Bitcoin in 3-fund indexed portfolio?

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kayanco
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Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 12:36 pm

Hi all,

Over time I've come to respect and value your collective knowledge and willingness to discuss and help each other understand stuff.

Based on my poor (and likely flawed) understanding of the actual reasons behind the 3-fund portfolio or index investing in general, I want to discuss if Bitcoin can/should be included in a broad indexed portfolio.

Points of discussion:

1.

I believe one of the reasons for including bonds and international is that they are supposed to have low correlation with each other (at least in theory). I've read that Bitcoin has low correlation with stocks and bonds. So would this be a reason to include Bitcoin in a portfolio?

(To be clear, I'm not asserting that Bitcoin has a low correlation. It's just something I came across. My question in other words is, assuming that it has a low correlation, would it then be a good idea to include it?

2.

Another feature/benefit of a total market index that I've read about, is that is gives you some exposure to a future blockbuster company. Let's say there's a low priced company today that goes big in the future. Holding an index would ensure some share of that. And the reverse. If a single company goes bust, the loss would be limited.

So does this line of reasoning imply holding bitcoin? If it becomes even bigger (as speculated), holding some % of it in a portfolio would give some portion of that bounty. But if it turns out to be a digital Tulip, the loss wouldn't be catastrophic.

3.

Nassim Taleb's barbell concept.

Where I believe he recommends some 90% investment in sometime safe, and 10% risky.
Can Bitcoin/crypot-currency be in that 10%? That is, 90% of portfolio = 3-fund portfolio, and 10% = Crypto-currency (or any other risky combination, e.g. 5% Crypto, 5% Biotech, etc, etc.). Would this be an implementation of his barbell concept? If not, please explain why.

Please share your thoughts/critique.
My aim is not to say that this is a good idea. If it's a bad idea, I'd like to understand why.

Thanks.

Fclevz
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Fclevz » Thu Sep 07, 2017 12:48 pm

At its core, Bitcoin is simply a currency.

You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever. Is Bitcoin really any different, other than its decentralized nature?

Sure, the 'price' fluctuates a lot, but that just seems to be speculation and implies that it's actually a poor currency, since a currency, or store of value, is generally preferred to be stable.

Chuck
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Chuck » Thu Sep 07, 2017 12:58 pm

Bitcoin is a currency. So if there is some portfolio design that uses "foreign" currency as a component, then Bitcoin can sooort of aaaalmost be a legitimate choice. It's pretty volatile, but there you go. My target asset allocation does not include currency (other than US Cash) so expanding my AA to include cryptocurrency is not part of my plan.

If you were looking for a Bogleheadish way to invest in cryptocurrency, you should take into account that there are a multitude of different coins. Here are some, and their market caps as of today:
  • Bitcoin, $76B
  • Etherium, $31B
  • BCC, $11B
  • Ripple $9B
  • Litecoin $4B
  • etc...
So, if you wanted to invest in cryptocurrency in general, you'd probably want to weight your investment according to the proportions of the cryptocurrency market in general. You would do this for all the same reasons you would have a 500 fund, or total market fund if you want to invest in stocks. If Bitcoin crashes, and/or some new coin rockets up, you'd want to be in on that.

Chuck
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Chuck » Thu Sep 07, 2017 12:58 pm

Fclevz wrote:
Thu Sep 07, 2017 12:48 pm
At its core, Bitcoin is simply a currency.

You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever.
Ah, you beat me to it.

Whakamole
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Whakamole » Thu Sep 07, 2017 1:12 pm

kayanco wrote:
Thu Sep 07, 2017 12:36 pm
I believe one of the reasons for including bonds and international is that they are supposed to have low correlation with each other (at least in theory). I've read that Bitcoin has low correlation with stocks and bonds. So would this be a reason to include Bitcoin in a portfolio?

(To be clear, I'm not asserting that Bitcoin has a low correlation. It's just something I came across. My question in other words is, assuming that it has a low correlation, would it then be a good idea to include it?
I don't think that's a de facto good reason to include it. Reasons to include bonds and international stocks are not purely based on correlation; I hold international because I believe in the "buy the haystack" approach for stocks, for instance.. I also don't think cryptocurrency has been around long enough for us to determine its correlation with stocks and bonds; Bitcoin came into being around 2009, so we haven't seen its performance during a bear market for stocks - exactly the time you'd want that low correlation to pay off.
Another feature/benefit of a total market index that I've read about, is that is gives you some exposure to a future blockbuster company. Let's say there's a low priced company today that goes big in the future. Holding an index would ensure some share of that. And the reverse. If a single company goes bust, the loss would be limited.

So does this line of reasoning imply holding bitcoin? If it becomes even bigger (as speculated), holding some % of it in a portfolio would give some portion of that bounty. But if it turns out to be a digital Tulip, the loss wouldn't be catastrophic.
Bitcoin is a bit different than stocks. A stock represents a share in a company and future profits of that company. Bitcoin represents a portion of a fixed pie; it can't "make money" because that is not its purpose. It's a bit more like a commodity, only there is a limited amount of the commodity, and the commodity has no commercial use (unlike, say, precious metals - silver, gold, and platinum do have industrial uses that cause supply to be depleted in the absence of mining.)
Nassim Taleb's barbell concept.

Where I believe he recommends some 90% investment in sometime safe, and 10% risky.
Can Bitcoin/crypot-currency be in that 10%? That is, 90% of portfolio = 3-fund portfolio, and 10% = Crypto-currency (or any other risky combination, e.g. 5% Crypto, 5% Biotech, etc, etc.). Would this be an implementation of his barbell concept? If not, please explain why.
That's not really the barbell - the 10% isn't "risky", it's betting on low probability events that have a high payoff. Too many people are betting on Bitcoin for a subsequent price rise to be a "black swan." I believe he used options for that part of the barbell, but he does talk about it in his books.

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 2:15 pm

Fclevz wrote:
Thu Sep 07, 2017 12:48 pm
At its core, Bitcoin is simply a currency.

You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever. Is Bitcoin really any different, other than its decentralized nature?

Sure, the 'price' fluctuates a lot, but that just seems to be speculation and implies that it's actually a poor currency, since a currency, or store of value, is generally preferred to be stable.
Thanks for replying. It does claim to be a currency, but I believe the governments treat it as a commodity.

