISA stops earning a profit and thus stops paying a dividend and if that continues, they'll cease to be a company. And all while that is taking place (because of decreased demand for their services) their stock price is going down. No matter what your investment is, there is no decoupling the speculation on what future demand is for that investment from the outcome (gain/loss) of your investment.
All that remains is the risk involved with determining the degree of accuracy at which you can predict future demand. Well establish market participants usually have fairly stable demand and so there is lower risk in predicting future demand, but there is also likely lower upside with such an investment. Furthermore, usually when there is more uncertainty as to what future demand will look like, there is more risk in such an investment, but also greater upside. As investors, it simply comes down determining your risk appetite and making a personal judgement on what you feel future demand will be for any given service. If you don't feel like analyzing every market or you don't have the expertise in a particular market, then that's where index investing is helpful since you can help spread that risk across the demand in multiple markets.
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
That's a bit "wishful thinking" in the analysis. You have to think one step beyond the "demand". The reason there is demand for a stock (or index fund) is economic growth. The reason there is demand for bitcoin is speculation. And that's the difference.
-
Here's a rephrased question:
What is an invalid reason to "know if you are wrong"?
Answer:
If the price goes up or down in the future.
Examples:
In hindsight in late January, had it been "wrong" NOT to buy GameStop at $100/share in mid-January? In hindsight by mid February however, was it "right" not to buy GameStop at $100/share in mid-January? Does correctness zig zag?
If I go to a casino and bet my entire retirement on black at the roulette table, will that be a "right" or "wrong" decision only after we learn the result? Am I really brilliant if I win, and a dumbass if I lose?
Rationale:
Fundamentals analysis does not apply to investments with no internally generated returns or distributions, so past price changes are irrelevant to the odds of future changes in price. There is no such thing as "cheap" or "expensive" for investments that are based entirely upon the expectation others will pay more for it in the future (examples: precious metals, cryptocurrencies, art and collectibles). Whether such expectations are true is probably unknowable for most people, so these non-productive asset classes mostly represent gambling.
What we are really asking is: Are decisions "good" or "right" because of their outcomes, which can be mere chance, or because of their processes, which can be repeated if proven reliable? Which would you rather have - the opportunity to take chances or a repeatable decision process that is usually profitable? Who is smarter, the person who is capable of gambling or the person who is capable of creating fairly reliable decision processes?
Also, we don't get the benefit of hindsight when we're trying to make rational decisions in the present. If outcomes determine the goodness or badness of a decision, we might as well guess because there is no way to know in advance if we're being good decision makers. In this mindset, a decision to sell VTSAX and go all-in on Spank Coin (an actual crypto) as a retirement plan cannot be judged until the results are in.
IMO, one can make the "right" decision to bring an umbrella even if it doesn't rain, or to not buy lotto tickets even if one would have won, or to go on a bike ride even if it resulted in a crash. It's the process, not the luck, that makes the difference for most people in the long run.
I want to add a few things here that I believe this fundamental analysis gets wrong and I see a lot of people often cite this hypothesis for a rationale for their investments. I wanted to dispute the following hypothesis:
---
The idea that "productive" investments are "valid" because they produce returns (or dividends) and are thus a "better" investments because of this compared with investments based on "the expectation that others will pay more in the future" (another wording for the term demand).
---
The reason why this analysis is flawed and what it misses is that every investment is based on demand. Let's say you're investing into a company (let's just use VISA to stick with the financial industry) and you're investing in them because they're a productive company that pays out a dividend. If you think that's somehow different from simple demand based investing (like commodity, real estate, bitcoin, etc), then you're missing the entire concept behind investing in the first place.
VISA, a financial services company, isn't in business (and thus doesn't pay a dividend) if there isn't continued demand for their services (payments). If somehow, VISA as a company is disrupted in the payments industry by some new technology or another company, then VISA stops earning a profit and thus stops paying a dividend and if that continues, they'll cease to be a company. And all while that is taking place (because of decreased demand for their services) their stock price is going down. No matter what your investment is, there is no decoupling the speculation on what future demand is for that investment from the outcome (gain/loss) of your investment.
