Bitcoins as investment

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boglerocks
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Bitcoins as investment

Post by boglerocks » Mon Jun 10, 2013 1:01 pm

[restarted thread, check post dates before responding - admin alex]

What's your take on this?

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Re: Bitcoins as investment

Post by nisiprius » Mon Jun 10, 2013 1:04 pm

Worth their weight in gold.
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Re: Bitcoins as investment

Post by nisiprius » Mon Jun 10, 2013 2:53 pm

Actually, assuming that was a straight question you deserve a better answer than a wisecrack. One of John C. Bogle's maxims is "Invest, don't speculate." People can and do make money by speculating, even wild speculation. And people do win the lottery, too. And every investment does contain an element of speculation. It's a question of how much.

Bitcoins are a completely speculative investment and have nothing to do with Boglehead-style investing. They fail two tests:

a) Don't invest in anything you don't understand. As of 2013, I think it is fair to say that nobody understands bitcoins.

b) Always understand how the investment is going to make money for you. If the only answer is "because it looks like it is going up," that's not an answer. That's the "greater fool" theory: I may be a fool to buy it, but I can make money because I can always sell it to a greater fool.

What is the source of value? Obviously, people will not agree on how much value anything has. But for a bond, the source of value is a known stream of future dollar payments, provided the issuer is capable of making them.

For a stock, it is a judgements based partly on non-speculative elements and hard numbers, like balance sheets and cash flows and dividends. And it is based partly on "castles in the air," belief in the future success of the company's business.

For gold, always controversial, there are no earnings, no dividends, nothing but a "castle in the air" the form of widespread belief that gold is valuable. However, it is a very widespread belief and there are centuries of historical records of gold prices to look at.

For commodity futures, also controversial, one can see that there is a useful service being performed in allowing producers to hedge future costs.

For bitcoins, their value is almost entirely speculation, almost entirely castles in the air. There is no large powerful authority that asserts that they have value. There are not huge numbers of people who believe that bitcoins have value--yet. They are a gamble that someday there will be.

It is hard to see what useful service is being performed. One can of course make up a castle-in-the-air story--speculative investments always have one. It is facilitating certain kinds of transactions for which traditional currencies don't serve well, for example. However, that too is problematical because some of those transactions are illicit. There is the looming danger that governments may interfere with bitcoins, for good reasons or for bad.

There is huge uncertainty about the tax status of any profits or losses made by speculating in bitcoins. And of course there is immediate past history of wild boom-and-bust events in bitcoin values.

Perhaps most serious, even if cryptocurrencies turn out to be hugely important someday, will bitcoins be that cryptocurrency? Automobiles are a successful technology, but are bitcoins like Ford or are they like Orient? Personal computers are an important technology, but are bitcoins like Apple or are they like MITS?

For all these reasons, bitcoins are almost a pure gamble, almost pure speculation. They are in the same category as penny stocks, or investing in Broadway musicals, or FOREX. They do not meet John C. Bogle's dictum, "Invest, don't speculate."
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Re: Bitcoins as investment

Post by boglerocks » Mon Jun 10, 2013 3:06 pm

It was a straight question and I appreciate your straight answer. Still I think it would be fun to dump in a small amount. I believe in the basic concept.

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Re: Bitcoins as investment

Post by ted123 » Mon Jun 10, 2013 3:15 pm

boglerocks wrote:It was a straight question and I appreciate your straight answer. Still I think it would be fun to dump in a small amount. I believe in the basic concept.
What is the basic concept that suggests they should be an investment? I understand (but don't really accept) the basic concept for holding them as a medium of exchange. I have no idea why any medium of exchange would make a good investment. Interestingly, the fact that people are treating them as an investment is making them totally unfit as a medium of exchange.

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Re: Bitcoins as investment

Post by nisiprius » Mon Jun 10, 2013 3:19 pm

boglerocks wrote:Still I think it would be fun to dump in a small amount....
Serious question: why would it be "fun," and can't you get more fun per dollar in some other way? I once attended a business meeting in Reno, at a hotel where the elevator bank was located in such a way that you could not get to or from your room without walking through a casino. The people I saw in the casino did not look to me like they were "playing," and did not look as if they were having "fun." They looked tense, stressed, and unhappy.

I understand the visceral thrill of risking more than you can afford to lose. The question is: can you actually get that thrill by risking an amount that you can afford?

It's your money and your life. I just always get puzzled by the use of the word "fun."
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Re: Bitcoins as investment

Post by Hub » Mon Jun 10, 2013 3:32 pm

ted123 wrote:I have no idea why any medium of exchange would make a good investment. Interestingly, the fact that people are treating them as an investment is making them totally unfit as a medium of exchange.
Well put. I could see believing in the concept, but I don't understand why the currency itself would be an investment.