Chuck
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Chuck » Thu Sep 07, 2017 2:50 pm

kayanco wrote:
Thu Sep 07, 2017 2:15 pm
Thanks for replying. It does claim to be a currency, but I believe the governments treat it as a commodity.
Either way, it's an asset that doesn't claim to produce interest or dividends. So your only hope for capital gains is that it is generally accepted as a useful "thing" by more and more people. Which, BTW, I'm not claiming is the "greater fool' theory. If it becomes more useful to more people, then of course it should become more valuable.

But if that is your intent, it is pretty much the textbook definition of speculation, right?

alex_686
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Re: Bitcoin in 3-fund indexed portfolio?

Post by alex_686 » Thu Sep 07, 2017 2:57 pm

kayanco wrote:
Thu Sep 07, 2017 2:15 pm
Thanks for replying. It does claim to be a currency, but I believe the governments treat it as a commodity.
The government taxes it like a commodity, thankfully. The taxes levels on currency and commodities are similar, but the taxes on currencies are much more complex. To extend, the US government taxes gold as a commodity but many people treat it like a currency.

To echo what others have said, Bitcoin is not a economic productive asset. Like other commodities it will just sit there. No dividends, no projects that deliver value, etc.

mnaspbh
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Re: Bitcoin in 3-fund indexed portfolio?

Post by mnaspbh » Thu Sep 07, 2017 6:16 pm

kayanco wrote:
Thu Sep 07, 2017 12:36 pm
Hi all,

Over time I've come to respect and value your collective knowledge and willingness to discuss and help each other understand stuff.

Based on my poor (and likely flawed) understanding of the actual reasons behind the 3-fund portfolio or index investing in general, I want to discuss if Bitcoin can/should be included in a broad indexed portfolio.

Points of discussion:

1.

I believe one of the reasons for including bonds and international is that they are supposed to have low correlation with each other (at least in theory). I've read that Bitcoin has low correlation with stocks and bonds. So would this be a reason to include Bitcoin in a portfolio?

(To be clear, I'm not asserting that Bitcoin has a low correlation. It's just something I came across. My question in other words is, assuming that it has a low correlation, would it then be a good idea to include it?
Assuming that bitcoin has a low correlation (which is unclear), it's not necessarily true that adding an uncorrelated asset to a portfolio will improve returns--it's entirely possible to overdiversify to where expected returns are lower than the less-diversified portfolio. So, low correlation (if present) is not necessarily sufficient reason to add an asset to a portfolio.
kayanco wrote:
Thu Sep 07, 2017 12:36 pm
2.

Another feature/benefit of a total market index that I've read about, is that is gives you some exposure to a future blockbuster company. Let's say there's a low priced company today that goes big in the future. Holding an index would ensure some share of that. And the reverse. If a single company goes bust, the loss would be limited.

So does this line of reasoning imply holding bitcoin? If it becomes even bigger (as speculated), holding some % of it in a portfolio would give some portion of that bounty. But if it turns out to be a digital Tulip, the loss wouldn't be catastrophic.
A total market index fund can give you exposure to a future blockbuster company, and most importantly you do not have to try to guess what that company is ahead of time. Buying bitcoin in this context is assuming that not only will one of the thousand-plus existing cryptocurrencies turn out to be a blockbuster going forward, but that it's definitely bitcoin.
kayanco wrote:
Thu Sep 07, 2017 12:36 pm
3.

Nassim Taleb's barbell concept.

Where I believe he recommends some 90% investment in sometime safe, and 10% risky.
Can Bitcoin/crypot-currency be in that 10%? That is, 90% of portfolio = 3-fund portfolio, and 10% = Crypto-currency (or any other risky combination, e.g. 5% Crypto, 5% Biotech, etc, etc.). Would this be an implementation of his barbell concept? If not, please explain why.
In theory, any investment with the chance of a high payout and high risk could be the "risky" end of a Taleb-style barbell allocation--but the other side should be "hyperconservative" in his words. A 3-fund portfolio is not hyperconservative; it's not even particularly conservative under most circumstances. "hyperconservative" for Taleb meant "wouldn't make any money" which is definitely not what most three-fund portfolio holders are expecting! Even sector-specific stock allocations isn't really risky--he advocated using options or other leverage on top of that. In a 2015 Reddit AMA thread, see his response to being asked about practical advice for non-experts implementing a barbell strategy:
wrote:Only try to make money from business. That is what Fat Tony would say. The business you know best. Options can be a business but it takes 3-4 years to understand it. It is real compared to investing, more like insurance/actuarial science.
See also this past discussion on barbell strategies.

So, if you feel that you're already enough of an expert to have determined that options are an insufficient way to get enough risk potential on the risky end of the barbell, you could consider cryptocurrencies or such.

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Uncle Pennybags
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Uncle Pennybags » Thu Sep 07, 2017 6:24 pm

One can invest one's mad money any way one wants.

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Taylor Larimore
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Taylor Larimore » Thu Sep 07, 2017 6:51 pm

Based on my poor (and likely flawed) understanding of the actual reasons behind the 3-fund portfolio or index investing in general, I want to discuss if Bitcoin can/should be included in a broad indexed portfolio.
kayanco:

Try to beat the market and your quest may never end.
Warren Buffett: "There seems to be some perverse human characteristic that likes to make easy things difficult."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 8:07 pm

Whakamole wrote:
Thu Sep 07, 2017 1:12 pm

I don't think that's a de facto good reason to include it. Reasons to include bonds and international stocks are not purely based on correlation; I hold international because I believe in the "buy the haystack" approach for stocks, for instance.. I also don't think cryptocurrency has been around long enough for us to determine its correlation with stocks and bonds; Bitcoin came into being around 2009, so we haven't seen its performance during a bear market for stocks - exactly the time you'd want that low correlation to pay off.
I like your response, thanks for chiming in.
To follow up on the "buy the haystack" analogy, which I find useful, would Bitcoin be part of the haystack? What about Gold? Or does the total stock + US bond cover everything?
Bitcoin is a bit different than stocks. A stock represents a share in a company and future profits of that company. Bitcoin represents a portion of a fixed pie; it can't "make money" because that is not its purpose. It's a bit more like a commodity, only there is a limited amount of the commodity, and the commodity has no commercial use (unlike, say, precious metals - silver, gold, and platinum do have industrial uses that cause supply to be depleted in the absence of mining.)
That's not really the barbell - the 10% isn't "risky", it's betting on low probability events that have a high payoff. Too many people are betting on Bitcoin for a subsequent price rise to be a "black swan." I believe he used options for that part of the barbell, but he does talk about it in his books.
Very useful again, thank you.