All that remains is the risk involved with determining the degree of accuracy at which you can predict future demand. Well establish market participants usually have fairly stable demand and so there is lower risk in predicting future demand, but there is also likely lower upside with such an investment. Furthermore, usually when there is more uncertainty as to what future demand will look like, there is more risk in such an investment, but also greater upside. As investors, it simply comes down determining your risk appetite and making a personal judgement on what you feel future demand will be for any given service. If you don't feel like analyzing every market or you don't have the expertise in a particular market, then that's where index investing is helpful since you can help spread that risk across the demand in multiple markets.
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
I completely agree with the logic.
The challenge I have with Bitcoin is understanding the value proposition.
I fully understand Visa's value proposition (particularly since I used to work in the industry). They make payments more convenient for consumers, they add value to banks by bringing in additional revenue streams, and they add value to merchants by attracting higher spending customers and simplifying the checkout process. The amount of value they add to each transaction is greater than the ~20bps they charge between merchants and banks.
I understand Bitcoin has a high price, as Beanie Babies once had a high price. I have yet to hear a value proposition of productive use argument that justifies a high price. What value does Bitcoin add to a transaction that justifies the volatility risk of holding it?
There could very well be a reason or a value proposition there. I just haven't heard it articulated yet.
-
The idea that "productive" investments are "valid" because they produce returns (or dividends) and are thus a "better" investments because of this compared with investments based on "the expectation that others will pay more in the future" (another wording for the term demand).
...
The reason why this analysis is flawed and what it misses is that every investment is based on demand. No matter what your investment is, there is no decoupling the speculation on what future demand is for that investment from the outcome (gain/loss) of your investment.
...
All that remains is the risk involved with determining the degree of accuracy at which you can predict future demand.
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
I agree that future demand trends are important to both corporate earnings and the amount people will be willing to pay for assets in the future. However I also think it's harder to predict future demand than it is to predict the earnings and cash flow of the S&P 500 (it helps that the S&P changes over time to automatically include corporations delivering what is in demand). What will increase in demand 10-15 years from now? Yoga pants or black jeans? Smartphones or wearables? Beef or tofu? Citrus or avocados? Windows or Mac laptops? China's digital yuan or the Australian dollar?
How many such prophesies are necessary to put together a diversified portfolio like you can buy today with VTSAX?
Then there is the risk of getting the demand prediction right and the investment wrong. For example, if a fund manager knew in late 1999 that Amazon would become the world's dominant retailer, they would have lost over 90% over the next 2-3 years, and probably their job too. If one knew in 2005 that demand for smartphones was about to go through the roof, they might have invested in Nokia and Blackberry. If one knew a couple of decades ago, or even a few years ago, that growth in China's middle class would far surpass the US's, one might have bought a China ETF and underperformed the US stock market. If one knew in the late 1990's that people would stop subscribing to newspapers and get all their news from the internet, one would have bought Yahoo.com or AOL, the dominant news platforms at the time. In hindsight, having correct marketing / demand prophesies can be costly.
I don't think we should equivocate the importance of demand to the stock indices and the importance of demand to cryptocurrencies.
The part about having real earnings and real cash flows - and the probability of growth in both - can be relied upon to maintain people's interest in buying index funds. Those earnings and cash flows represent the opportunity to retire with less than 100% of the cash one will need for the entire remainder of one's life, or at least the opportunity to grow wealth without working for it. I cannot imagine a scenario where demand for that outcome would decrease, unless the total number of people suddenly decreased. This is not speculation - people have always wanted to buy future cash flows and always will. The price of those cash flows may vary but the demand for them is permanent.