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Re: Bitcoins as investment

Post by Random Musings » Mon Jun 10, 2013 4:02 pm

boglerocks wrote:It was a straight question and I appreciate your straight answer. Still I think it would be fun to dump in a small amount. I believe in the basic concept.
If you believe in the basic concept, why do you ask what our take is on it?

IMHO, it's a volatile currency, and I don't want my currencies that volatile.

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Re: Bitcoins as investment

Post by ogd » Mon Jun 10, 2013 4:18 pm

nisiprius wrote:a) Don't invest in anything you don't understand. As of 2013, I think it is fair to say that nobody understands bitcoins.
I don't think they're that hard to understand (I have a crypto background). The technical details and the resulting properties are fairly straightforward. As for predicting future value, to me it's reasonable to analyze bitcoin and come up with the conclusion that the valuation is entirely random. It still counts as understanding, much like quantum mechanics.

If you ask me, paying real dollars for solutions to toy mathematical problems which you then call a "currency" is a very, very silly thing to do.

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Re: Bitcoins as investment

Post by boglerocks » Tue Jun 11, 2013 1:22 am

What is the basic concept that suggests they should be an investment?
"because it looks like it is going up"?
I understand (but don't really accept) the basic concept for holding them as a medium of exchange. I have no idea why any medium of exchange would make a good investment. Interestingly, the fact that people are treating them as an investment is making them totally unfit as a medium of exchange.
I don't understand why a medium of exchange necessarily makes a bad investment.
Serious question: why would it be "fun," and can't you get more fun per dollar in some other way?
I think it's fun to invest an amount I can afford to lose in something I believe in.
I could see believing in the concept, but I don't understand why the currency itself would be an investment.
"because it looks like it is going up"?
If you believe in the basic concept, why do you ask what our take is on it?
I can't ask for your take if I believe in the concept?
If you ask me, paying real dollars for solutions to toy mathematical problems which you then call a "currency" is a very, very silly thing to do.
What prevents if from being a real currency? Government backing?

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Re: Bitcoins as investment

Post by Johm221122 » Tue Jun 11, 2013 3:22 am

i think it's fun to invest an amount I can afford to lose in something I believe in
What exactly do you believe?
because it looks like its going up?
Enron, World com, Lehman brothers etc....
John

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Re: Bitcoins as investment

Post by nisiprius » Tue Jun 11, 2013 5:29 am

boglerocks wrote:
What is the basic concept that suggests they should be an investment?
"because it looks like it is going up"?
...
I could see believing in the concept, but I don't understand why the currency itself would be an investment.
"because it looks like it is going up"?
Boglerocks, "because it looks like it is going up" is practically the definition of "speculation." It's related to the word "spectacles" and comes from speculare, to observe. You absolutely need to be clear on the difference between "speculation" and "investment." Speculate if you like, but do not kid yourself about what you are doing. bitcoins are not an investment.
If you ask me, paying real dollars for solutions to toy mathematical problems which you then call a "currency" is a very, very silly thing to do.
What prevents if from being a real currency? Government backing?
Yes. And if you don't think that matters, think again. Whether you like them or trust them, governments are big, powerful entities with armies and navies and the ability to make laws. There is a difference between "It's money because Australia says it is" and "It is money because Satoshi Nakamoto says it is." Sure, if you can get a few billion people to agree that bitcoins are money, they could be a currency whether a government backed them or not, and that could happen someday but it has not happened yet and it is wild speculation to predict that it ever will happen.

Please keep in mind: every speculative investment always has a colorful story attached to it, there is always a grain of truth to them. The storyline behind bitcoin is "currency." Please keep in mind that there are a lot of people who have a vested interest in selling you bitcoins--every person who owns them, but also the people who operate the exchanges. Their hope of profit consists in trying to convince people that it is a currency, and they will do everything they can to make it look that way. People are selling the dream.

Ever see the TV ads for the "Bradford Exchange" (do they still run them?) "I'm broadcasting live from the trading floor of the Bradford Exchange..." That's a company that makes collectible souvenir plates, and they are selling the dream of souvenir plate as investments by giving it the trappings of a stock or commodity exchange.

Look, bitcoins may turn out to be a fabulous speculation, they might turn out to be a bust. But they are speculation, not investment, and this forum is devoted to "investing advice inspired by Jack Bogle" who wrote "invest, don't speculate."
Last edited by nisiprius on Tue Jun 11, 2013 6:55 am, edited 3 times in total.
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Re: Bitcoins as investment

Post by chicagobear » Tue Jun 11, 2013 5:50 am

The Federal government will shut it down and you will lose all that you've invested.

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Re: Bitcoins as investment

Post by John3754 » Tue Jun 11, 2013 6:05 am

""because it looks like it is going up"?"

Performance chasing is a poor strategy.

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Re: Bitcoins as investment

Post by core5 » Tue Jun 11, 2013 6:12 am

One of the appeals is you can use it to buy illicit substances online without involving a real bank. Check out its relationship to "silk road."