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randomizer
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Re: Bitcoin in 3-fund indexed portfolio?

Post by randomizer » Thu Sep 07, 2017 8:08 pm

You could make a lot of money off Bitcoin, but it's speculation, not investment. Not for me.

Whakamole
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Whakamole » Thu Sep 07, 2017 8:20 pm

kayanco wrote:
Thu Sep 07, 2017 8:07 pm
Whakamole wrote:
Thu Sep 07, 2017 1:12 pm

I don't think that's a de facto good reason to include it. Reasons to include bonds and international stocks are not purely based on correlation; I hold international because I believe in the "buy the haystack" approach for stocks, for instance.. I also don't think cryptocurrency has been around long enough for us to determine its correlation with stocks and bonds; Bitcoin came into being around 2009, so we haven't seen its performance during a bear market for stocks - exactly the time you'd want that low correlation to pay off.
I like your response, thanks for chiming in.
To follow up on the "buy the haystack" analogy, which I find useful, would Bitcoin be part of the haystack? What about Gold? Or does the total stock + US bond cover everything?
I don't think gold is a great investment - one of the things that gold proponents used to say is that an ounce of gold would have bought you a good suit a few hundred years ago and it still would today. That may be true. Meanwhile an equivalent amount invested in stocks would have made you rich:

Image

Even bonds did better than gold.

I'd recommend reading Larry Swedroe's book on alts. It doesn't cover some of the newer things like crypto or peer-to-peer lending, but it does cover a lot of other investments. I'll spoil his results for you: most of them are not very good. My personal conclusion is that nothing has changed; you've got equity (stocks), you've got debt (bonds), and then there are a bunch of things that people try to sell you because it's good for them.

CodeMaster
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Re: Bitcoin in 3-fund indexed portfolio?

Post by CodeMaster » Thu Sep 07, 2017 8:22 pm

I found this video super interesting and useful and easy to understand.

If you do invest, use gemini.com or gdax.com , stay away from coinbase and their high hidden fees its the worst.

https://www.youtube.com/watch?v=eeZ4V2Ka40Y

Bitcoin is a currency but beauty comes from it being decentralized. i.e. no gov or banks or third party controls your money, its your money and your free to do what you want with it. It can transfer to anyone or anywhere in world instantly. The world is preparing to adapt to coins, one day youll be able to swipe a card and pay via coins easily.
Its not easy to do right now... but its already being developed.

What your do with it isnt tracked for audit etc so more and more poeople are buying and using it.

Government are starting to regulate it, including China, however they are having a hard time how since its a global currency, its like regulating the internet that isnt owned by any one country.

Of course coins comes with its own set of risks... the video explains it all briefly

:beer

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 8:26 pm

Chuck wrote:
Thu Sep 07, 2017 2:50 pm
kayanco wrote:
Thu Sep 07, 2017 2:15 pm
Thanks for replying. It does claim to be a currency, but I believe the governments treat it as a commodity.
Either way, it's an asset that doesn't claim to produce interest or dividends. So your only hope for capital gains is that it is generally accepted as a useful "thing" by more and more people. Which, BTW, I'm not claiming is the "greater fool' theory. If it becomes more useful to more people, then of course it should become more valuable.

But if that is your intent, it is pretty much the textbook definition of speculation, right?
I agree with you, I would consider it speculation.

For myself I would even consider any individual stocks as speculation, because I don't know the underlying fundamentals. But an index fund would give an exposure to all the stocks, but not Bitcoin. Which is partly why I made this post to understand if it's justified to get into.

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 8:38 pm

alex_686 wrote:
Thu Sep 07, 2017 2:57 pm
..
To echo what others have said, Bitcoin is not a economic productive asset. Like other commodities it will just sit there. No dividends, no projects that deliver value, etc.
Good reminder. This is a useful distinction which I hadn't thought of. I will try to keep this in mind.

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Uncle Pennybags
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Uncle Pennybags » Thu Sep 07, 2017 8:54 pm

kayanco wrote:
Thu Sep 07, 2017 8:07 pm
To follow up on the "buy the haystack" analogy, which I find useful, would Bitcoin be part of the haystack? What about Gold? Or does the total stock + US bond cover everything?
Total stock has gold mines that go up and down with gold. Why would the haystack only hold one "coin" when there are so many?
CodeMaster wrote:
Thu Sep 07, 2017 8:22 pm
Bitcoin is a currency but beauty comes from it being decentralized. i.e. no gov or banks or third party controls your money...
Not true despite what they say. There is much people don't know that they should. "Hard fork"

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 9:18 pm

mnaspbh wrote:
Thu Sep 07, 2017 6:16 pm

Assuming that bitcoin has a low correlation (which is unclear), it's not necessarily true that adding an uncorrelated asset to a portfolio will improve returns--it's entirely possible to overdiversify to where expected returns are lower than the less-diversified portfolio. So, low correlation (if present) is not necessarily sufficient reason to add an asset to a portfolio.
mnaspbh, I liked reading your reply. You seem quite well-versed.

I'm sure there would be some mathematical model to simulate the returns based on adding/removing assets, and how much diversification is ideal, etc etc.
In theory, any investment with the chance of a high payout and high risk could be the "risky" end of a Taleb-style barbell allocation--but the other side should be "hyperconservative" in his words. A 3-fund portfolio is not hyperconservative; it's not even particularly conservative under most circumstances. "hyperconservative" for Taleb meant "wouldn't make any money" which is definitely not what most three-fund portfolio holders are expecting! Even sector-specific stock allocations isn't really risky--he advocated using options or other leverage on top of that. In a 2015 Reddit AMA thread, see his response to being asked about practical advice for non-experts implementing a barbell strategy:
wrote:Only try to make money from business. That is what Fat Tony would say. The business you know best. Options can be a business but it takes 3-4 years to understand it. It is real compared to investing, more like insurance/actuarial science.
See also this past discussion on barbell strategies.

So, if you feel that you're already enough of an expert to have determined that options are an insufficient way to get enough risk potential on the risky end of the barbell, you could consider cryptocurrencies or such.
Thanks for sharing the links. You seem to be well-read on this, I appreciate that.

