Bitcoin isn’t a typical investment instrument in that sense, so I’m not sure applying the same heuristic works.
Also a thought occurs. Many people reading this will think “but these cynics are mistaken. Those who invested in bitcoin have seen massive returns”.
Not so. The paper value of bitcoin is up, but unlike a stock, you don’t own anything. You need someone to actually buy the bitcoin in order to gain value.
Whereas as long as a company has profits, there’s a floor on things. The shares will have real use value so the price can’t fall too low.
Meaning buy bitcoin at $200, own now at $41,000. Only has value if you sell. If everyone tries to sell and no one is buying there’s no floor, none.
Whereas bought Apple at $20, own at $132. The price could fall, but there’s some kind of floor below which it could not fall based on current profits and dividends, and that floor is almost certainly above $32.
On a side note, sarcasm and snark don’t aid better understanding in a discussion. I appreciate your point but it would be better made being direct.
If you are comparing crypto to USD savings, it is quite obvious from a 10 year chart which one is irrational. Even if you completely write off the growth of crypto entirely, it is quite easy to beat negative value growth.
1. It's not "easy" to beat negative value growth at baseline. EG: a risky investment that loses your entire investment is much worse.
2. If this was year 1999, could you have written exactly the same about .COM stocks shortly before they crashed and burned? If not, what is the thing you see about Crypto that makes that value feel real vs bubbly?
The bubbles are observable, though, and we have over a decade of time elapsed in order to show that in addition to bubbles (and full corrections!) on that basis of hype, there is an overall growth trend that results from the mathematical scarcity which .com shares lack.
As far as comparison to a dotcom, they had to make payroll, nurture a profitable market, predict changes, outpace rivals etc. Many ways to suffer catastrophic death in that equation. whereas a bitcoin has no such requirement. All it has to do is not inflate too bad.
So, question: All the other coins, which are also strictly limited mathematically, they are also good long term investments, since they won't inflate too bad? They do all have "an overall growth trend that results from the mathematical scarcity", do they?
Why bitcoin? because dollars suck. Why altcoin? is a legitimate question, but bitcoin has flaws. Personally I like to believe that the 'flip' will occur at some point to ethereum due to its technical and monetary superiority, but I think its more likely that due to the network effect, bitcoin will keep its crown as main coin.
Just for fun, I want to share what I conceive as an easy disaster scenario for crypto.
Let's be clear on one thing - the dollar price of BTC is driven by supply and demand. To the extent that more and more people want to buy it, while the available supply for sale is limited, the price goes up.
Let's be soberly clear that the there's another side of the coin - IF there was a case where there were relatively few buyers compared to the supply for sale, the price tumbles.
Then to conceive a disaster scenario we just need to imagine a situation where this happens: where people are selling and there's nobody to buy.
I can easily conceive such a scenario.
Let's first think about who's driving the buying. I guess there are now institutional players but there's also a lot of "wow I heard people made money in BTC so I am going to convince my wife to let me buy some instead of fixing our roof" people. To the extent that such people enter the market, they drive the price up.
At some point, such people will be tapped out of dollars, and the world will be tapped out of such people. In other words, every dollar that someone was going to aggressively/recklessly (from their own position) put into BTC, is already in BTC.
Let's imagine an idealized scenario where no new dollars are going into BTC because of the above, and no dollars are being taken out (because people are HODLing) and ignore mining for this. In this scenario, the price gets "stuck" at whatever level the last trade happened.
Now the thing about people who invest money they can't afford, they very quickly need it. The guy's wife says "the roof has been leaking for 3 months now and you aren't making money in BTC, sell it and fix the roof."
So the guy goes to sell - but there's nobody to sell it to. There's no people sitting on the sidelines because as mentioned above, everyone's already in. So he has to drop the price lower and lower until someone buys it.
Now other people see that the price has moved down. So the prior "greater fool" things "wait, I cashed out my 401k because BTC is going up, but it just sat flat for 3 months and now moved down and I am losing money, OH SH*T, BAIL (or, his wife makes him have this "realization"). So that drops the price even more.
Now there are other people who are looking at this downward movement and going "wait a minute, 3 months ago I felt like I was going to be able to buy an island with my BTC holdings, but now it's starting to look like I can only buy a condo. I better cash some out just in case it slides more because my loss aversion is kicking in and I was bullish before, but now I am experiencing the feeling of "not as rich as I once felt" and it's messing with me.
But this guy doesn't have that many willing people to sell to either, so it keeps sliding and snowballing down.
