Larry Swedroe: Bitcoin & It’s Risks

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Random Walker
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Larry Swedroe: Bitcoin & It’s Risks

Post by Random Walker » Tue Dec 05, 2017 6:18 pm

http://www.etf.com/sections/index-inves ... nopaging=1

Larry Swedroe on the speculative nature of Bitcoin

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by bigred77 » Tue Dec 05, 2017 7:50 pm

I thought that article was excellent.

I have the same position when it comes to bitcoin: The technology behind it is ground breaking but it's without a doubt purely speculative at this time. You are buying it today with the hopes of reselling it for a higher price in the future. It is not a productive asset that has cash flows to analyze. I'm not telling people not to buy bitcoin, but just understand it's hugely volatile and participants in that market should really try to understand as many of the associated risks as possible.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Dead Man Walking » Tue Dec 05, 2017 8:21 pm

This article is an example of Larry Swedroe at his best - a clear, concise explanation of a speculative investment. Thanks for posting it.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by abuss368 » Tue Dec 05, 2017 8:22 pm

Thanks! Frankly I do not fully understand it yet. I do however have a movie to watch on Netflix. Hopefully that will help.
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by abuss368 » Tue Dec 05, 2017 8:23 pm

Will this be like the tulip bulb mania of the 1600s?
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Higman » Tue Dec 05, 2017 8:27 pm

Here are some technical risks to take into consideration:

https://isc.sans.edu/forums/diary/9+Fas ... ins/23071/

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Tue Dec 05, 2017 8:29 pm

Comes across as a faux-neutral but truly anti-bitcoin piece.

Swedroe twice pushes a "daily losses as high as 80%" bit. Does he mean this one flash crash?

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by arcticpineapplecorp. » Tue Dec 05, 2017 8:43 pm

thank you for posting it. that was one of the best yet concise articles I've read on the risks of bitcoin. Anyone considering speculating in the invisible stuff should definitely read that article beforehand.
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by technovelist » Tue Dec 05, 2017 8:51 pm

abuss368 wrote:
Tue Dec 05, 2017 8:23 pm
Will this be like the tulip bulb mania of the 1600s?
No.

It will be much bigger.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by ulrichw » Tue Dec 05, 2017 9:29 pm

I know Bitcoin fairly well, including at the technical level, and thought Swedroe did a decent job summing up the risks involved with Bitcoin speculation.

The only thing I'd possibly disagree with is: "Bitcoin is purely speculation, and smart investors don’t speculate."

I would qualify this as "smart investors don't speculate with a significant proportion of their funds."

I would guess that most smart investors speculate on something at some point. As long as they only speculate with "play money", they could still maintain their status as "smart."

As far as the tulip/bitcoin comparison - the value creation side of the equation is very similar, IMO, but the big issue with tulip bulbs is that it isn't very hard to create more tulip bulbs. Bitcoin, on the other hand, has a hard limit on supply.

A perhaps more apt comparison would be diamonds. Why have diamonds sustained such a high value?
Because they're beautiful? Cubic Zirconia and synthetic diamonds are basically indistinguishable from real diamonds, yet they're valued much lower. It seems that their value is just as artificial as Bitcoin's, yet they have sustained their value for quite a while.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Tue Dec 05, 2017 9:40 pm

To Swedroe's credit, the word "tulip" or "tulips" does not once appear in his article, despite his mentions of multiple historical asset bubbles.

I wonder if, like many others, he also acknowledges that Tulipmania is an exaggerated myth.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by abuss368 » Tue Dec 05, 2017 9:43 pm

technovelist wrote:
Tue Dec 05, 2017 8:51 pm
abuss368 wrote:
Tue Dec 05, 2017 8:23 pm
Will this be like the tulip bulb mania of the 1600s?
No.

It will be much bigger.
I recall our days in speculation. Now we are very happy with our Boglehead investment portfolio!
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by bberris » Tue Dec 05, 2017 10:36 pm

LS talks about illicit activity supported by bitcoin. Obviously there is some.