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Re: Bitcoins as investment

Post by nisiprius » Tue Jun 11, 2013 7:26 am

core5 wrote:One of the appeals is you can use it to buy illicit substances online without involving a real bank. Check out its relationship to "silk road."
That is part of the bitcoin storyline. I think it is a big part of it. And I think it's a red flag.

"You can't cheat an honest man." When you think you have been handed a safe, convenient, riskless way to participate in illegal profit, watch out, as that is the common element in most con games. Madoff's clients believed he was front-running his brokerage accounts. Nigerian emails offer you rewards for helping to smuggle money.

What makes bitcoins different from a moderately successful but boring venture like PayPal (which doesn't call itself currency and isn't currency--but has a better claim to being a currency than bitcoins?) What makes it different from a dozen failed efforts to establish Internet currencies like millicent and BitPass (remember BitPass? No? I didn't think so).

Surely a big part of it is the pirate flag excitement, and the idea that it is bound to boom because there is drug money behind it, that you can profit from the booming underground economy simply by buying a few bitcoins.

Actually I am surprised that nobody is making the argument that "crime is a big part of the total economy so why wouldn't you want to have exposure to it--and bitcoin is the most practical way to get it?"

But let's be clear. It's irrelevant whether bitcoins are a good gamble, a bad gamble, or even possibly a scam. The point is that buying bitcoins, not because you need to purchase something with them, but because you hope to sell them later for more than you paid, is speculation.
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Re: Bitcoins as investment

Post by Valuethinker » Tue Jun 11, 2013 8:59 am

nisiprius wrote:But let's be clear. It's irrelevant whether bitcoins are a good gamble, a bad gamble, or even possibly a scam. The point is that buying bitcoins, not because you need to purchase something with them, but because you hope to sell them later for more than you paid, is speculation.
It is a good point.

If you buy bitcoins because they are a good and effective medium for the purchase of psycoactive (sp?) pharmaceuticals then this is a good reason to own them. Or perhaps for the purchase of stolen merchandise.

But if you simply own them because there is a near finite (slowly rising) supply then you are betting that someone else will want them in the future more than you do.

Hyman Minsky defined 3 phases in a financial bubble:

-when people borrow to buy things ('margin investors')
- when people borrow to buy things on an interest only basis (repayment is dependent on price rising or staying same) ('speculative investors')
- when people borrow to buy asset and can only pay the interest with more borrowing ('Ponzi investors')

(that's roughly it, Don't take me as gospel)

The last phase he called 'Ponzi borrowers'. Bitcoin in its bubblier moments feels like the last one.

I must admit, following G. Soros' comments to Congressional committee, that pension funds buying commodity futures has a feel of speculative investing. Pension funds don't have future consumption of these commodites to hedge. They are just buying in the hope of price appreciation (a little more complicated than that because pace Larry Swedroe, in 'contango' there is an inherent roll return if you buy the cash now and hold until the future--I think that is how it works).

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Re: Bitcoins as investment

Post by ogd » Tue Jun 11, 2013 11:58 am

boglerocks wrote:Serious question: why would it be "fun," and can't you get more fun per dollar in some other way?

I think it's fun to invest an amount I can afford to lose in something I believe in.
Sounds like wishful thinking to me. And yes, I understand the political undertones.
boglerocks wrote:If you ask me, paying real dollars for solutions to toy mathematical problems which you then call a "currency" is a very, very silly thing to do.

What prevents if from being a real currency? Government backing?
What's missing is inertia. An entire economy being priced in XYZ, wages and loans and contracts and the like, with the rise in competitiveness that would accompany a sudden repricing acting like a nice backstop. Or to put it another way, I like knowing that there would be consequences if my money dropped 10x in value, and every politician and central bank involved, and their trading partners, would be scrambling to fix it or prevent it in the first place. As it is, a 10x drop in bitcoin would mostly go unnoticed, with the direst consequence being (perhaps) some shootings in Mexico as drug trades get re-settled. So I wouldn't be comfortable holding bitcoing even overnight without a clear contract from somebody to buy it off of me for $X.

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Re: Bitcoins as investment

Post by boglerocks » Tue Jun 11, 2013 1:04 pm

Thanks for the info guys. I love getting the Bogle perspective here. Is *anyone* onboard with this? Any other open-source geeks / businessmen here?

How about this: ARMH (40.22) and GOOG (881.67) are going up. I'll post back in a while with the latest prices and then maybe I won't be such a crackpot. :)

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Re: Bitcoins as investment

Post by nisiprius » Tue Jun 11, 2013 1:28 pm

boglerocks wrote:Thanks for the info guys. I love getting the Bogle perspective here. Is *anyone* onboard with this? Any other open-source geeks / businessmen here?