This is obviously an idealized scenario but you can hopefully see the forces that would cause any bubble to unravel. Once the supply of naive inbound dollars dries out (as it inevitably must), the people who invested last because they were sure it was going to be easy money, get nervous, sell, price slides, that unravels more people who now have something to lose whereas before they felt invulnerable, etc etc all the way down.
That basically means that you were early to the party for crypto, and made some bad decisions with stocks (which have yielded some 5% pa in real terms for many decades).
It all comes down to: investing is great if you buy low and sell high.
Let's just say this - if you aren't able to imagine the scenario under which your BTC (or any investment) crashes down to near zero, you're just not thinking well enough.
I can conjure up a disaster scenario just standing right now in my kitchen, and I don't even own crypto.
Even if Bitcoin goes to zero, many who hold BTC when it hits zero will still have made a profit out of it.
Not the concern of the one making a profit off of this. Not sure it should be either. That's the role of the regulators.
I guess I agree with your point actually - if someone got to a place where they already got more $USD out of bitcoin than they invested, it's safe to play.
Personally I am not invested in BTC at all because I have a pretty thorough "short thesis" on it (you can see a bit of it in my comments in this thread.)
I wouldn't be opposed to betting some play amounts on it (I'd bet short, however) - same as money that I had "invested" in prediction markets - not investments in the "I am building my wealth this way" kind of sense.
If you go outside the framework of a thought experiment, to play safe - we can’t move a discussion forward. So pick a number based on the hypothetical scenario you mentioned. That’s the entire point of a thought experiment, to test boundaries.
You do not need to answer the question. The point I'm trying to make is that as an investor you can invest in an asset class even if you can imagine an Armageddon (crash to zero for BTC) scenario. You just have to allocate the right proportion towards the asset incorporate the volatility. Remember, the same scenario could also happen for any investment asset. The lesser the likelihood of the Armageddons the higher the allocation. You can simply reduce your asset allocation to what you perceive as the likelihood of the Armageddon scenario. I can tell you for sure that none of us can predict a scenario with a 100% probability. Given that, an allocation of 1$ or even 0.01-0.99$ is not a bad idea.
Oh, as far as BTC getting to zero - I can't imagine how that can happen without every government on the planet banning it [0]. Currently, you have governments in well developed economies consider it as an ordinary tangible asset [1] and even trading them from exchanges (9th largest in Europe) [2]!
[0] https://www.visualcapitalist.com/the-feds-balance-sheet-the-...
[1] https://www.winheller.com/en/banking-finance-and-insurance-l...
I disagree. There's plenty of stuff one "could" invest in and very few one "should."
I look at it on expected value basis and then, risk adjusted. Because I have a short case on BTC, I expect any investment in it to have expected value of 0 so any $ allocated to it would be wasted. Instead I spread my money in investments I expect to have positive value, and I invest in many of them for diversification benefits (which may be is what you were getting at?)
But the point of diversification is to secure uncorrelated positive returns. A negative return on the other hand is just a negative return. I totally agree with you that I could be wrong in my short case on BTC, my logic rests on it.
And just in defense of my case - I think about markets as someone who's studied and worked in them for 18+ years. Doesn't mean I am right and I have an open mind. So whenever I encounter someone who has the opposite view, I explain to them my case with the hopes that they can point me to what I am missing, but I always walk away with the impression they hadn't thought about the issue deeply and with nuance. Again, I could totally be wrong, but as an investor if it seems like I did my homework and the others are driven by hype/FOMO/not understanding then I am gonna sit it out :)
Honestly, I found that comment disrespectful and making a mockery of a point - it's all too common these days. If I were to take the opposite of the comment, we should NOT invest in anything and stay 100% in cash because each and every asset has risks and volatility.
> I disagree. There's plenty of stuff one "could" invest in and very few one "should."
You know that I agree with you right? I never said you SHOULD invest in BTC. I was making the point that IF one wants to invest in the BTC, then one can do so by a minimal asset allocation. It fits within your "expected value" framework.
> But the point of diversification is to secure uncorrelated positive returns. A negative return on the other hand is just a negative return. I totally agree with you that I could be wrong in my short case on BTC, my logic rests on it.
I agree. But, surely if you were willing to consider an Armageddon scenario for BTC; you could also consider a 100% upside scenario too. We did a thought experiment on the Armageddon scenario, I haven't seen any calculations on the upside.
> And just in defense of my case - I think about markets as someone who's studied and worked in them for 18+ years. Doesn't mean I am right and I have an open mind. So whenever I encounter someone who has the opposite view, I explain to them my case with the hopes that they can point me to what I am missing, but I always walk away with the impression they hadn't thought about the issue deeply and with nuance. Again, I could totally be wrong, but as an investor if it seems like I did my homework and the others are driven by hype/FOMO/not understanding then I am gonna sit it out :)
I am grateful for you that you took the time to listen. I could not find a e-mail or contact on your profile. I'd be happy to take this offline and I want to understand what I am missing here.