I've started to wonder whether bitcoin is actually useful for illegal activity. Sure you can trade it between thieves, but how do you actually launder significant amounts? It's not like you can convert your bitcoins at the casino.

And actual transactions in bitcoin (to buy something, not to trade for dollars) take hours, according to the few people who have tried.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Swelfie » Wed Dec 06, 2017 2:58 am

bberris wrote:
Tue Dec 05, 2017 10:36 pm
LS talks about illicit activity supported by bitcoin. Obviously there is some.

I've started to wonder whether bitcoin is actually useful for illegal activity. Sure you can trade it between thieves, but how do you actually launder significant amounts? It's not like you can convert your bitcoins at the casino.

And actual transactions in bitcoin (to buy something, not to trade for dollars) take hours, according to the few people who have tried.
Bitcoin is not nearly as useful for illicit activity as people think. There is a very good paper trail for the movement of it. However, it is easier to move than cash and more unstoppable. The government can intervene in a wire transfer or credit card charge, but once a Bitcoin transaction has been initiated, and it takes no third party to do so, it is nigh unstoppable. So if someone wanted to give a terrorist organization a million dollars and didn't mind being caught, it's a scary technology for government to deal with. For day to day drug money it's almost a blessing to them in it's transparency. "Mixing" coins is often thought to be a good method of covering up the transaction history, but there aren't many mixers out there and who is to say the ones that are out there aren't actually being run by the FBI? The mixer learns more about you than anyone while covering your tracks.

The term Bitcoin though is being used though interchangeably with the technology itself which is crypto currencies. Bitcoin is indeed expensive, slow and traceable. It is the only one that is that slow and expensive though due to artificial constraints (possibly direct market manipulation tactics). Among these others are things like Monero, which move securely in minutes between accounts, have low fees and neither the source, destination or amount of the transaction is discernable. These ARE useful for laundering, drug money and other illicit purposes. They are also very useful for legitimate purposes, being fungible and more trustworthy for the parties transacting. The government may indeed attempt to squash these, likely with limited success, but enough to keep their legitimate uses from being practical and there by driving down their value.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by triceratop » Wed Dec 06, 2017 3:26 am

It was too bad Larry didn't have a chance to fit in a quip about factor investing in bitcoin markets

Then we could return to our regularly scheduled Larry-article-arguments :)
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by mlebuf » Wed Dec 06, 2017 3:41 am

Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by mmcmonster » Wed Dec 06, 2017 6:19 am

mlebuf wrote:
Wed Dec 06, 2017 3:41 am
Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
My 11 year-old son's been listening in on my conversations regarding bitcoin and blockchain technology with some friends of mine. (They are considering doing some insider trading on one of the other cryptocurrencies since -- their belief -- it's not regulated by the SEC.) I'm pretty certain my son has a reasonable grasp of what bitcoin is and isn't.

Don't underestimate a 12 year-old. :D

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Valuethinker » Wed Dec 06, 2017 6:59 am

mmcmonster wrote:
Wed Dec 06, 2017 6:19 am
mlebuf wrote:
Wed Dec 06, 2017 3:41 am
Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
My 11 year-old son's been listening in on my conversations regarding bitcoin and blockchain technology with some friends of mine. (They are considering doing some insider trading on one of the other cryptocurrencies since -- their belief -- it's not regulated by the SEC.) I'm pretty certain my son has a reasonable grasp of what bitcoin is and isn't.

Don't underestimate a 12 year-old. :D
Wise words. At 12 I could give you a quite knowledgeable discussion of Soviet military strategy & technology. (I could not, now).

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Valuethinker » Wed Dec 06, 2017 7:29 am

Jonathan wrote:
Tue Dec 05, 2017 9:40 pm
To Swedroe's credit, the word "tulip" or "tulips" does not once appear in his article, despite his mentions of multiple historical asset bubbles.

I wonder if, like many others, he also acknowledges that Tulipmania is an exaggerated myth.
South Sea Bubble, which he does mention, has not been exaggerated. At least in terms of Londoners at the time-- the vast majority of the British population (Scotland had unified with England in 1707) would not have had any money with which to speculate.

