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Comment by baron_harkonnen | Hacker News Reader

I recommend you read some of Stephen Deihl's thoughts on the subject[0].

You're not alone if you feel that cryptocurrency doesn't make sense as an investment vehicle, but the HN community will make you feel crazy for not seeing what a great thinking this is an incredible new opportunity and "things are different this time!"

There is no better indication of a bubble then people telling you that you're the crazy one for questioning it. I remember people telling me I was crazy for not buying a house in 2007, and crazy for not trading tech stocks in 1999.

[0] https://www.stephendiehl.com/posts/crypto.html

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> There is no better indication of a bubble then people telling you that you're the crazy one for questioning it. I remember people telling me I was crazy for not buying a house in 2007, and crazy for not trading tech stocks in 1999.

I'm not sure that's a good indicator with so many counter examples: the internet, large touch screen phones, Cloud in the earlier days, etc.

We truly have no idea what the future if Cryptocurrencies are.

Bitcoin has been around for about a decade now. It didn’t take anywhere near that long for the internet, large touch screen phones, the cloud, etc. to really catch on.

And for every technological advance met with skepticism that eventually succeeded, there are orders of magnitude more that crashed and burned (e.g., the segway, 3D televisions, HD DVD, and countless others)

> Bitcoin has been around for about a decade now. It didn’t take anywhere near that long for the internet

That's not true, as is obvious with only basic fact checking. Apart from it not being obvious what you mean by "internet" (does ARPANET count?), the internet proper saw its first commercial access providers appear in 1989[1] and it certainly was nowhere near popular in 1999 as it is now. In fact, I would say the change from that period is almost fundamental. Remember, 56k modems were popular back then and a very small part of the world's population had internet access.

My point is, this certainly fits into the larger picture of where Bitcoin is right now. It's vastly more popular then 10 years ago, because now my plumber and barber ask me about it, it is regularly talked about in the news and there are almost no countries without laws enacted as a response to it.

[1]: https://www.rogerclarke.com/II/OzI04.html#CIAP

> the internet proper saw its first commercial access providers appear in 1989[1] and it certainly was nowhere near popular in 1999 as it is now

The internet had 248 Million users in 1999 [1] Bitcoin has, estimating very liberally ~28M users worldwide [2].

> It's vastly more popular then 10 years ago, because now my plumber and barber ask me about it, it is regularly talked about in the news and there are almost no countries without laws enacted as a response to it.

Nobody's disputing that. As in my previous examples, we've all heard of 3D televisions, segways, HD DVD's, 8-track, beta max, Theranos, Juicero, and tons of other laughably bad ideas. That doesn't indicate success.

[1] https://www.internetworldstats.com/emarketing.htm

[2] https://www.buybitcoinworldwide.com/how-many-bitcoin-users/

> That doesn't indicate success.

Of course it does not, but it certainly is not a good argument for failure either.

> We truly have no idea what the future of X is

What an excellent reason not to invest in X!

That is what risk is.... not knowing. If you want high reward from an investment, you need to take high risks, which means you will invest without knowing something.

Now, some risks are smarter than others...

That's not necessarily a good idea. You don't need to take on higher risk for a higher return. It's usually better to leverage risk-adjusted returns rather than chase high total returns with commensurate risk.

You can take on more risk that if you have the appetite, but if that's the case you could also just use levered beta (e.g. 3x levered S&P 500). This would significantly improve your portfolio while still being fundamentally much easier to understand than a novel asset.

If your portfolio has a decent risk adjusted return and very low volatility and beta exposure, it's safer to just leverage it up to the same risk as the S&P 500. This reduces the chance of you blowing up your capital in the long run.

I would argue there are very few investment goals for which extreme risk is sound (especially if it's unhedged!).

That's also ignoring the cost of capital, as leveraging risk adjusted returns has to take that into account. You don't get the same rate of return if you use margin, say, in order to leverage.

If you use a 3x or other leveraged fund, then you run into tracking issues (look at https://www.etf.com/etfanalytics/etf-comparison/SPXL-vs-SPY) where you see tracking break down), you can lose everything (remember XIV?), and you have other potential issues.

So it's not as simple as leveraging up a low-risk portfolio to assume a given risk/return ratio. There's also diversification to keep in mind.

That is a good point, but that all applies to riskier investments as well. Whether or not that specific example will beat out something like cryptocurrencies does depend on margin and transaction costs, this is true.

> You don't need to take on higher risk for a higher return

The lower the risk of an instrument, the more it will be saturated with investors, the more thinly per-investor share of profit will be spread. Therefore there is no such thing as "low risk, high returns", unless it is a scam. There is no unexploited profit opportunity that is risk free, if one thinks they have found one, they must have just missed accounting for the hidden risks.

I didn't say "low risk, high returns." It is a spectrum. What you've said in your first two sentences sounds fine as a textbook principle. But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis. Very often you can then leverage this up to a higher absolute return than SPY while keeping lower volatility and beta overall.

> There is no unexploited profit opportunity that is risk free

This is essentially encapsulated by a Sharpe ratio (among other things). On the contrary, it is not especially difficult to produce a relatively high Sharpe ratio, accounting for transaction and margin costs, if you don't have a large amount of money to invest (large means single digit billions or more). This is especially, but not exclusively, the case if you don't care to compound your returns.

> But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis.

Sure, there are asymmetries in real life and information takes a while to dissipate to all agents, but unless you're a robo-trader doing high frequency temporal arbitrage, I don't buy for a second that you can beat the market on a continuous basis. You might think you do, but that would be just some hot-hand fallacy.