How about this: ARMH (40.22) and GOOG (881.67) are going up. I'll post back in a while with the latest prices and then maybe I won't be such a crackpot. :)
Uh... I guess I don't think you get it about speculating vs. investing. You will get a more sympathetic reception in other forums. As for individual stocks, please read:

The 15-Stock Diversification Myth
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Re: Bitcoins as investment

Post by petercooperjr » Tue Jun 11, 2013 1:34 pm

I've been paying attention to Bitcoins since the end of 2010 or so. I'll re-post what I said 2 years ago:
petercooperjr wrote:I think that it won't be adopted in current form extremely widely since it's very hard for people to understand. (Then again, probably most people using US dollars don't understand how they're created and authenticated.) My best guess is that it'll stick around, and continue to have value among a niche group, much like other virtual currencies like World of Warcraft gold and Second Life Linden dollars, but I don't see it taking over the world economy anytime soon.

What I find most interesting about it, though, is the ideas that it has. That something as fundamental as our money could be run and controlled by the people, rather than by a central government, is a very powerful thought. As technology manages to connect people together more and more, it may make us rethink entirely how we construct and run our government and society. So, I see Bitcoin as a useful experiment in seeing how things might be one day, and giving people ideas to improve on.

But in terms of being an investment, only invest money that you're perfectly fine with losing, since there's almost nothing that could be higher risk as its value is purely that people see value in it. (Than again, its advocates would suggest that the same is true of the US dollar.)
Now, I've seen my play-money (mostly from CPU-mining when that was possible and moving my Second Life Lindens that I'd received for free) morph into something that suddenly has a significant value (It was a bit of an awkward conversation with my wife). When the bitcoin was staying over $100 I sold a bit more than half, and got some "free money". I'm keeping the rest in bitcoins for now because it's an interesting experiment, I do occasionally buy (legal!) things with it (it's cheaper for the merchant than credit cards), it does have the possibility of going up, and I probably have some irrational feeling that I'm now "playing with the house's money" since I already got a windfall out of it. But it could very well go to zero tomorrow, and I'd be just fine with that. If you want to put some in to participate in the experiment, I think that's great, but there's at least as much chance of it going down rather than up. Don't be surprised to lose all or most of your investment, or for it to be differently regulated and taxed than it is now, or for it only to be used among a small group of geeks like World of Warcraft gold is.

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Re: Bitcoins as investment

Post by ogd » Tue Jun 11, 2013 1:45 pm

petercooperjr wrote:What I find most interesting about it, though, is the ideas that it has. That something as fundamental as our money could be run and controlled by the people, rather than by a central government, is a very powerful thought.
It sounds good prima facie, but the past teaches us that dollar-weighted democracy is no democracy at all. ("Dollar" is a bit of a misnomer in this case, of course). Particulary when many of the "dollars" involved are rather shady.

I prefer trying to control my government with my one vote share. Maybe I'm an idealist.

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Re: Bitcoins as investment

Post by ted123 » Tue Jun 11, 2013 1:53 pm

I understand (but don't really accept) the basic concept for holding them as a medium of exchange. I have no idea why any medium of exchange would make a good investment. Interestingly, the fact that people are treating them as an investment is making them totally unfit as a medium of exchange.
I don't understand why a medium of exchange necessarily makes a bad investment.
Because people like their currencies to be stable. If bitcoins appreciate 5 percent by next week, then the pizza you bought this week is going to seem really expensive. You might decide that you'd rather keep the bitcoins next time and not buy the pizza. If bitcoins are depreciating, vendors may decide they're better off holding their stock and selling it later. And as bad as this is in transactions when the bill is paid in full at the time of the transaction, it's much worse when goods and services are being sold on credit (including on invoice).
Is *anyone* onboard with this? Any other open-source geeks / businessmen here?
The part about open-source geeks and businessmen is a different issue. For the reasons I mention above, a businessman using bitcoins probably shouldn't want bitcoins to be viewed as an investment vehicle. He should just want to trade goods and services at a fair (bitcoin) value, and to later trade the bitcoins he receives in return at fair value again for the goods and services he consumes, without worrying about whether he's also coming out on the short end of a speculative trade each time.

As for open-source geeks...I can see the interest in the technology behind bitcoins. I can imagine that in many ways, the value of the technology will far outlast the value of the bitcoins themselves. But you have to untangle those issues.

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Re: Bitcoins as investment

Post by SSSS » Tue Jun 11, 2013 2:04 pm

Bitcoin is a digital currency/commodity, not an investment. Bitcoin was never intended to be an investment. Speculators and misguided "investors" are destabilizing the value and slowing the adoption of Bitcoin as a currency. If you do not intend to use Bitcoin as a medium of exchange for goods and services, please stay away.

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Re: Bitcoins as investment

Post by boglerocks » Tue Jun 11, 2013 2:09 pm

I do want to say that I'm 100% OK with the value of Bitcoins dropping to zero, otherwise I wouldn't buy something so volatile. If I buy $1k worth, I could lose $1k, but if it hits, I could really be in the money. Plus it's something I want to participate in.