I keep thinking of the Scotsman John Law and the Mississippi Bubble in France (which was also the invention of paper money)

https://en.wikipedia.org/wiki/John_Law_ ... f_the_West

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Valuethinker » Wed Dec 06, 2017 7:38 am

https://johnhcochrane.blogspot.co.uk/20 ... .html#more

Swedroe links to this blog, by John Cochrane, a highly respected academic on the subject of asset prices.

There's a sideswipe at behavioural theories. My own view is that you can have both-- rational speculation (Cochrane - speculative demand) AND noise traders.

But the Cochrane post is definitely worth reading as to what is most likely going on.

The thing is, as JC points out, you can have bubbles in things which are useful. For example houses are useful because they provide housing services (people live in them in non econ-speak). Much of the dot com era money raised was wasted, but some good businesses got funded, large amounts of cable infrastructure got built, etc. Bitcoin can be highly useful and in a valuation bubble.

(there's a truly troubling thing now. Venture Capital money has been soaring, but startup investing has been deteriorating for years. We are eating our seed corn-- it's the high risk startup stuff that kicks off each new wave of technological and business innovation. That, plus reductions in government funded university R&D, is truly concerning).

But add in speculative demand to the rational demand, and a shortage of supply, and you can get the vertical takeoff of prices. As when the Hunt Brothers temporarily cornered the silver market.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by NotWhoYouThink » Wed Dec 06, 2017 7:41 am

Jonathan wrote:
Tue Dec 05, 2017 9:40 pm
To Swedroe's credit, the word "tulip" or "tulips" does not once appear in his article, despite his mentions of multiple historical asset bubbles.

I wonder if, like many others, he also acknowledges that Tulipmania is an exaggerated myth.
Also to his credit, an apostrophe does not appear in his headline.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by BogleMelon » Wed Dec 06, 2017 8:56 am

As someone who speaks English as a second language, I always appreciate writers such as Swedroe who writes in an easy way, using simple phrases, plain English and bullet points..etc. Thanks for sharing the article. It was a good read.
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Top99% » Wed Dec 06, 2017 9:08 am

I found this article really interesting and the fact that you are own your own when it comes to securely storing your Bitcoins with no recourse if they get stolen should give many people pause. Hopefully some of the big players (Amazon for example) will step up and offer storage. I do find the technology behind crypto currencies fascinating.
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by wolf359 » Wed Dec 06, 2017 9:35 am

Top99% wrote:
Wed Dec 06, 2017 9:08 am
I found this article really interesting and the fact that you are own your own when it comes to securely storing your Bitcoins with no recourse if they get stolen should give many people pause. Hopefully some of the big players (Amazon for example) will step up and offer storage. I do find the technology behind crypto currencies fascinating.
Isn't that also true with physical cash? If I'm holding lots of physical cash, then I have no recourse if it gets stolen.

Storing your bitcoins in an exchange actually increases risk, because the exchange may get hacked. The fact that you can store it on a flash drive in a safe offline is actually a beneficial feature.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by scone » Wed Dec 06, 2017 10:03 am

Hello Larry, thanks for the article. I have a question. Could a "mega" bitcoin bubble and bust spill over into the real economy? How would the contagion be transmitted? Can and should investors protect themselves somehow?
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by lolbatross » Wed Dec 06, 2017 10:16 am

Thus, we cannot make any recommendation on whether or not purchasing bitcoin is a good investment. Nor is there any way to determine its value, as there are no cash flows to evaluate. In fact, we have to say that an investment in bitcoin should be considered purely a speculation at this point. That may change in the future. But unfortunately, when it comes to the future, our crystal balls remain cloudy.
I enjoyed this article for a number of reasons, but the largest was the humility in this summary. There is a huge difference between this no recommendation and the many who are outright calling it a bubble.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by randomizer » Wed Dec 06, 2017 10:24 am

Bitcoin is purely speculation, and smart investors don’t speculate.
That's my favorite bit.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by HomerJ » Wed Dec 06, 2017 10:52 am

wolf359 wrote:
Wed Dec 06, 2017 9:35 am
Top99% wrote:
Wed Dec 06, 2017 9:08 am
I found this article really interesting and the fact that you are own your own when it comes to securely storing your Bitcoins with no recourse if they get stolen should give many people pause. Hopefully some of the big players (Amazon for example) will step up and offer storage. I do find the technology behind crypto currencies fascinating.
Isn't that also true with physical cash? If I'm holding lots of physical cash, then I have no recourse if it gets stolen.