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Thu Sep 07, 2017 10:19 pm

Taylor Larimore wrote:
Thu Sep 07, 2017 6:51 pm
Based on my poor (and likely flawed) understanding of the actual reasons behind the 3-fund portfolio or index investing in general, I want to discuss if Bitcoin can/should be included in a broad indexed portfolio.
kayanco:

Try to beat the market and your quest may never end.
Warren Buffett: "There seems to be some perverse human characteristic that likes to make easy things difficult."
Best wishes.
Taylor
Taylor, thanks for chiming in.

Yes, it does seem that it's foolish to try to beat the market. Which is why I'm a fan of your 3-fund portfolio and have come to respect it.

In this thread I'm not trying to beat the market but clarify a few things for my own understanding.

Your reply brings a question to my mind:
Does the market include the returns people get from Bitcoin?

I'm asking because if Bitcoin is considered part of the market, then yes, it would be net zero-sum.
But if it's not part of the market, then why is it not possible to beat the market? For example, if someone gets x% from the market but also bought something (could be anything, let's suppose a stamp) which increased in value, have they not beaten the market?

Please explain if interested. I'd appreciate it.

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Uncle Pennybags
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Uncle Pennybags » Fri Sep 08, 2017 3:51 am

kayanco wrote:
Thu Sep 07, 2017 10:19 pm
But if it's not part of the market, then why is it not possible to beat the market...
For everyone who beats the market beats someone. If you buy a "coin" someone had to sell the "coin". Why hold only one "coin" when they are so many? When the "shoe shine boy" is talking "coin" it's time to get out.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by oldcomputerguy » Fri Sep 08, 2017 5:08 am

In my world picture, an investment provides a return, either through capital appreciation, interest payments, dividends, or some combination of all three. The only gain Bitcoin provides is through capital appreciation (i.e. price increase), and that is completely and totally speculative. To my way of thinking it's in the same category as a lottery ticket. I don't hold Bitcoin or any other cyber-currency, and have no plans to. I consider "investing" in Bitcoin to be a pyramid scheme of immense proportions. Sooner or later, the last guy to buy shares is gonna take it in the back.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

AlohaJoe
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Re: Bitcoin in 3-fund indexed portfolio?

Post by AlohaJoe » Fri Sep 08, 2017 5:18 am

kayanco wrote:
Thu Sep 07, 2017 12:36 pm
Nassim Taleb's barbell concept.

Where I believe he recommends some 90% investment in sometime safe, and 10% risky.
It is worth pointing out that Taleb's barbell concept has arguably not worked out that well in the real world.
AQR Capital Management LLC calculates that black swan events need to happen, on average, at least once every decade for tail-risk strategies to break even.
According to data by CBOE Eurekahedge, those who invested in tail-risk funds when their performance peaked in September 2011 would have by now lost 55% of their money.
Tail-risk funds are down 6.3% this year through July, according to data group eVestment, and have lost money in four of the five preceding years.
London hedge fund giant Man Group launched the AHL Tail Protect Fund in 2009 and has lost 45% since then
From an article just this week about it....

objectivefunction
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Re: Bitcoin in 3-fund indexed portfolio?

Post by objectivefunction » Fri Sep 08, 2017 6:35 am

kayanco wrote:
Thu Sep 07, 2017 8:07 pm
I like your response, thanks for chiming in.
To follow up on the "buy the haystack" analogy, which I find useful, would Bitcoin be part of the haystack? What about Gold? Or does the total stock + US bond cover everything?
I think the "buy the haystack" analogy as applied to cryptocurrencies would mean buying into several coins on a market weighted basis. There are some issues with this. There are a lot of coins, and many of them are illiquid, so it would be impossible for an individual to buy into the entire crypto market without having to putting in more money than one should reasonably risk. This is not a regulated, efficient market, so you have to make some judgments about which coins are scams, which are trustworthy, which have some fundamental difference that makes them worth investing in (versus just being a bitcoin copycat). If you're willing to put the time in to research and all that, then you could make it work, but it's not quite the same as "buying the haystack" of stocks.

I think the counter argument from the 3-fund perspective is that if/when cryptocurrencies become regulated, stable, etc. they will be reflected in the stock market via companies that are involved, and there's no need to directly buy into cryptocurrencies. Just stay the course. One way that some of the value of cryptocurrencies is reflected in the stock market is that GPU manufacturers, like NVidia, are selling lots of GPUs as they are used for mining (https://www.coindesk.com/new-amd-graphi ... ning-boom/).

I think that covers what place that cryptocurrencies may or may not have in a 3-fund portfolio. I'm not trying to derail the thread, but for the purposes of understanding cryptocurrencies better, to better judge whether they are a good investment for you (or even an investment at all), I'd like to respond to some other things people have said.
alex_686 wrote:
Thu Sep 07, 2017 2:57 pm
To echo what others have said, Bitcoin is not a economic productive asset. Like other commodities it will just sit there. No dividends, no projects that deliver value, etc.
Valuing bitcoin is not simple, but neither is valuing a stock. When you value a stock you don't simply look at how much cash they have and say that is how much the company is worth. You try to judge what kind of product they have, how much market dominance, how much is that market growing, what are their profit margins, etc.

You can attempt to value bitcoin based on fundamentals, and I think the most reasonable approach would be based on the amount of energy that miners put into extending the blockchain. I think that may provide a floor to bitcoin's value. If it is not profitable for a miner to expend electricity (which costs money) and get paid for that effort in bitcoin, then bitcoin is unsustainable.

Beyond that, bitcoin is valuable to people because of its features: easy to store, cheap cross border transfer, smart contracts, efficient discovery of title (which people want to use to "digitize" things like real estate title). There are also risks: security risks, regulatory and legal risks, losing to a competing cryptocurrency, etc. There are several components to bitcoins price, part of it is definitely speculation because of the "momentum" it has, but part of it is that people value the features it provides (or the future potential of those features). You could try to bracket bitcoins future value by figuring that if/when it becomes ubiquitous as a medium of exchange, then it must capture some percentage of the value of fiat currencies, or if/when it becomes ubiquitous as a store of value, then it must capture some percentage of the market value of gold.

If you also don't own individual stocks, and all of this sounds complicated, time consuming, and speculative, then you should stick to the 3-fund portfolio.
CodeMaster wrote:
Thu Sep 07, 2017 8:22 pm
What your do with it isnt tracked for audit etc so more and more poeople are buying and using it.
The whole point of the blockchain is that everything you do with it, for all time, is publicly documented and auditable by anyone. Due to its pseudononymous nature, you can stay anonymous as long as no one can connect your real identity with your pseudonym. Once that is done, it becomes easier to start to unravel all of your transactions. Your real identity can be connected with your pseudonym as soon as you make some real world transaction (buy something that is shipped to your house, meet someone for an in-person exchange, etc.).