I know this stuff isn't Bogle-worthy and I apologize for my hereticin'. I have maximum respect for the Bogle way.

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Re: Bitcoins as investment

Post by nisiprius » Tue Jun 11, 2013 2:19 pm

Actually the part I don't get about the technology is that it doesn't seemed to be designed to be a stable store of value at all. Nothing in it would lead you to expect it to have a stable purchasing power. It's very clever that you can have distributed authentication without a central authority, and it's very clever that such a mechanism can impose a limit on the total supply, but you'd like a currency to have a stable value, and bitcoins don't even come close to providing that.

P.S. I just tried Googling "bitcoins as a stable store of value" just to see whether the bitcoin community has a pat answer to that, and the impression I get is that they acknowledge that bitcoins are not a stable store of value and can never be. For example, this person says "in that same article the reporter says I 'backed off from the notion that [bitcoin] can serve as a stable store of value[.]' But I don’t see how I can back off from a view I’ve never held." Admittedly I am not digging deeper to find out why he doesn't think it's important for a currency to be a stable store of value.
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Re: Bitcoins as investment

Post by boglerocks » Thu Nov 07, 2013 4:57 pm

The value of a Bitcoin has nearly tripled since I started this thread.

http://www.cryptocoincharts.info/period ... rket=btc-e

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Re: Bitcoins as investment

Post by abuss368 » Thu Nov 07, 2013 5:00 pm

Crazy. And if one losses money and wealth in it why would you be surprised. I have read a lot on this in the Wall Street Journal and I can not believe the craze and that folks are honestly "investing" in this "market".

I will stick to low cost index funds (and that does not include any low cost Bitcoins Total Market Index Funds either!!!).
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Re: Bitcoins as investment

Post by boglerocks » Fri Nov 08, 2013 7:36 am

Big business is getting behind Bitcoin, but you know better? I mean that in the most respectful way.

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Re: Bitcoins as investment

Post by IPer » Fri Nov 08, 2013 9:23 am

If you want to put your money with the kind of scum that currently run bitcoin (go ahead and try to make a purchase), go ahead. Personally I would much
rather invest my hard earned cash with real companies that have been managed for many years and drive the world
economies as opposed to some currency that tends to go against the grain and offer a utopian vision of the way things
are supposed to be but will never pan out. VTI, VYM, VDIGX, VTTHX, or if you want more fun VB and VO, these in my opinion will
offer much more fun for way longer than bitcoin.
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Re: Bitcoins as investment

Post by 3CT_Paddler » Fri Nov 08, 2013 9:35 am

boglerocks wrote:The value of a Bitcoin has nearly tripled since I started this thread.

http://www.cryptocoincharts.info/period ... rket=btc-e
Go back over your comments and instead of "Bitcoins" say "US Dollars" or "Euros". Can you imagine how speculative it sounds to tell someone that they need to hoard Euros because the price for Euros relative to dollars has tripled in the past year? "Investing" in Bitcoins is not investing, its speculation. It could work out beautifully for you, or it could leave those who are purchasing at these higher prices with large losses in the next couple years.

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Re: Bitcoins as investment

Post by petercooperjr » Fri Nov 08, 2013 4:35 pm

I think this article covers the current state of Bitcoin pretty well:
Everything you need to know about the Bitcoin ‘bubble’, by Timothy B. Lee

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Re: Bitcoins as investment

Post by boglerocks » Tue Nov 12, 2013 7:31 am

If you want to put your money with the kind of scum that currently run bitcoin (go ahead and try to make a purchase), go ahead.
That's an antiquated notion. Coinbase (http://www.coinbase.com) is 100% legit and has the banking industry behind them. Making a purchase there is easier than using PayPal.
Personally I would much rather invest my hard earned cash with real companies that have been managed for many years and drive the world economies
Nothing wrong with that.
Go back over your comments and instead of "Bitcoins" say "US Dollars" or "Euros". Can you imagine how speculative it sounds to tell someone that they need to hoard Euros because the price for Euros relative to dollars has tripled in the past year?
I made those comments *before* Bitcoin tripled. Key difference. :) I'm not even getting a pat on the back for that? Really?
"Investing" in Bitcoins is not investing, its speculation. It could work out beautifully for you, or it could leave those who are purchasing at these higher prices with large losses in the next couple years.
Absolutely true. I'm dollar cost averaging to smooth out the bumps. You can set up an automatic recurring buy at Coinbase and since they take 1% you can buy really small.

I can't resist. Here's a previous post of mine in this thread:
How about this: ARMH (40.22) and GOOG (881.67) are going up. I'll post back in a while with the latest prices and then maybe I won't be such a crackpot.
ARMH: 45.52
GOOG: 1,010.59

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Re: Bitcoins as investment

Post by investingdad » Tue Nov 12, 2013 7:49 am

Despite being an engineer and despite holding an MBA, I admit to *still* not understanding how Bitcoin cryptography works despite reading an Idiot's guide to Bitcoins online about 6 months ago.