Storing your bitcoins in an exchange actually increases risk, because the exchange may get hacked. The fact that you can store it on a flash drive in a safe offline is actually a beneficial feature.
But we're talking about investment levels of money. Very few people keep $50,000 in cash in their house, for fear of theft or fire. Sure, if you have $120 in bitcoin, you can keep in on a flashdrive in your desk, just like you keep $120 in your wallet.

But if you are actually investing serious money in bitcoin, I see a rather big issue with the fact that you either have to keep $50,000 on a flash drive in your house, or you have to keep $50,000 on some shady Exchange where it could be hacked.

I don't understand why many people in the U.S. would prefer bitcoin over a FDIC-insured bank.
Last edited by HomerJ on Wed Dec 06, 2017 11:18 am, edited 1 time in total.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by garlandwhizzer » Wed Dec 06, 2017 10:58 am

Thanks for posting, Random Walker. Larry is highly intelligent, very experienced, and very knowledgeable and it is helpful to get his input on an issue where there is so much confusion and ignorance, Bitcoin. Personally, I've never really understood it and still don't fully, but I've suspected from its price action alone that it was a speculative bubble resting on nothing more solid than sentiment. Sentiment can reverse completely overnight. It has no book value and no profit stream. Investing in Bitcoin is more akin to gambling than investing.

Bubbles are defined in retrospect and during the inflation phase it is easy to believe: "This time is different." I have been attracted from time to time to certain speculative investments, but I always limit that very-high-risk/very-high-reward exposure to 4% of my portfolio value. If I were totally rational, I would never do it at all.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by ensign_lee » Wed Dec 06, 2017 11:15 am

As someone who believes in bitcoin, I think that was a well written article.

Kudos to you, Larry. Better researched than most of the articles I've run across.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Wed Dec 06, 2017 11:16 am

Be mindful of this false dichotomy: Is bitcoin a bubble, or a wise investment?

It can be both. The "bubble" can pop, the asset value can plummet rapidly, and then it can slowly rebuild to higher than pre-bubble levels.

Note this quote from Fred Wilson, famous venture capitalist and grad of both MIT and Wharton School, about the dot-com bubble:
“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases, and server structure. All that stuff has allowed what we have today, which has changed our lives … that’s what all this speculative mania built.”
Wilson toes the line well. He's a crypto investor, but he also believes that blockchain tech will not take off until the end of this decade.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by SEAworld9 » Wed Dec 06, 2017 11:36 am

mlebuf wrote:
Wed Dec 06, 2017 3:41 am
Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
i get this logic but we should flip the mirror. bitcoin aside.... do you really understand every single company and product, its SWOT, and your personal perspective on the future growth prospects for every organization you're invested in through index funds?

we say as bogleheads that we're smart because we're investors, not speculators. but this "investment" approach is to give all of our money to people we've never met, who will then put it into to companies, 99% of which we can't name.... which is all okay as long as they charge a low expense ratio. this is literally what we're doing.

to an outsider, it could be said this is less investing and more spray and pray. which may be better than something that's concentrated in a few equities or bonds, but i dont think the stance can be taken that one only invests in things they totally understand.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by SEAworld9 » Wed Dec 06, 2017 11:59 am

SEAworld9 wrote:
Wed Dec 06, 2017 11:36 am
mlebuf wrote:
Wed Dec 06, 2017 3:41 am
Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
i get this logic but we should flip the mirror. bitcoin aside.... do you really understand every single company and product, its SWOT, and your personal perspective on the future growth prospects for every organization you're invested in through index funds?