Rather than befuddling law enforcement, the blockchain can be very useful to them. Here is a panel discussion from Consensus 2015 with representatives from the FBI, IRS, and DoJ: https://www.youtube.com/watch?v=XStTO4Rj0zc. Here is a paper about some new techniques to match bitcoin transactions with advertisements for prostitution in order to help find victims of sexual trafficking: http://engineering.nyu.edu/press-releas ... rafficking. Here is a law firm that specializes in blockchain criminal and legal issues: http://www.steptoe.com/. Here are several blockchain analytics companies that cluster transactions, discover identities, etc.: Blockchain Intelligence Group (https://blockchaingroup.io/), Chainalysis (https://www.chainalysis.com/), CypherTrace (https://ciphertrace.com/). Here is a public/private alliance specializing in combating criminal activity on the public blockchain: Blockchain Alliance (http://blockchainalliance.org/). There are a lot of other resources about this if you google about.
Uncle Pennybags wrote:
Thu Sep 07, 2017 8:54 pm
CodeMaster wrote:
Thu Sep 07, 2017 8:22 pm
Bitcoin is a currency but beauty comes from it being decentralized. i.e. no gov or banks or third party controls your money...
Not true despite what they say. There is much people don't know that they should. "Hard fork"
It is useful to understand hard forks. They are not an easy thing to do. They require getting consensus from many other participants, and usually result from some contentious issue. If you own a cryptocurrency when it "hard forks" you end up owning both currencies after the fork, so they are not as dangerous as they sound. There has been a lot of fear about hard forks in the cryptocurrency community, but there's seems to be less fear these days. It's happened a couple of times and hasn't been as disastrous as some thought. After the fork the market can decide which was the "right" way to resolve the contention. You can throw your hat in the ring, or just own both. A hard fork does not necessarily mean that one side continues and one becomes worthless. In the case of both hard forks that have happened (ethereum classic and bitcoin cash) both sides of the fork continue to exist with their own market valuations.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Jeff Albertson » Fri Sep 08, 2017 7:33 am

As for investment planning, if you plan on always buying in on the current hot investment, the one that recently went up a lot, then you need to plan on working to a very old age, out of necessity.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Taylor Larimore » Fri Sep 08, 2017 7:40 am

kayanco wrote:
Thu Sep 07, 2017 10:19 pm
Taylor Larimore wrote:
Thu Sep 07, 2017 6:51 pm
Based on my poor (and likely flawed) understanding of the actual reasons behind the 3-fund portfolio or index investing in general, I want to discuss if Bitcoin can/should be included in a broad indexed portfolio.
kayanco:

Try to beat the market and your quest may never end.
Warren Buffett: "There seems to be some perverse human characteristic that likes to make easy things difficult."
Best wishes.
Taylor
Taylor, thanks for chiming in.

Yes, it does seem that it's foolish to try to beat the market. Which is why I'm a fan of your 3-fund portfolio and have come to respect it.

In this thread I'm not trying to beat the market but clarify a few things for my own understanding.

Your reply brings a question to my mind:
Does the market include the returns people get from Bitcoin?

I'm asking because if Bitcoin is considered part of the market, then yes, it would be net zero-sum.
But if it's not part of the market, then why is it not possible to beat the market? For example, if someone gets x% from the market but also bought something (could be anything, let's suppose a stamp) which increased in value, have they not beaten the market?

Please explain if interested. I'd appreciate it.
Kayanco:

I do not know anything about Bitcoin so I cannot answer your question.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bitcoin in 3-fund indexed portfolio?

Post by nisiprius » Fri Sep 08, 2017 8:09 am

The role of correlation is widely misunderstood... and wildly misrepresented. It's a very subtle thing. Always be alert: when an investment is represented as having "low correlation," even if it is true, the reason for bringing up correlation is often that the presenter can't claim anything better.

First, the claim itself always needs investigation, because correlations are wildly unstable and undergo sudden changes. For example, commodities were claimed to have low correlation with stocks around 2006, but suddenly developed high correlation just about the time they became popularized. It's not clear whether this is because correlations really change in some fundamental underlying way--it's believed that this happened with commodities--or whether it's just sampling error.

Second, even if correlations were perfectly stable, the way the statistics work it would take a very long data sample to establish the value of the correlation with any accuracy. This isn't remotely true of bitcoin. It hasn't existed long enough.

Third, low correlation in itself is not necessarily beneficial or valuable. It is only valuable as part of a trio of characteristics which are rarely found together. In order to improve the risk-adjusted return of a stock portfolio, the proposed diversified must itself have a return that is similar to stocks and a risk (in the sense standard deviation) that is similar to stocks. If and only if this is true, then adding the diversifier will have a small risk reduction effect. And notice that risk reduction is not necessarily valuable if it comes together with a decrease in return at the same time!

Finally, never forget that robust, persistent negative correlation is just about unheard of. Simply having low, even zero correlation occurs, e.g. between stocks and bonds. When we think of low correlation we are tempted to dwell on the times when stocks fall but the diversifier rises. However, low correlation means that we will also see times when stocks rise but the diversifier falls... and times when both rise... and times when both fall. Even when it works, the effect is not that strong, and shows up mostly when you do the math and compute the Sharpe ratio; it takes the form of an incremental improvement, not obvious to the naked eye in a growth chart.
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Re: Bitcoin in 3-fund indexed portfolio?

Post by queso » Fri Sep 08, 2017 8:29 am

I have a position in crypto that I keep on a Trezor. It's kind of cool and earns me nerd points. It's strictly play money. You would have to have nerves of steel to deal with the swings if it were an actual significant part of your AA. There is no way I could sleep at night if it were anything more than play money.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by laohan » Fri Sep 08, 2017 8:33 am

nisiprius wrote:
Fri Sep 08, 2017 8:09 am
The role of correlation is widely misunderstood... and wildly misrepresented. It's a very subtle thing. Always be alert: when an investment is represented as having "low correlation," even if it is true, the reason for bringing up correlation is often that the presenter can't claim anything better.

<snip>
This is a good post (including the part I didn't quote), thanks for contributing.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by avalpert » Fri Sep 08, 2017 9:09 am

The short answer is no, it has no place anymore than any other currency, commodity or collectible does. The more specific answers to your questions are:
kayanco wrote:
Thu Sep 07, 2017 12:36 pm
1.

