VTSAX owns stock in 3,606 companies. Do you know what the 2,800th biggest company is? Do you know what they do? Do you know what use there is for that company? I couldn't even find a list of all the companies in VTSAX. But I own stock in that 2,800th biggest company, and you probably do too.
Thank you Cycling Stache. You've made some excellent points. You bring up a lot of good counter points to those that espouse the benefits of index stock investing while condemning investing of any kind into crypto-currencies.
Earlier in another post I mentioned that it isn't a bad idea to put just 1% of your portfolio into bitcoin since, for the most part, it is a non-correlated asset. I am a big advocate of index investing, but while I suggested a 1% allocation for Bitcoin, it was criticized by those who say that index investing is the only viable investment choice.
It is often the argument, that being profit driven businesses, they provide dividends and grow as a business becoming more valuable in the future. The criticism against Bitcoin is that it has no "intrinsic" value (which I disagree with) and does not generate revenue of any kind. However, businesses only generate profit if the business that they are in is a demanded business. If a business does not generate profit, then there are no dividends given to investors. Furthermore, obviously not every business succeeds. Given a lack of demand for a company's product, the company can decline dramatically, go bankrupt, etc. Many companies have come and gone within the S&P 500 index. Everyone that promotes index investing has no idea of the actual valuations, earnings, future productivity, competition, debt, assets, etc of all of the companies within the index.
If the critique against Bitcoin is the fact that it isn't a revenue generating company, and the main path promoted for investing in revenue generating companies is to do so through index investing, then to take that logic further, one must be willing to advocate for investing in railroads, luxury goods, retail, software, airlines, publishing, insurance, aerospace, apparel, semiconductors, banking, restaurants, and all manner of markets that exist within the index. Much of these markets themselves have no "intrinsic" value to the human race as well. If you can't make a case for investing in the future of each one of those markets individually, then the argument for indexing becomes less about the fact that you're investing in revenue producing companies in those markets and more about the fact that you're divesifying your investment across a large number of those markets such that your exposure to each one is limited.
So if you can't make the case for specifically investing in the future of railroads or any other individual market that exists in the S&P 500, but you do advocate for investing in it at a miniscule amount (say 1% or less), then how can one criticize the choice to put 1% in a crypto-currency? As I said, this isn't about the revenue producing aspects of a company as, absent profits, there are no dividends for investors. It then comes down to whether or not you feel that the future railroads market has a brighter future than the Bitcoin market. Insert whatever S&P 500 market you'd like in for railroads and I'm sure you could come across something that you don't fully understand or something that would likely have a questionable future. Yet, buy index investing, you're buying into that. Combine this with the fact that you could potentially be investing in some very questionable markets during times where their valuations are extremely high, and you'd probably find yourself some very risky investments being made (albeit at small percentages <1%) within your index. Yet we're OK with that simply because of the fact that it only makes up a small percentage of our portfolio.
The point about not being smarter than the market or not trying to beat the market simply comes from the diversification that indexing provides. It isn't that indexing provides us deep insight to the stock market that allows us to feel like expert investors.
So again, promoting investing into potentially declining markets through indexing (even though diversified) allows one to criticize someone who chooses to invest an equally diversified portion of their portfolio (1% or less) into cryptocurrencies? The Bitcoin market is larger than most S&P 500 companies. If we can't individually make the case for investing directly into each and every one of the companies within the S&P 500 index, then how can you make the case for or against investing in a market the size of Bitcoin, especially if you don't fully understand that market? The argument seems pretty arbitrary otherwise as to what we're OK with investing via an index.
Personally, I know more about the crypto-currency market and the technologies within it than I do about any given market that exists within the S&P 500 index. I am a big proponent of index investing, but I allow myself to extend my diversification beyond what the S&P 500 index provides because of how closely I follow what is going on in the Bitcoin space and the fact that I actively participate in the technology of it. Bitcoin may not replace fiat currencies in our lifetime, but I believe that there is a large enough following and large enough demand for it that it will not go to $0 any time soon. Much to the same extent that open-source Linux is not a common desktop choice for every day users in their home, there is still a large enough niche market for it to continue to exist and evolve for personal desktops.
Cycling Stache, I know this is one step further than the argument you're making, but I thought I'd add in and go a little bit further with the points you were making. Good discussion none-the-less.