we say as bogleheads that we're smart because we're investors, not speculators. but this "investment" approach is to give all of our money to people we've never met, who will then put it into companies, 99% of which we can't name.... which is all okay as long as they charge us a low expense ratio. this is literally what we're doing.

to an outsider, it could be said this is less investing and more speculative spray and pray. which may be better than something that's concentrated in a fewer number of equities or bonds, but i dont think the stance can be taken that one only invests in things they totally understand.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Wed Dec 06, 2017 12:17 pm

SEAworld9 wrote:
Wed Dec 06, 2017 11:36 am
mlebuf wrote:
Wed Dec 06, 2017 3:41 am
Never invest in anything you don't understand or can't explain to a 12 year-old. Following this simple rule will save you from a world of hurt.
i get this logic but we should flip the mirror. bitcoin aside.... do you really understand every single company and product, its SWOT, and your personal perspective on the future growth prospects for every organization you're invested in through index funds?
I agree 100%. I call this a BogleMyth, along with stuff like Tulipmania and the definition of investing. I have shared these myths myself.

Every community has its cherished myths. They can even serve perfectly valid purposes, but it's important to acknowledge them as myths.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Valuethinker » Wed Dec 06, 2017 12:29 pm

Jonathan wrote:
Wed Dec 06, 2017 11:16 am
Be mindful of this false dichotomy: Is bitcoin a bubble, or a wise investment?

It can be both. The "bubble" can pop, the asset value can plummet rapidly, and then it can slowly rebuild to higher than pre-bubble levels.

Note this quote from Fred Wilson, famous venture capitalist and grad of both MIT and Wharton School, about the dot-com bubble:
“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases, and server structure. All that stuff has allowed what we have today, which has changed our lives … that’s what all this speculative mania built.”
Wilson toes the line well. He's a crypto investor, but he also believes that blockchain tech will not take off until the end of this decade.
Did Wilson have the same view of US Sub Prime Mortgage lending? Will the presence of lots of dedicated ASICs for bitcoin miners be a socially useful outcome? What about the pollution generated from all that electricity being burned?

Not all bubbles lead to socially or economically useful outcomes.

The problem we are struggling with here is the use of the term "investment" for something that apparently cannot produce cash flows for owners, ever.

*All* of the return in this investment is in the ability to sell it on to someone else in the future, at a higher price.

That's quite different from a stock (even the longest shot biotech stock will eventually pay dividends to owners, if its' products are successful), or a bond (by definition, certain cash flows).

In other words this looks a lot like say buying foreign currencies *but* you get (a bit) of interest on your deposit account (under normal conditions) when you buy & hold FX.

I will make this comment about investing, generally. If you are onto a good thing, your time is wasted here. You want to be out there making money from the good thing-- wedging up, going on margin to buy. You DO NOT want to be evangelizing here, because all you are doing is closing that window of undervaluation that you have identified.

Unless you think you will get a SELL signal when we buy into your arguments? :oops:

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Wed Dec 06, 2017 12:51 pm

Thus gold is not an investment? Interestingly, your position mirrors Jack Bogle's recent comments on bitcoin, at the Council on Foreign Relations. 42-second video of his comments: https://www.youtube.com/watch?v=QgrNYSQve8o .

Note how he mentions gold too, but he doesn't follow up as to whether or not gold is an investment. Is it?