Will demand increase for an internet points system that consumes entire cities worth of electricity just to support speculative trading, has few real-world applications several years after widespread awareness occurred, has only theoretical benefits over the status quo reserve currency, has enormous technical barriers to widespread adoption, is likely to be supplanted by government digital currencies, and is structured like a multi-level marketing scheme based on the promise of constant deflation? This is a different species of demand, speculative demand, and there is little basis to predict speculative demand will go up or down. Predicting bitcoin demand is 100% guesswork, I agree. Buying an index fund OTOH is trading one's cash for a fairly narrow range of possible future returns - probably between $100 and $120 earnings on average for each of the next 5 years in the case of the S&P500. Is my 100-120 five year annual average estimate speculative? Not compared to predicting crypto prices it isn't!
-
That's a bit "wishful thinking" in the analysis. You have to think one step beyond the "demand". The reason there is demand for a stock (or index fund) is economic growth. The reason there is demand for bitcoin is speculation. And that's the difference.
This is not true at all. Economic growth does not equal demand for a stock. Also, I specifically differentiated between the difference of an index fund versus a stock. An index fund diversifies your risk across demand sectors, but that does not change the underlying thesis that I posited in regards to demand. The demand thesis still exists there. It's just that you lowered your risk posture in regards to speculation on future demand. My point still stands.
-
I agree that future demand trends are important to both corporate earnings and the amount people will be willing to pay for assets in the future. However I also think it's harder to predict future demand than it is to predict the earnings and cash flow of the S&P 500 (it helps that the S&P changes over time to automatically include corporations delivering what is in demand). What will increase in demand 10-15 years from now? Yoga pants or black jeans? Smartphones or wearables? Beef or tofu? Citrus or avocados? Windows or Mac laptops? China's digital yuan or the Australian dollar?
How many such prophesies are necessary to put together a diversified portfolio like you can buy today with VTSAX?
Then there is the risk of getting the demand prediction right and the investment wrong. For example, if a fund manager knew in late 1999 that Amazon would become the world's dominant retailer, they would have lost over 90% over the next 2-3 years, and probably their job too. If one knew in 2005 that demand for smartphones was about to go through the roof, they might have invested in Nokia and Blackberry. If one knew a couple of decades ago, or even a few years ago, that growth in China's middle class would far surpass the US's, one might have bought a China ETF and underperformed the US stock market. If one knew in the late 1990's that people would stop subscribing to newspapers and get all their news from the internet, one would have bought Yahoo.com or AOL, the dominant news platforms at the time. In hindsight, having correct marketing / demand prophesies can be costly.
I don't think we should equivocate the importance of demand to the stock indices and the importance of demand to cryptocurrencies.
The part about having real earnings and real cash flows - and the probability of growth in both - can be relied upon to maintain people's interest in buying index funds. Those earnings and cash flows represent the opportunity to retire with less than 100% of the cash one will need for the entire remainder of one's life, or at least the opportunity to grow wealth without working for it. I cannot imagine a scenario where demand for that outcome would decrease, unless the total number of people suddenly decreased. This is not speculation - people have always wanted to buy future cash flows and always will. The price of those cash flows may vary but the demand for them is permanent.
Will demand increase for an internet points system that consumes entire cities worth of electricity just to support speculative trading, has few real-world applications several years after widespread awareness occurred, has only theoretical benefits over the status quo reserve currency, has enormous technical barriers to widespread adoption, is likely to be supplanted by government digital currencies, and is structured like a multi-level marketing scheme based on the promise of constant deflation? This is a different species of demand, speculative demand, and there is little basis to predict speculative demand will go up or down. Predicting bitcoin demand is 100% guesswork, I agree. Buying an index fund OTOH is trading one's cash for a fairly narrow range of possible future returns - probably between $100 and $120 earnings on average for each of the next 5 years in the case of the S&P500. Is my 100-120 five year annual average estimate speculative? Not compared to predicting crypto prices it isn't!
See quote below where I talked about risk and its relation to index investing. Index investing is great and all of my stock investing is done through index investing. It helps me diversify my risk across different demand sectors in the market where I simply don't have the market expertise to speculate accurately enough on where future demand is going in these markets. But, again as I mentioned in my previous post, that does not diminish the point I was making about demand and that all investing is a speculation on future demand. It's just that certain types of investing carry lower risk (index funds) and others carry higher risk (stock trading and bitcoin investing). But it is still all a play on speculation on future demand, plain and simple. It all comes down to what your risk appetite is and how well you feel you can judge future demand.