I believe one of the reasons for including bonds and international is that they are supposed to have low correlation with each other (at least in theory). I've read that Bitcoin has low correlation with stocks and bonds. So would this be a reason to include Bitcoin in a portfolio?

(To be clear, I'm not asserting that Bitcoin has a low correlation. It's just something I came across. My question in other words is, assuming that it has a low correlation, would it then be a good idea to include it?
Low correlation alone doesn't make it something you should hold - the value of rocks have low correlations to stocks, doesn't mean you would want to include it in your investment portfolio.
2.

Another feature/benefit of a total market index that I've read about, is that is gives you some exposure to a future blockbuster company. Let's say there's a low priced company today that goes big in the future. Holding an index would ensure some share of that. And the reverse. If a single company goes bust, the loss would be limited.

So does this line of reasoning imply holding bitcoin? If it becomes even bigger (as speculated), holding some % of it in a portfolio would give some portion of that bounty. But if it turns out to be a digital Tulip, the loss wouldn't be catastrophic.
No, there is a big difference between holding all publicly traded companies at their current market weights in order to capture the overall performance of public company performance (not missing out on the unexpected gainers) and holding some of every potential speculative asset out there just in case beanie babies make a comeback (financially speaking).
3.

Nassim Taleb's barbell concept.

Where I believe he recommends some 90% investment in sometime safe, and 10% risky.
Can Bitcoin/crypot-currency be in that 10%? That is, 90% of portfolio = 3-fund portfolio, and 10% = Crypto-currency (or any other risky combination, e.g. 5% Crypto, 5% Biotech, etc, etc.). Would this be an implementation of his barbell concept? If not, please explain why.
Taleb's 'risky assets' are ones that are known by the market to be highly risky and priced accordingly - with the expectation of total loss of principal. There is no way a speculation like bitcoins that has had the runnup it has can play that role - if anything at this point you would be buying downside risk not upside potential.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Uncle Pennybags » Fri Sep 08, 2017 9:45 am

objectivefunction wrote:
Fri Sep 08, 2017 6:35 am
A hard fork does not necessarily mean that one side continues and one becomes worthless.
I try to keep it simple and not get bogged down with charts and algorithms. This "hard fork" shows there is control by persons unknown. 99.9% of "coin" "investors" don't understand what they are investing in.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Tamalak » Fri Sep 08, 2017 10:18 am

No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Valuethinker » Fri Sep 08, 2017 10:28 am

Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design

- therefore if inflation in the USD is say 2% in the long run, Bitcoin should appreciate by 2% pa in the long run against the USD

- (another argument: to me somewhat circular because it requires that Bitcoin actually have value; that Bitcoin should rise in value with the cost of manufacturing it which is dependent upon hardware cost and electricity cost per kwhr)

I don't fully subscribe to this argument, for separate reasons:

- Bitcoin cannot serve as a store of value, currently, because it is too volatile. Thus even if it does rise against the USD by 2% p.a. at an underlying level, that is totally drowned out by the volatility

- practically, governments cannot allow Bitcoin to be a currency which allows transactions for things they wish to limit or prohibit - drugs for example, or in the avoidance of Chinese exchange controls

I therefore tend to see Bitcoin as another financial speculative asset, like gold. We are in a world of nearly negative real interest rates (arguably, negative) and thus negative cost of carry. That buoys speculative assets-- whether Condos in Vancouver (but they have utility-- you can live in that $1m condo (or rent it out for c. 1.5% of value p.a.) or Bitcoin. All things being equal, I think the long term investor is better off in gold- -where supply rises very slowly but there is broad agreement that the metal is valuable and can serve as a store of value (albeit a volatile one).

Perhaps Ethereum, which has more transactional utility, is a better cryptocurrency.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Tamalak » Fri Sep 08, 2017 12:13 pm

Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design
That doesn't fit with my (admittedly limited) understanding of Bitcoin. Bitcoin supply is designed to INCREASE slowly over time - you can 'mine' for Bitcoin by contributing processing power to Bitcoin transactions. So Bitcoin should experience some inflation, although I'm not sure what the rate would be.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by nisiprius » Fri Sep 08, 2017 12:23 pm

Tamalak wrote:
Fri Sep 08, 2017 12:13 pm
Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design
That doesn't fit with my (admittedly limited) understanding of Bitcoin. Bitcoin supply is designed to INCREASE slowly over time - you can 'mine' for Bitcoin by contributing processing power to Bitcoin transactions. So Bitcoin should experience some inflation, although I'm not sure what the rate would be.
No, the total number of bitcoins has a hard limit of 21 million. If there is enough processing power, it is possible to mine all 21 million or at least come very close to it, but not to exceed it. The rate of bitcoins mined per unit of processing power declines, literally exponentially. I guess in a very technical sense if, at some point in the future, 20 million have been mined, and it takes many, many years to mine the last million, you could argue that technically the supply is still increasing with time, but the point is that the total supply has a hard limit on it.

It's projected that 80% of all bitcoins will have been mined by the end of 2017.
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Re: Bitcoin in 3-fund indexed portfolio?

Post by Valuethinker » Fri Sep 08, 2017 12:39 pm

Uncle Pennybags wrote:
Fri Sep 08, 2017 10:38 am
Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
- unlike fiat currencies, the number of Bitcoins is finite by algorithm design
Do you also believe that "coins" can't be taken back and there is no control over the "coins"?
I believe that the monetary theory of inflation is both trivially true, and irrelevant in the modern economy. Because the velocity of money is what changes, and the financial system can create new types of money to innovate around any attempt by Central Banks to regulate money supply. This was the reason why Central Banks abandoned narrow Monetarism (arguably, they never believed it; it was "policy entrepreneurs" like Sir Alan Walters who persuaded Mrs. Thatcher that it should be implemented).

That said, have Central Banks in the post 1973 era ever deliberately shrunk the Money Supply? Or set a "hard limit" as to its upper bound?

Because Bitcoin does indeed set a hard limit to its upper bound.

As I said, someone wanted the source of inherent return, and I have tried to provide an explanation of what could be one, from the perspective of its advocates. I think there are so many other issues with the thing, that I am not sure it is relevant.

But in some equilibrium state, if Bitcoin was as useful in transactions and as a store of value as a national currency of a country without exchange controls and a good credit rating (Canada, say) then its exchange rate with the USD should appreciate by c. 2% p.a. (assuming that is the long run average USD inflation).