Characterizing an investment as only something that can produce cash flows in the future is another BogleMyth. That's your personal definition of "investment", and numerous reference sources disagree with you:

Image

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I don't believe my time is wasted here. I think that exposing myself to opposing critical viewpoints (and yours certainly count) is essential to developing and growing my understanding of these issues.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by inittowinit » Wed Dec 06, 2017 1:34 pm

ulrichw wrote:
Tue Dec 05, 2017 9:29 pm
Why have diamonds sustained such a high value?
Because they're beautiful? Cubic Zirconia and synthetic diamonds are basically indistinguishable from real diamonds, yet they're valued much lower. It seems that their value is just as artificial as Bitcoin's, yet they have sustained their value for quite a while.
The inexplicably high price of diamonds is primarily due to a massive, 75-year marketing campaign by DeBeers.

https://www.theatlantic.com/internation ... ng/385376/

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by aristotelian » Wed Dec 06, 2017 2:01 pm

HomerJ wrote:
Wed Dec 06, 2017 10:52 am

I don't understand why many people in the U.S. would prefer bitcoin over a FDIC-insured bank.
You are assuming that people see Bitcoin as a cash currency. According to my back of the napkin research, 98% of the people in Bitcoin see it as a speculative investment, hoping that the price will increase and they will get rich quick. The 2% who do see Bitcoin as an alternative to FDIC insured savings are either criminals or people who are extremely mistrustful of the government.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by smesman » Wed Dec 06, 2017 2:51 pm

Jonathan wrote:
Wed Dec 06, 2017 12:51 pm
Characterizing an investment as only something that can produce cash flows in the future is another BogleMyth. That's your personal definition of "investment", and numerous reference sources disagree with you:
Jonathan, I think the main point is that Bogleheads basically embrace being average. They try to get the results the average investor should get with the least amount of risk & expenses as possible.

Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game. All profits that are made just go into the pockets of the traders.

With stocks however the odds are stacked in favor of the average person. This is because companies produce stuff and innovate. If you invested 40 years ago your buying power increased by a lot but also the "loan" you made to those companies has helped improve the products of the world.

Since currencies and commodities and such don't produce anything, the absolute best the average person can hope for is to get back the money they paid for it adjusted for inflation. So it would not be a really big money maker. It can still very useful. E.g. I'm happy to take care of old people now if that guarantees that I'll be taken care of when I'm old as well. But would you really trust bitcoin to perform that role, especially with its current volatility?

SEAworld9
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by SEAworld9 » Wed Dec 06, 2017 5:18 pm

smesman wrote:
Wed Dec 06, 2017 2:51 pm
Jonathan wrote:
Wed Dec 06, 2017 12:51 pm
Characterizing an investment as only something that can produce cash flows in the future is another BogleMyth. That's your personal definition of "investment", and numerous reference sources disagree with you:
Jonathan, I think the main point is that Bogleheads basically embrace being average. They try to get the results the average investor should get with the least amount of risk & expenses as possible.

Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game. All profits that are made just go into the pockets of the traders.

With stocks however the odds are stacked in favor of the average person. This is because companies produce stuff and innovate. If you invested 40 years ago your buying power increased by a lot but also the "loan" you made to those companies has helped improve the products of the world.

Since currencies and commodities and such don't produce anything, the absolute best the average person can hope for is to get back the money they paid for it adjusted for inflation. So it would not be a really big money maker. It can still very useful. E.g. I'm happy to take care of old people now if that guarantees that I'll be taken care of when I'm old as well. But would you really trust bitcoin to perform that role, especially with its current volatility?
i want to highlight this as one of the most honest, thoughtful posts so far in the subject in all of these threads. great stuff.

a couple more thoughts: as bogleheads, we're not in the initial rounds of funding or issuance of shares. so the companies we "invest" in aren't really taking our cash to put to work. rather we're buying a fraction of ownership after it's changed hands multiple times over, in hopes that we can sell it at a higher price later. this sounds a lot similar to the mechanics with bitcoin and many other things people invest in.

a lot of the basis for the support of fiat vs bitcoin is in the trust of the government and FDIC-insured accounts, etc. i like your example of "i'm happy to take care of old people now if that guarantees that i'll be taken care of when i'm old as well." on this note, as a 34 year-old i'm paying my full share to social security, but i can tell you that in none of my retirement projections are the social security inflows higher that $0. so do i trust bitcoin to have a role in the future? maybe, maybe not - i'm not so sure. do i trust the government to deliver me back a portion of all SS money that's taken out of all of my paychecks? maybe, maybe not - i'm not so sure on that either.