I won't share my email or other contact here since I tend to share somewhat personal stories on HN so I'd rather it not totally tie to who I am (though really who cares) so let me lay out the simplest view of my short case on BTC.
I believe that valuation matters. I "believe" in the price of an oil futures contract for example because I know it represents the best effort of invested parties to arrive at what that price ought to be (through a market mechanism.) So people say things like "I am bullish on oil as long as it's under $X" - and once it goes above $X (plus some margin perhaps) even the bulls sell. This is good because it's sane behavior in the market.
With Bitcoin, I don't see anyone say "I am bullish until it crosses $X" - the culture of the marketplace is that it's going up no matter the price. In market terms it creates unchecked upward pressure on the price, which in my mind equates to bubble conditions.
And then I have seen enough bubbles burst (in my lifetime and through study of history) to know that unchecked upward pressure will stop just after it reaches its max. And since people aren't anchoring to an analytic $X price, there's likewise no floor on the way down. I spelled out the mechanics of this in what you call Armageddon analysis.
To boil this down very simply: 1. Whenever people are buying without an attempt to valuate, they inflate a bubble. 2. Bubbles always burst.
I have other, more technical and psychological elements to the short case, but this is the simplest piece. People bidding something up without concern for valuation always spells trouble.
Some have even happened.
You lose your key, or get hacked, or send to the wrong address and everything you invested is gone.
Oh, and if someone manages to reverse SHA256, or finds a vulnerability in the public key scheme it all becomes worthless instantly... That is if they don't keep it secret and milk the whole thing for everything it's worth.
The value comes from being able to manipulate the price, one would suppose.
I suppose there are now some whales, including governments that seized BTC from criminals, that could induce a crash by selling thousands of BTC within a short frame of time. But that may be true for many stocks as well.
It depends on the trading volume. For many "altcoins" or "shitcoins" it may be true, because they have low trading volume. Bitcoin probably less so these days.
I'd read elsewhere that there was a tiny minority of BTC holders that own 95% of it, no idea of the authenticity of that.
As a Layman, my assumption is the more liquidity in the market, the harder it would be to manipulate and less reason to dump onto the market if a large stakeholder.
But I think the same applies to many stocks. If Musk of Bezos would sell off a majority of their shares in their own companies, it would perhaps also move the price.
At the moment, crashes in Bitcoin can also be seen as a good thing because it helps give more people access to Bitcoin. It's even possible that some of the stakeholders (whales with thousands of BTC) occasionally deliberately induce crashes for exactly that purpose.
Disclosure - I made up the dog.
Point being that the scarcity argument of bitcoin is on its own not persuasive.
I used the cheeky example of dog poop because I though it was cute but I guess it was"too cute" and obscured the point.
Almost ironically, having a deflationary system is something one would really like to avoid if you thought about it. It only rewards hoarding. The king, with his hoard of gold, only grow's richer by the year. As long as he is cash flow positive, the supply upon which the peasants rely on to trade shrinks and therefore the value of each grain increases.
I, for one, don't think this system is one we should be rushing to return to.
No physical currency can be divided into 10 million pieces, no one has a crystal ball.
If one year an apple costs 2 gold coins, but next year, that same apple costs only 1 gold coin - this would be deflation. I'm still trading gold coin(s) for an apple (fungible), it's just that the currency itself got stronger against the asset I wanted to purchase.
The currency (or asset) will continue to outperform the dollar or any fiat currency because it is setup that way to scale inversely and inverted-like through the magic of fungibility.
No one no where ever created a means of trade accurate to the ten millionth. Go look it up I’ll wait.
Just because something scales inversely to your currency that doesn’t make it a ponzi, it makes it mathematically and theoretically possible; as the market itself has proven for nearly a decade.
If millennials invest in btc before boomer pensions get in, it’ll be a needed transfer of wealth.
If there’s a deflationary asset wave, each person is incentivized to get in early. Which I think is what is happening.
Although I think one huge hack or whale unloading could drop the trust in Bitcoin for years.
Incidentally, I hear that there are all these forks and clones of BTC, many of which have strictly limited supply. So, they are also valuable long term investments, I assume?
Disclosure: I think cryptos are this generation’s baseball cards. I have exposure to companies that make money trading cryptos and selling services to crypto investors.
Yes, that's the deal with money, which incentivises you to either spend it or invest it in productive (unlike BTC) enterprises. As it happens, inflation has been very low, arguably too low in the last decade+.