> This is essentially encapsulated by a Sharpe ratio (among other things).

You're conflating two things. Sharpe ratio is about a profit opportunity with regards to its well established degree of risk. Unexploited opportunity is when you asymmetrically discover a new return opportunity upon what was already priced.

In both cases it comes down to the belief that "I am smarter than other investors, and can profit from an angle they haven't thought". I will not assert a strong efficient market hypothesis, but in overwhelming majority of the cases, no, you're not.

Like I said, run through a basic risk parity strategy holding SPY and an uncorrelated ETF. Calculate the beta, volatility and return over 10 - 20 years. It does beat the market continuously on a risk adjusted basis. With leverage it also beats on total returns with lower volatility and beta.

Beating the market is not mysterious, it's just difficult to do it by a lot or at scale. Just because well performing portfolios are well known doesn't mean they cease being effective in principle, the way you seem to think would happen. These days a risk parity portfolio isn't enough to solicit funds from savvy investors because it's well known and they won't pay management/performance fees if that's all you're offering. But it's been a staple since Dalio developed it 30 years ago for good reason.

You can find code for running through the kinds of things I'm talking about, as well as more in-depth discussion here: https://qoppac.blogspot.com.

if you leverage your risk for a higher return you _also_ increase your risk

Yes, but you can choose how much risk to take on using your leverage weight. You don't have to accept the baseline risk of the inherently riskier asset. It's easier to start with a less risky portfolio and weight it accordingly than it is to derisk a portfolio which is intrinsically riskier.

>We truly have no idea what the future if Cryptocurrencies are.

Yes we do...

Why in the utter hell would I ever use crypto that has ABSOLUTLY ZERO GUARANTEE after I pay someone?

Curious, which country are you living in that doesn't have laws against fraud or theft?

Curious, why are you being intentionally obtuse?

Have you ever paid for anything in cash? That has exactly the same guarantees.

> but the HN community will make you feel crazy for not seeing what a great thinking this is an incredible new opportunity and "things are different this time!"

The HN community is strongly hostile to crypto. Few people here like the downvotes when they speak positively about crypto, although I keep taking them!

As a store of value it's better than gold in some ways, because you don't need to physically store it. But unlike gold, which can appreciate in value indefinitely, Bitcoin is mathematically capped in how much it can appreciate in value because the expected value of mining and purchasing need to go to par.

>But unlike gold, which can appreciate in value indefinitely, Bitcoin is mathematically capped in how much it can appreciate in value because the expected value of mining and purchasing need to go to par.

I don't think you're using the term "appreciate in value" correctly. I think what you meant to say is that gold can be mined infinitely (on earth, in space) and therefore has potentially infinite supply, whereas the total supply of bitcoins is capped at 21 million.

Apologies for posting something borderline meme-ish on HN, but I think this video actually answers your question (watch the whole thing):

https://www.youtube.com/watch?v=XbZ8zDpX2Mg

"The Politics of Bitcoin: Software as Right-Wing Extremism"... just wow. Is it crazy to consider that crypto companies might simply provide better tools than a lot of banks, therefore driving worldwide adoption?

Your argument here makes it sound like people are using crypto for practical applications on a scale approaching banks. If that was the case I would be far less skeptical, but, aside form a few enthusiasts that make crypto transactions to make a point that "people use these" I don't know of anyone that uses crypto for practical, everyday financial transactions.

Can you provide me some evidence that people are using crypto at a large scale, and that that scales in increasing in a way that it is anywhere near competing with banking services? It seems that even after a decade of enthusiasm people are still mostly "investing" in it.

yes but that is a use. bitcoin is useful as a savings technology. that is how monetary technology should work, especially at first

You are crazy for not buying a house in 2007. I can't think of a better investment to have right now than a house purchased in 2007...

The price of the house structure itself decreases with time. The price of the land the house sits on might increase, depending on where it is.

Land prices in very, very few areas have increased sufficiently to match a risk adjusted return (or even the nominal return) of a broad market index fund, such as VOO or VTI. Especially considering the liabilities and ongoing maintenance costs with owning housing structures.

The labor adjusted return is far better too, you spend minutes and a few clicks investing in an index fund, versus hours and days on real estate.

*with the caveat that those very few areas also hold a large percentage of the population, since land prices are correlated with population density and zoning regulations (i.e. see Hong Kong for ex.)

One thing to not forget is the amount of leverage provided for you in the housing market is disproportionate compared to the leverage you would get in stocks (20% down is 5x leverage, and there are some options to get in on a house with even less than that).

If you look at the real rate of return on everything (paper from 2017, analyzing the period between 1870 and 2015 in several developed countries), they claim the return on property is around 8% per year, which is comparable to stocks but with a lower variance.

A caveat though is that housing outperformed equity slightly 1870-1950, and equity has outperformed 1950-today. Housing is also a very locale-specific thing, since there is no global private 'housing' market you can invest in.

https://www.frbsf.org/economic-research/files/wp2017-25.pdf

Absolutely right about the advantages of leverage. And with real estate, you can do a 1031 tax exchange and continue growing your wealth tax free indefinitely as long as you can pay the property taxes. Although, residential real estate offers a pittance in returns compared to commercial.

But I think almost everyone who doesn't have an interest in doing the grunt work of real estate investing would be better served sticking their money in an index fund ETF rather than real estate. It's drastically less work, less worry. Extremely low cost broad market index funds and ETFs are relatively new too, I'd be interested in seeing an analysis of performance after they went mainstream.

I think you are forgetting about all the people who could not hold onto their houses.

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