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HomerJ
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by HomerJ » Thu Dec 07, 2017 1:19 am

SEAworld9 wrote:
Wed Dec 06, 2017 5:18 pm
a couple more thoughts: as bogleheads, we're not in the initial rounds of funding or issuance of shares. so the companies we "invest" in aren't really taking our cash to put to work. rather we're buying a fraction of ownership after it's changed hands multiple times over, in hopes that we can sell it at a higher price later. this sounds a lot similar to the mechanics with bitcoin and many other things people invest in.
Companies have human capital adding to their value. There is input into the system. They build things or provide services and make profits. That's why the economy and stocks grow.

Bitcoin is more like diamonds or gold. Very different. Bitcoin price is purely a supply and demand thing. Most stocks represent more than that. There is actual revenue and increasing profits behind most stocks going up (Obviously there have been "bubbles" in individual stocks as well, as human emotion takes over and bids prices up way beyond what is reasonable).

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by hilink73 » Thu Dec 07, 2017 1:57 am

Random Walker wrote:
Tue Dec 05, 2017 6:18 pm
http://www.etf.com/sections/index-inves ... nopaging=1

Larry Swedroe on the speculative nature of Bitcoin

Dave
Thanks for the link to Larrys article.

More oil to the fire in the Bitcoin discussions. :-)

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by Jonathan » Thu Dec 07, 2017 2:39 am

smesman wrote:
Wed Dec 06, 2017 2:51 pm
Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game.
You are assuming that bitcoin is a zero sum game.

Bitcoin certainly hasn't been a zero sum game so far. As it stands, the average bitcoin investor has profited handsomely. In fact we've heard many positions describing genuine value that bitcoin and other cryptos bring to the financial ecosystem.

The truth is that, right now, you don't know whether bitcoin will turn out to be a zero sum game, and neither do I, or anyone else. It could be a zero sum game, or a textbook asset bubble, but it could also be a financial black swan event.

Rather than flatly declaring asset classes to be zero sum games, or bubbles, or Ponzis, or tulips - the more responsible and accurate answer that we can give as Bogleheads is: "I don't know".

objectivefunction
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by objectivefunction » Thu Dec 07, 2017 10:08 am

scone wrote:
Wed Dec 06, 2017 10:03 am
Hello Larry, thanks for the article. I have a question. Could a "mega" bitcoin bubble and bust spill over into the real economy? How would the contagion be transmitted? Can and should investors protect themselves somehow?
Not Larry, but here are a couple of recent articles that talk about the possibilities of systemic risk with respect to Bitcoin:

"Bitcoin Is an Emerging Systemic Risk"
https://www.coindesk.com/bitcoin-emergi ... emic-risk/

"Fed Vice Chair: Cryptocurrencies Threaten Financial Stability"
https://www.coindesk.com/fed-vice-chair ... stability/

You'll have to use your own discretion about whether there are actual merits to the arguments.
aristotelian wrote:
Wed Dec 06, 2017 2:01 pm
You are assuming that people see Bitcoin as a cash currency. According to my back of the napkin research, 98% of the people in Bitcoin see it as a speculative investment, hoping that the price will increase and they will get rich quick. The 2% who do see Bitcoin as an alternative to FDIC insured savings are either criminals or people who are extremely mistrustful of the government.
Several logical fallacies here. I don't see myself in your dichotomy at all. I believe we are in the middle of a long-term S-curve of adoption. There are fits and spurts on the way up, but eventually it will capture enough value and level out. Something like what is described here:

"Speculative Bitcoin Adoption/Price Theory"
https://medium.com/@mcasey0827/speculat ... ed48ecf7da

I liked Larry's article, and mostly agreed with it. Except for this:
First, despite the claims I hear that one of the reasons for buying bitcoin is that there is a limited supply, this just isn’t true.
This is a common (but false) objection to bitcoin. The supply limit is built into the bitcoin protocol. To change that would require thousands of bitcoin nodes to agree to the change, and making the change would actually create a new cryptocurrency. In the strictest sense, bitcoin's supply is limited, because changing the limit creates something new and different from what we now call bitcoin, and what we now call bitcoin can continue to exist. Now you could say that is just being pedantic, and it certainly is, but the reality is there is a lot of contention between people about what gets the right to be called "bitcoin." I don't think that making a supply change would go over well with people currently holding bitcoin, and something akin to the Ethereum/Ethereum Classic split would occur.