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Re: Bitcoin in 3-fund indexed portfolio?

Post by rmelvey » Fri Sep 08, 2017 3:08 pm

I think a small position can make sense if you are interested in the technology. I would make it no more than 10% of my portfolio and I would take it out of the stocks portion. It has low correlation which technically has risk reduction properties for portfolios, but it's SO volatile. I have 5% in crypto which feels right for me.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Fri Sep 08, 2017 3:46 pm

Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design

- therefore if inflation in the USD is say 2% in the long run, Bitcoin should appreciate by 2% pa in the long run against the USD

- (another argument: to me somewhat circular because it requires that Bitcoin actually have value; that Bitcoin should rise in value with the cost of manufacturing it which is dependent upon hardware cost and electricity cost per kwhr)

I don't fully subscribe to this argument, for separate reasons:

- Bitcoin cannot serve as a store of value, currently, because it is too volatile. Thus even if it does rise against the USD by 2% p.a. at an underlying level, that is totally drowned out by the volatility

- practically, governments cannot allow Bitcoin to be a currency which allows transactions for things they wish to limit or prohibit - drugs for example, or in the avoidance of Chinese exchange controls

I therefore tend to see Bitcoin as another financial speculative asset, like gold. We are in a world of nearly negative real interest rates (arguably, negative) and thus negative cost of carry. That buoys speculative assets-- whether Condos in Vancouver (but they have utility-- you can live in that $1m condo (or rent it out for c. 1.5% of value p.a.) or Bitcoin. All things being equal, I think the long term investor is better off in gold- -where supply rises very slowly but there is broad agreement that the metal is valuable and can serve as a store of value (albeit a volatile one).

Perhaps Ethereum, which has more transactional utility, is a better cryptocurrency.

Valuethinker, I'm glad you joined the conversation my friend, and shared your views. Very informative!

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Whakamole » Fri Sep 08, 2017 3:54 pm

rmelvey wrote:
Fri Sep 08, 2017 3:08 pm
I think a small position can make sense if you are interested in the technology. I would make it no more than 10% of my portfolio and I would take it out of the stocks portion. It has low correlation which technically has risk reduction properties for portfolios, but it's SO volatile. I have 5% in crypto which feels right for me.
Where are you getting the data that shows crypto has a low correlation to stocks?

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Tamalak » Fri Sep 08, 2017 4:08 pm

nisiprius wrote:
Fri Sep 08, 2017 12:23 pm
Tamalak wrote:
Fri Sep 08, 2017 12:13 pm
Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design
That doesn't fit with my (admittedly limited) understanding of Bitcoin. Bitcoin supply is designed to INCREASE slowly over time - you can 'mine' for Bitcoin by contributing processing power to Bitcoin transactions. So Bitcoin should experience some inflation, although I'm not sure what the rate would be.
No, the total number of bitcoins has a hard limit of 21 million. If there is enough processing power, it is possible to mine all 21 million or at least come very close to it, but not to exceed it. The rate of bitcoins mined per unit of processing power declines, literally exponentially. I guess in a very technical sense if, at some point in the future, 20 million have been mined, and it takes many, many years to mine the last million, you could argue that technically the supply is still increasing with time, but the point is that the total supply has a hard limit on it.

It's projected that 80% of all bitcoins will have been mined by the end of 2017.
Thanks, I didn't know that. What, then, will be the incentive for people to donate processing power once the bitcoin reward is negligible?

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Re: Bitcoin in 3-fund indexed portfolio?

Post by objectivefunction » Fri Sep 08, 2017 4:19 pm

Tamalak wrote:
Fri Sep 08, 2017 4:08 pm
Thanks, I didn't know that. What, then, will be the incentive for people to donate processing power once the bitcoin reward is negligible?
After all the bitcoins have been mined (which is expected to happen in about 2140) miners will get paid to add blocks to the blockchain via transaction fees. Actually long before 2140 the block incentive will be pretty much nothing since it exponentially decays, as nisiprius said.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by objectivefunction » Fri Sep 08, 2017 4:21 pm

[deleted]
Last edited by objectivefunction on Fri Sep 08, 2017 4:24 pm, edited 1 time in total.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Fri Sep 08, 2017 4:23 pm

Fclevz wrote:
Thu Sep 07, 2017 12:48 pm
..
You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever. ..
I wanted to come back to this. Yes, you are right, I don't consider investing in other currencies. But why don't I?
Or why don't most people?

When I thought about your statement, I realized that the reason I don't do it, is convention and social norm, not because of some well thought out decision. I don't hear people doing it or recommending it.

So I'd like to ask, why not?

Today we can get 1.30 dollars for a pound, what if in 5 years it's $20 for a pound? So why is it not considered a good idea (at least on this forum) to hold a variety of currencies, in case one of them increases or the dollar weakens manifold?

I'm wondering from a diversification point of view. Because for stocks, the BH type of thinking doesn't bank on one or a few companies, because the future is unpredictable in terms of which company will thrive.

So why do we bank on a single currency, the dollar, and not diversify in currency?
If I were to guess, is it because we trust the US government that they will always keep the dollar strong, or that the US will remain a superpower and so it's currency will remain valued?

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Re: Bitcoin in 3-fund indexed portfolio?

Post by avalpert » Fri Sep 08, 2017 4:28 pm

kayanco wrote:
Fri Sep 08, 2017 4:23 pm
Fclevz wrote:
Thu Sep 07, 2017 12:48 pm
..
You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever. ..
I wanted to come back to this. Yes, you are right, I don't consider investing in other currencies. But why don't I?
Or why don't most people?

When I thought about your statement, I realized that the reason I don't do it, is convention and social norm, not because of some well thought out decision. I don't hear people doing it or recommending it.

So I'd like to ask, why not?

Today we can get 1.30 dollars for a pound, what if in 5 years it's $20 for a pound? So why is it not considered a good idea (at least on this forum) to hold a variety of currencies, in case one of them increases or the dollar weakens manifold?

I'm wondering from a diversification point of view. Because for stocks, the BH type of thinking doesn't bank on one or a few companies, because the future is unpredictable in terms of which company will thrive.

So why do we bank on a single currency, the dollar, and not diversify in currency?
If I were to guess, is it because we trust the US government that they will always keep the dollar strong, or that the US will remain a superpower and so it's currency will remain valued?
No, it's because that is the currency you do your spending in - unless you don't in which case you very well may hedge against specific currency movements. You don't care how many dollars it takes to buy a british pound unless you will be buying british pounds in the future.