Setting aside whatever I learned in all my finance and accounting classes when wrapping up my MBA back in 2000...the most important financial lesson I've learned I had the good fortune of learning at the tender age of 26 when the Tech bubble popped. I should NEVER invest in anything that I cannot easily understand.

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Re: Bitcoins as investment

Post by Valuethinker » Tue Nov 12, 2013 8:08 am

boglerocks wrote:Big business is getting behind Bitcoin, but you know better? I mean that in the most respectful way.
What big commercial enterprises have gotten behind Bitcoin?

We cannot count hedge funds, venture funds and their ilk. They are fundamentally derivative ('parasites' is a stronger word) ie the enterprise that makes things and sells them to people (and in fact, that takes deposits and lends them to other entities) is what you would call 'commercial'.

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Re: Bitcoins as investment

Post by Valuethinker » Tue Nov 12, 2013 8:15 am

investingdad wrote:Despite being an engineer and despite holding an MBA, I admit to *still* not understanding how Bitcoin cryptography works despite reading an Idiot's guide to Bitcoins online about 6 months ago.

Setting aside whatever I learned in all my finance and accounting classes when wrapping up my MBA back in 2000...the most important financial lesson I've learned I had the good fortune of learning at the tender age of 26 when the Tech bubble popped. I should NEVER invest in anything that I cannot easily understand.
Having also been burned in the dot com era, I can +1 this advice.

You don't need to understand the nitty gritty, but you have to have a clear idea of 1). what the company makes 2). what its inputs are 3). what its outputs are 4). who it sells them to. So even with a company like Oracle I 'get' that it designs and writes software (coding) then instals that in big corporates to manage their data, and charges upfront and ongoing licensing fees. Pfizer the same with drugs. Intel with chips Etc.

If this is not clear (and let's remember Google had no revenue or business model until it bought Adwords from someone else) then it may be an interesting company but it is in the realm of Venture Capital.

Similarly when you get a company like Facebook which struggles to amortize its amazing asset, you want to be careful about it. Google made lots of earnings even the year it floated. So did Microsoft.

Bitcoin? I can see the use, and it's mostly about untraceable financial transactions-- the black, or at least the grey economy. I cannot see how there is any fundamental value there, other than the value we place on it. A belief system if you will, rather than a currency.

Being a fan as I am of William Gibson, Walter Jon Williams, Bruce Sterling etc. I think that study of these Science Fiction authors (I look forward to Charlie Stross' explication because he is both a computer hack *and* an accomplished SF writer) probably helps me to better understand Bitcoin and its potential than a lot of what is out there. Didn't someone say the problem with modern SF is that we live in a Science Fictional world?

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Re: Bitcoins as investment

Post by Valuethinker » Tue Nov 12, 2013 8:19 am

boglerocks wrote:The value of a Bitcoin has nearly tripled since I started this thread.

http://www.cryptocoincharts.info/period ... rket=btc-e
And that is entirely a zero sum game.

There's no wealth or value being created here, just winners and losers. In that sense, it's close to gold as an investment, but gold has the advantage of 000s of years of history behind it, consumer demand in India and other countries, value as jewelry, stable reserve for Central Banks etc.

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Re: Bitcoins as investment

Post by Valuethinker » Tue Nov 12, 2013 8:26 am

nisiprius wrote:Actually the part I don't get about the technology is that it doesn't seemed to be designed to be a stable store of value at all. Nothing in it would lead you to expect it to have a stable purchasing power. It's very clever that you can have distributed authentication without a central authority, and it's very clever that such a mechanism can impose a limit on the total supply, but you'd like a currency to have a stable value, and bitcoins don't even come close to providing that.

P.S. I just tried Googling "bitcoins as a stable store of value" just to see whether the bitcoin community has a pat answer to that, and the impression I get is that they acknowledge that bitcoins are not a stable store of value and can never be. For example, this person says "in that same article the reporter says I 'backed off from the notion that [bitcoin] can serve as a stable store of value[.]' But I don’t see how I can back off from a view I’ve never held." Admittedly I am not digging deeper to find out why he doesn't think it's important for a currency to be a stable store of value.
Quite. It *could* be a means of exchange. But, generally, it's only superior if you are trying to avoid official controls and reporting-- drugs, tax evasion etc.

As a 'store of value' the other monetary function, it just doesn't work compared to say USD or EUR or CHF or NKR.

What we discovered in September 2008 is that 'near forms of money' are NOT equivalent to money ie cash. So Money Market Fund units, REPOs, short term corporate securities, Commercial Paper, etc. etc. ALL of these things can get severely reduced in value or cease to have monetary value if the financial system goes into a liquidity meltdown. Even bank deposits.