All that remains is the risk involved with determining the degree of accuracy at which you can predict future demand. Well establish market participants usually have fairly stable demand and so there is lower risk in predicting future demand, but there is also likely lower upside with such an investment. Furthermore, usually when there is more uncertainty as to what future demand will look like, there is more risk in such an investment, but also greater upside. As investors, it simply comes down determining your risk appetite and making a personal judgement on what you feel future demand will be for any given service. If you don't feel like analyzing every market or you don't have the expertise in a particular market, then that's where index investing is helpful since you can help spread that risk across the demand in multiple markets.
So the argument is and always has to do with risk in determining future demand for any investment.
I've posted plenty about what bitcoin is and how it can help the world in many posts here on this forum, so feel free to look them up. But the arguments that I've bolded in your post above are hardly accurate as to where the demand for bitcoin comes from and therefore it is no wonder why I feel you're making an inaccurate assumption about where future demand for it is going in the future.
-
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
That's close but not quite right. With Visa stock you are buying a portion of the future income stream. The stock gets bid up or down based on what people think that future income stream will be.
With Bitcoin, you are buying the hope that someone will want to pay more for your Bitcoin tomorrow than you paid today. The price gets bid up or down if people think the future value will be higher or lower than the current value.
-
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two. It is all about demand for something and that demand is all based on human subjectivity that must be speculated upon.
That's close but not quite right. With Visa stock you are buying a portion of the future income stream. The stock gets bid up or down based on what people think that future income stream will be.
With Bitcoin, you are buying the hope that someone will want to pay more for your Bitcoin tomorrow than you paid today. The price gets bid up or down if people think the future value will be higher or lower than the current value.
That future income stream is based on future demand. No demand, no income stream. Which goes back to the point I made, it's still all just speculation on future demand. With bitcoin, since it is strictly supply and demand, you're speculating that future demand will also be higher (and thus a higher price being paid). The bets are the same no matter how you slice it; speculation on future demand. You can try and make yourself feel warm and fuzzy that somehow you're investment hypothesis is different because you're investing in a stock, but its still the same bet at the end of the day.
Most of us reduce our risk in that regard with index funds so that if demand in the hospitality space falls (like it did during the pandemic), then our losses are minimized since demand could pick up else where (tech stocks) and we're invested in both. Income stream is an effect caused by demand.
-
That future income stream is based on future demand. No demand, no income stream. Which goes back to the point I made, it's still all just speculation on future demand. With bitcoin, since it is strictly supply and demand, you're speculating that future demand will also be higher (and thus a higher price being paid). The bets are the same no matter how you slice it; speculation on future demand. You can try and make yourself feel warm and fuzzy that somehow you're investment hypothesis is different because you're investing in a stock, but its still the same bet at the end of the day.
Most of us reduce our risk in that regard with index funds so that if demand in the hospitality space falls (like it did during the pandemic), then our losses are minimized since demand could pick up else where (tech stocks) and we're invested in both. Income stream is an effect caused by demand.
Again, this is not quite right especially the part in bold. The future income is profits made by the company. Buying a share of stock gives you a claim to a portion of those future earnings, as well as the physical assets of the company. That's why the concept of stocks was invented. Originally, companies paid out 100% of earnings in the form of dividends, but investors quickly realized that if a company retained some earnings it could grow faster and ultimately pay out more in dividends or otherwise grow the enterprise.
A portion of that future income is what you are buying when you buy stock. That has been the fundamental reason for stock trading for the last 400 years. You can pay too much and lose money of course, but that is the reason why people invest in stocks.
Bitcoin does not have earnings. Therefore people cannot invest in Bitcoin to capture future earnings. It is impossible. That statement by the way, makes no comment on whether Bitcoin is a good investment or not. But it is a statement of fact.