The reason we don't advocate speculating in the currency market is because the expected return for any particular pair is zero and the rest is just gambling. There are of course people who do speculate in the currency market and some who have made quite the fortune doing so.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by objectivefunction » Fri Sep 08, 2017 4:29 pm

kayanco wrote:
Fri Sep 08, 2017 4:23 pm
Fclevz wrote:
Thu Sep 07, 2017 12:48 pm
..
You probably aren't considering 'investing' in Canadian Dollars or British Pounds or Euros or whatever. ..
I wanted to come back to this. Yes, you are right, I don't consider investing in other currencies. But why don't I? Or why don't most people?
If you're coming from an indexing perspective it is because many of the large multinational corporations that you own as a part of your index already work with and hold multiple currencies. So you get exposure to the movement of currencies indirectly.

Also, as has been mentioned, currencies do not produce profit and the only expectation of a return is based on a price increase, and people feel that is speculation, not investment.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by alex_686 » Fri Sep 08, 2017 4:39 pm

kayanco wrote:
Fri Sep 08, 2017 4:23 pm
So why do we bank on a single currency, the dollar, and not diversify in currency?
If I were to guess, is it because we trust the US government that they will always keep the dollar strong, or that the US will remain a superpower and so it's currency will remain valued?
Not really. The expected inflation adjusted return of currency is zero. It is a zero sum game. In order for you to win you need to anticipate a market move. i.e., you need to time the market and there needs to be a loser on the other side. Like gold, currencies are not economically productive assets. Plain currencies tend to lose value to inflation. Safe zero risk government bonds offer rates at about inflation.

Are you familiar with the concepts "Purchasing Power Parity" and "No Arbitrage Pricing". These concepts should help.

My new favorite book is David Chambers and Elroy Dimson "Financial Market History: Reflections on the Past for Investors Today". They cover historical currency speculation. Using the carry trade one can make steady abnormally high profits buy exporting the difference between strong and weak currencies. Note, this is actively trading, not diversification. The problem is that the occasional currency crisis which wipes people out.

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Re: Bitcoin in 3-fund indexed portfolio?

Post by Valuethinker » Fri Sep 08, 2017 4:40 pm

kayanco wrote:
Fri Sep 08, 2017 3:46 pm
Valuethinker wrote:
Fri Sep 08, 2017 10:28 am
Tamalak wrote:
Fri Sep 08, 2017 10:18 am
No, there's no place for bitcoin. Bitcoin is a currency. The average forward-looking expected return on a currency is zero. The average forward-looking expected real return on a currency is zero minus inflation.

Take a moment to feel good for lottery winners, and then move on.
The argument for Bitcoin on that basis is this:

- unlike fiat currencies, the number of Bitcoins is finite by algorithm design

- therefore if inflation in the USD is say 2% in the long run, Bitcoin should appreciate by 2% pa in the long run against the USD

- (another argument: to me somewhat circular because it requires that Bitcoin actually have value; that Bitcoin should rise in value with the cost of manufacturing it which is dependent upon hardware cost and electricity cost per kwhr)

I don't fully subscribe to this argument, for separate reasons:

- Bitcoin cannot serve as a store of value, currently, because it is too volatile. Thus even if it does rise against the USD by 2% p.a. at an underlying level, that is totally drowned out by the volatility

- practically, governments cannot allow Bitcoin to be a currency which allows transactions for things they wish to limit or prohibit - drugs for example, or in the avoidance of Chinese exchange controls

I therefore tend to see Bitcoin as another financial speculative asset, like gold. We are in a world of nearly negative real interest rates (arguably, negative) and thus negative cost of carry. That buoys speculative assets-- whether Condos in Vancouver (but they have utility-- you can live in that $1m condo (or rent it out for c. 1.5% of value p.a.) or Bitcoin. All things being equal, I think the long term investor is better off in gold- -where supply rises very slowly but there is broad agreement that the metal is valuable and can serve as a store of value (albeit a volatile one).

Perhaps Ethereum, which has more transactional utility, is a better cryptocurrency.

Valuethinker, I'm glad you joined the conversation my friend, and shared your views. Very informative!
Crypto currencies are one of those things one could throw into the portfolio for diversification purposes.

But you really cannot afford more than 1-2% because you could lose the lot, when the Chinese government, say, decides to ban Bitcoin-- or the world's law enforcement agencies do a deal to prevent its use in unauthorized activities*.

So one is just not going to be able to put enough in to make a difference.

Of the c-currencies, it appears to me that Ethereum is the most appealing, because of its support by major financial institutions. It can thus be made to fit into existing Anti Money Laundering and reporting protocols. However I have not studied this in any detail.

* my guess is they do that the way all these things are done. Any financial institution that handles Bitcoin, exchanges bitcoin for anything else, is prosecuted under existing anti terrorist and anti money laundering protocols. Throw in prison terms for executives of said institutions. Then there is no way for Bitcoin to get into the financial system.

kayanco
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Re: Bitcoin in 3-fund indexed portfolio?

Post by kayanco » Fri Sep 08, 2017 6:45 pm

alex_686 wrote:
Fri Sep 08, 2017 4:39 pm
..
My new favorite book is David Chambers and Elroy Dimson "Financial Market History: Reflections on the Past for Investors Today". They cover historical currency speculation ..
Thanks you for the book suggestion. Would you be able to recommend an audbile equivalent book I can listen to?

alex_686
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Re: Bitcoin in 3-fund indexed portfolio?

Post by alex_686 » Fri Sep 08, 2017 7:08 pm

kayanco wrote:
Fri Sep 08, 2017 6:45 pm
Thanks you for the book suggestion. Would you be able to recommend an audbile equivalent book I can listen to?
Due to dyslexic and convenience I consume a fair number of audio books. I can't recommend a equivalent book. It is not a text or technical book but it is dense and academic. In my experience this would not translate well into a audio format. Dense explanation, references to other academic papers, charts, tables, pages of citations at the end of each chapter.

The Economist podcast, subscription required, does run articles of comparable quality in their "Economics and Investment" section, but it is nowhere as complete.

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rmelvey
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Re: Bitcoin in 3-fund indexed portfolio?

Post by rmelvey » Fri Sep 08, 2017 7:16 pm

This article is a little bit older, but a very thorough analysis on correlation coefficients with major asset classes.
https://www.signalplot.com/what-is-bitc ... al-assets/

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