In September 2008 the only kind of money worth having was money. And then, if you had to deposit it somewhere, it had to be somewhere truly too big to fail (like the Fed, the Bank of England, HSBC).


I had friends, financial professionals, who moved hundreds of thousands of pounds into HSBC from Barclays, RBS etc. Ie from the world's top 20 banks into the world's number two bank. Or who went down the High Street, opening up accounts with every building society and depositing £30k in each (the insurance limit at that time)-- some of them opened up 10 or 20 bank accounts in 2 weekends.

THAT is what is called a liquidity run. And may I never see another in my lifetime. The sense of being on a rollercoaster and not being able to get off-- this is what astronaut training must be like.

The other appeal of Bitcoin is ideological. To the libertarian it must look like a dream come true. Therefore I believe it will get regulated. I penned a long post on this, but this is not the place for it.

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Re: Bitcoins as investment

Post by petercooperjr » Tue Nov 12, 2013 9:04 am

Valuethinker wrote:Bitcoin? I can see the use, and it's mostly about untraceable financial transactions-- the black, or at least the grey economy. I cannot see how there is any fundamental value there, other than the value we place on it. A belief system if you will, rather than a currency.
The use I see isn't the untraceableness of it, so much as the fast worldwide network. One can send any amount of money anywhere in the world, for a very low cost. Compared to Western Union or international bank wires, it could be a reasonable competitor. I think it could also compete with the likes of PayPal for receiving money for services online (I find it silly that nonprofits, say, trying to fundraise basically need to accept credit cards at a 2 or 3 percent fee, which is a system mainly designed for merchants that may be sending merchandise and credit fees are needed to cover fraud). If nothing else, it may be the incentive for other services to lower their fees to be able to compete, as there isn't as much of a monopoly anymore. If Bitcoin catches on, I think it will be more as a transfer-of-money-mechanism than a store-of-money mechanism.

And much like gold, it may continue to serve as some amount of save storage of value, even though it's only because some people believe that it will (And the foundation of all of our modern currency is that it only has value because people believe in it). I wouldn't bet on it continuing to serve as a good (if volatile) store of value, but at this point I wouldn't bet against it either. It could go to 0 tomorrow, or could go to the moon. Maybe somebody wants to put a little play money into it, but please don't put anything in it that you're not willing to lose.

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Re: Bitcoins as investment

Post by Valuethinker » Tue Nov 12, 2013 9:11 am

petercooperjr wrote:
Valuethinker wrote:Bitcoin? I can see the use, and it's mostly about untraceable financial transactions-- the black, or at least the grey economy. I cannot see how there is any fundamental value there, other than the value we place on it. A belief system if you will, rather than a currency.
The use I see isn't the untraceableness of it, so much as the fast worldwide network. One can send any amount of money anywhere in the world, for a very low cost. Compared to Western Union or international bank wires, it could be a reasonable competitor. I think it could also compete with the likes of PayPal for receiving money for services online (I find it silly that nonprofits, say, trying to fundraise basically need to accept credit cards at a 2 or 3 percent fee, which is a system mainly designed for merchants that may be sending merchandise and credit fees are needed to cover fraud). If nothing else, it may be the incentive for other services to lower their fees to be able to compete, as there isn't as much of a monopoly anymore. If Bitcoin catches on, I think it will be more as a transfer-of-money-mechanism than a store-of-money mechanism.
Thank you. An excellent point I had not considered.

*If* bitcoin creates utility value by disintermediating expensive intermediaries, well that is something the Internet is *very* good at doing: publishing, music companies, Hollywood, they are all feeling the bite.
And much like gold, it may continue to serve as some amount of save storage of value, even though it's only because some people believe that it will (And the foundation of all of our modern currency is that it only has value because people believe in it). I wouldn't bet on it continuing to serve as a good (if volatile) store of value, but at this point I wouldn't bet against it either. It could go to 0 tomorrow, or could go to the moon. Maybe somebody wants to put a little play money into it, but please don't put anything in it that you're not willing to lose.
I think that's a fair statement of it. If it has a lot of utility, then probably it becomes a store of value.

But the fixed supply makes it an object of speculation too.

People speculate on the Yen, the dollar, the Swiss franc even though they know there is a Central Bank capable of (and in the Swiss Central Bank case, has formally announced it as a policy) infinitely printing money to drive the value back down.

So Bitcoin with its fixed and finite supply is likely to be the subject of even more volatile swings in value.

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Re: Bitcoins as investment

Post by 3CT_Paddler » Tue Nov 12, 2013 10:16 am

Some people like to point out the 2-3% fees charged by companies for financial transactions, but they neglect to mention the cost of Bitcoin mining machinery and energy. I would bet its cost to the Bitcoin ecosystem is similar to the fees charged by credit cards. And don't forget that without exchanges (which are a weak point in the Bitcoin ecosystem, and are subject to the local laws), Bitcoin cannot function.