For someone holding bitcoin, if something like that were to occur (and it already has *twice* with Bitcoin Cash and Bitcoin Gold) such an event has little consequence to me. There are three outcomes: 1) everyone switches to the unlimited supply version of Bitcoin (let's call it BitcoinU), 2) no one switches to BitcoinU, 3) some but not all people switch to BitcoinU. No matter what the case, I will end up holding equal amounts of Bitcoin and BitcoinU (because that's the way forks work), and I can just ride it out. Either one side goes to zero or the other does or neither do (or both do :)). I'm not really worse off for the fork than I was before it.

The second problem with this argument is that there are already many, many other cryptocurrencies, and some that have even forked from bitcoin, and Larry admits as much in his article. Why hasn't one of these competitors already over taken bitcoin? There have been plenty of chances. The reason is because bitcoin is not just software, or some algorithm, or data on a bunch of nodes, bitcoin is an economic ecosystem with many players with many incentives and actual capital involved. After 9 years, Bitcoin makes up 63% of the cryptocurrency market, you can't just "make up a new bitcoin." Many have tried and failed.

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HomerJ
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by HomerJ » Thu Dec 07, 2017 10:14 am

Jonathan wrote:
Thu Dec 07, 2017 2:39 am
In fact we've heard many positions describing genuine value that bitcoin and other cryptos bring to the financial ecosystem.
I haven't heard of any... other than sending money to Venezuela (where it's illegal, and you might get the person you send it to jailed).

What exactly is bitcoin being used for NOW that makes it better than normal currencies? Paying hackers who ransom the pictures of your children on your PC?

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HomerJ
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by HomerJ » Thu Dec 07, 2017 10:16 am

objectivefunction wrote:
Thu Dec 07, 2017 10:08 am
After 9 years, Bitcoin makes up 63% of the cryptocurrency market, you can't just "make up a new bitcoin." Many have tried and failed.
Sure, you can. You just proved you can. 37% is a not insignificant percentage.

objectivefunction
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by objectivefunction » Thu Dec 07, 2017 10:44 am

HomerJ wrote:
Thu Dec 07, 2017 10:16 am
Sure, you can. You just proved you can. 37% is a not insignificant percentage.
After bitcoin, the next cryptocurrency by marketcap is Ethereum which has 9% of the cryptocurrency market. To be clear I'm not saying that bitcoin cannot be supplanted, I'm saying it is not *easy*.

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by JCE66 » Thu Dec 07, 2017 11:13 am

Bogleheads.....Here is the part I just don't get about Bitcoin. The article was great!

How do I convert Bitcoin to currency? Meaning, let's hypothetically assume I have 1+MM in Bitcoin....how do I actually convert this to dollars in my bank account that I can spend on whatever?

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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by technovelist » Thu Dec 07, 2017 11:23 am

JCE66 wrote:
Thu Dec 07, 2017 11:13 am
Bogleheads.....Here is the part I just don't get about Bitcoin. The article was great!

How do I convert Bitcoin to currency? Meaning, let's hypothetically assume I have 1+MM in Bitcoin....how do I actually convert this to dollars in my bank account that I can spend on whatever?
You have to sell it to someone else.
In theory, theory and practice are identical. In practice, they often differ.

wrongfunds
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Re: Larry Swedroe: Bitcoin & It’s Risks

Post by wrongfunds » Thu Dec 07, 2017 12:05 pm

can you sell/buy fractional bitcoin? does that mean, each bitcoin can have unlimited number of owners? how does that actually work? is the list of the owners and their fractional ownership information embedded inside the bitcoin byte data?

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