Bitcoin and stocks are completely different types of investments. It is nonsensical to try and conflate them.
-
Again, this is not quite right especially the part in bold. The future income is profits made by the company. Buying a share of stock gives you a claim to a portion of those future earnings, as well as the physical assets of the company. That's why the concept of stocks was invented. Originally, companies paid out 100% of earnings in the form of dividends, but investors quickly realized that if a company retained some earnings it could grow faster and ultimately pay out more in dividends or otherwise grow the enterprise.
A portion of that future income is what you are buying when you buy stock. That has been the fundamental reason for stock trading for the last 400 years. You can pay too much and lose money of course, but that is the reason why people invest in stocks.
Bitcoin does not have earnings. Therefore people cannot invest in Bitcoin to capture future earnings. It is impossible. That statement by the way, makes no comment on whether Bitcoin is a good investment or not. But it is a statement of fact.
Bitcoin and stocks are completely different types of investments. It is nonsensical to try and conflate them.
Whether a company pays out dividends or not is irrelevant here. If you didn't feel there was going to be demand for a company's product in the future, regardless of whether or not that company pays out a dividend or not in the event of profits, it's not going to be a good investment. So it still comes down to speculation on future demand. If you can figure out how to make a profit with a lack of demand, I and every business owner would love to hear it. There is no income/profit unless you have demand.
It's like what you're try to do is make a claim that buying Blockbuster stock in 2005 was a wise investment simply because they had a good history of paying dividends. There is/was a clear lack of demand for their product, so it doesn't really matter whether or not they pay dividends and up until that point they had a good history of paying dividends. But none of that matters if you don't have demand for your business.
https://www.foxnews.com/story/blockbuster-wont-pay-dividend-first-time-since-1999 (https://www.foxnews.com/story/blockbuster-wont-pay-dividend-first-time-since-1999)
-
Comparing Bitcoin to stocks makes little sense. Separating out index funds entirely, you could loosely classify stocks into two forms:
1) Value stocks
2) Growth stocks
Clearly, Bitcoin will never pay a dividend and never generate an income stream, so it should never be compared to #1. Within the stock world it is most similar to #2. The difference is that people speculate that a growth stock will be worth more to someone else, under the premise that it will eventually represent a share of an income stream. Bitcoin fundamentally fails the second half of this test, regardless of whether you think it otherwise provides value, so it is either a purely speculative stock or not stock-like at all.
This is why it is more important to compare it to a currency from an investment perspective. Demand for currencies is fundamentally different from demand for stocks. Nations rising and falling and their economic and financial structure is very different from that of a stock and they should not be compared. Taken to extremes, if zero people lined up to ever buy my F share from me, I would still get an income stream from Ford, so F would still have value. Now, I'm speculating that demand for Ford cars will not go to 0, which is risk, but we can clearly see that this is different from the case of demand for currency/commodities/etc. Another way to see how universally saying "demand is everything across instruments" is to wonder aloud why we have both stocks and bonds.
Currencies are inherently speculative investments in nature. In fact, if you look up speculation on Investopedia they use Forex trading as their primary example.
Notably, nothing about Bitcoin being a currency as opposed to a stock means it is better or worse, just about what it is appropriate to compare it to. It has potential upsides as a currency and definite, clear downsides. This along with some other fundamental reasons + hype drive its variance sky high. It fundamentally fails to function as a currency today, with some hope it might function like that in the future.
That, in a word, is a speculative investment.
That doesn't make it bad! Forex is the largest trading market in the world in terms of dollars changing hands per day.
To answer the titular question:
I'll know I'm wrong if, upon reflection, I realize that I understated my desire for a speculative currency investment in my portfolio in the past.
-
I'm not comparing bitcoin to stocks based on what they are. So arguing about what classification of investment bitcoin or stocks falls into is pointless since that isn't the debate I'm in. Doesn't matter whether we're talking currencies, stocks, commodities, etc.
The point I'm making is that regardless of your investment, stocks or bitcoin, it still all comes down to speculation on future demand. Not sure why that's controversial or hard to understand.