I think some of the ideas implemented by Bitcoin are valuable and interesting, but at the end of the day, Bitcoin itself looks like a speculative scheme designed to enrich early adopters.

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Re: Bitcoins as investment

Post by Ketawa » Tue Nov 12, 2013 10:26 am

The cost of bitcoin mining machinery and energy mostly only matters to the people trying to mine them. It isn't causing a drag on the overall system.

One of my coworkers is very "interested" in Bitcoin and already holds a bunch as a speculative investment. He's the type who bemoans the fact he didn't get in with a $500 investment when Bitcoins were priced in the cents. He purchased one of the ASICs used to mine bitcoins for about $7k and claims to mine about 1 Bitcoin per day. By his calculations a couple weeks ago, he was making $4500 per month in mining.

My response was to ask why the company is even bothering to sell the ASICs if they're that profitable? Why not just keep them and mine for itself, or sell them for a higher price? I guess as more of them come online, his mining yield is also going to decrease substantially.

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Re: Bitcoins as investment

Post by Epsilon Delta » Tue Nov 12, 2013 10:39 am

Ketawa wrote:The cost of bitcoin mining machinery and energy mostly only matters to the people trying to mine them. It isn't causing a drag on the overall system.
Transferring a bitcoin is not a simple matter of debiting one ledger and crediting another. The calculations performed by the miners are essential to bitcoins, you can't transfer a bitcoin without them. If the miners don't do the calculations for the mined bitcoins then the transfer agent(s) are going to need to do them themselves and that will require transaction fees.

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Re: Bitcoins as investment

Post by investingdad » Tue Nov 12, 2013 10:43 am

Ok, can somebody please provide a very high level explanation of the math behind the 'mining' that creates a bitcoin out of the ether? And maybe supplement that with an explanation as to why bitcoins cannot be copied and why they don't get 'lost'?

thanks!

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Re: Bitcoins as investment

Post by 3CT_Paddler » Tue Nov 12, 2013 11:19 am

investingdad wrote:and why they don't get 'lost'?

thanks!
They can definitely be 'lost' or wiped out.

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Re: Bitcoins as investment

Post by kenyan » Tue Nov 12, 2013 11:30 am

boglerocks wrote: I can't resist. Here's a previous post of mine in this thread:
How about this: ARMH (40.22) and GOOG (881.67) are going up. I'll post back in a while with the latest prices and then maybe I won't be such a crackpot.
ARMH: 45.52
GOOG: 1,010.59
I wouldn't get too excited about that. The overall market is up over 10% in that time as well, and both of these selections have had much wilder swings (as expected). Bitcoins are certainly doing well, but I don't feel the need to risk my future speculating on them. For a small portion of the portfolio, I suppose it could go in the 5% speculation bucket that some Bogleheads use, and I don't have a problem with that. I don't have such a bucket at this time, so I'm staying the course with my boring sliced-and-diced index fund portfolio.
Retirement investing is a marathon.

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Re: Bitcoins as investment

Post by Alex Frakt » Tue Nov 12, 2013 11:31 am

I'm often asked to explain bitcoins so I've been trying to come up with the best metaphor. To me the keys are that it's not legal tender (so it's not currency), has a finite supply (so it's not beanie babies), and no material value (not gold or precious metals). So far I've come up with collectible pre-19xx stamps or the sunken Yap stone coin http://www.npr.org/blogs/money/2011/02/ ... tone-money .

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Re: Bitcoins as investment

Post by SHB » Tue Nov 12, 2013 11:58 am

Or Tulips!

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Re: Bitcoins as investment

Post by Epsilon Delta » Tue Nov 12, 2013 12:10 pm

investingdad wrote:Ok, can somebody please provide a very high level explanation of the math behind the 'mining' that creates a bitcoin out of the ether? And maybe supplement that with an explanation as to why bitcoins cannot be copied and why they don't get 'lost'?

thanks!
You could do worse than read the original paper, http://bitcoin.org/bitcoin.pdf. It's only nine pages and the concepts are in the first 4 and a half and don't require much (if any) math.

The math does not create new bitcoins nor does the math guarantee a finite supply of them. These properties are simply the consensus of a majority of the "miners", and could be changed if enough people want to. What the math does guarantee (or at least tries to) is the integrity of a public ledger that records the ownership of each bitcoin, the integrity of each transaction (including transactions that create mined bitcoins) and ensures that the concensus is not violated.

The place to start understanding how the math bitcoins work is with the public ledger, not with mining.

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Re: Bitcoins as investment

Post by boglerocks » Wed Nov 13, 2013 7:13 am

It could go to 0 tomorrow, or could go to the moon. Maybe somebody wants to put a little play money into it, but please don't put anything in it that you're not willing to lose.
I agree 100%.

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