To further my point based on your own example:
"If zero people lined up to ever buy my F share from me, I would still get an income stream from Ford."
Future demand speculation about a stock isn't about future demand speculation for the stock itself. It is about future demand speculation for Ford vehicles themselves. If no one lines up to buy Ford vehicles in the future, you're not going to get anyone to buy your stock and you're also not going to get an income stream (dividend) from it either. So if you're buying Ford stock, you're speculating that people will be lining up to buy Fords in the future (future demand speculation).
-
I'm not comparing bitcoin to stocks based on what they are. So arguing about what classification of investment bitcoin or stocks falls into is pointless since that isn't the debate I'm in. Doesn't matter whether we're talking currencies, stocks, commodities, etc.
The point I'm making is that regardless of your investment, stocks or bitcoin, it still all comes down to speculation on future demand. Not sure why that's controversial or hard to understand.
To further my point based on your own example:
"If zero people lined up to ever buy my F share from me, I would still get an income stream from Ford."
Future demand speculation about a stock isn't about future demand speculation for the stock itself. It is about future demand speculation for Ford vehicles themselves. If no one lines up to buy Ford vehicles in the future, you're not going to get anyone to buy your stock and you're also not going to get an income stream (dividend) from it either. So if you're buying Ford stock, you're speculating that people will be lining up to buy Fords in the future (future demand speculation).
I guess I'm not sure what's the actionable value-add in your statement about demand/speculation. Is your point that some consideration of demand matters for all investments? Or, said another way, that there is not zero risk/speculation in any investment? Then, I agree, for the purposes of this conversation, but I'd counter that this is why we have different classes of financial instruments and clearly defined words like "speculation" in the lexicon.
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.
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.
^this is my greater point, below is minor.
If you're buying VISA stock, you're speculating that the future demand for VISA's services will continue to rise. If you're buying bitcoin, you're speculating that the future demand for bitcoin's services will rise. There is no difference between the two.
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.
-
Whether a company pays out dividends or not is irrelevant here.
Correct! That's why I've said (several times now) "hope of future earnings." It doesn't necessarily matter if the company pays dividends, retains earnings, or even makes a profit. The share price is driven by hope of future earnings. Amazon didn't make profit for tens or something and has never paid a dividend. Yet there is clearly huge value in the enterprise.
It's like what you're try to do is make a claim that buying Blockbuster stock in 2005 was a wise investment simply because they had a good history of paying dividends.
Huh? Did you read anything I wrote?
I said stock prices are driven by the "hope of future earnings."
Let's do a thought experiment: Are past earnings the same as future earnings? Why no, no they are not. Here is the difference: Past earnings are in the past. Future earnings are in the future. That's the concept I'm trying to hammer home here: Hope of future earnings.
Now, past earnings might be a useful metric to estimate future earnings. But no one bought Blockbuster to capture past earnings. They bought Blockbuster to capture future earnings. That's why people buy stock: The hope of capturing future earnings.
There is/was a clear lack of demand for their product, so it doesn't really matter whether or not they pay dividends and up until that point they had a good history of paying dividends. But none of that matters if you don't have demand for your business.
Right! The stock price was being driven by the hope of future earnings. In the case of Blockbuster, there was very little hope of future earnings, which was reflected in the stock price. Netflix on the other hand, was busy making the money that Blockbuster used to make. That was reflected in their stock price too.
Remember stock prices are driven by the "hope of future earnings." That's why people buy stocks. That's the reason why stocks were created. Bitcoin has no earnings. Therefore, no one buys Bitcoin in hope of capturing future earnings. They buy it for other reasons.
-
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.
-
Correct! That's why I've said (several times now) "hope of future earnings."
If you can explain how you have earnings without demand, like I said, I and every business owner would love to hear it. You may think it is about "hope of future earnings", but it is about future demand (you can't have earnings without demand). Demand must come before earnings are had. I'm repeating myself now and you still don't get it, so I don't have the time to explain it any further.
Cheers
-
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:
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:
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.
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.