Bitcoin Return and Investing Ideas

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grayfox
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Bitcoin Return and Investing Ideas

Post by grayfox » Mon Sep 18, 2017 6:05 am

If you go to https://coinmarketcap.com/ and then click on Bitcoin, and then click on Historical Data, and then choose All-Time, you can see the daily bitcoin prices for everyday going back to April 28, 2013.

Bitcoin actually started in January 2009 when Satoshi Nakamoto released the open-source code. I don't know where to find Jan-2009 to April-2013.

Then you can copy and paste the table into a spreadsheet. Here is September 2017, so far:

Code: Select all

Date		Open	High	Low	Close	Volume		Market Cap

Sep 16, 2017	3637.75	3808.84	3487.79	3625.04	1818400000	60271600000
Sep 15, 2017	3166.3	3733.45	2946.62	3637.52	4148070000	52453500000
Sep 14, 2017	3875.37	3920.6	3153.86	3154.95	2716310000	64191600000
Sep 13, 2017	4131.98	4131.98	3789.92	3882.59	2219410000	68432200000
Sep 12, 2017	4168.88	4344.65	4085.22	4130.81	1864530000	69033400000
Sep 11, 2017	4122.47	4261.67	4099.4	4161.27	1557330000	68256000000
Sep 10, 2017	4229.34	4245.44	3951.04	4122.94	1679090000	70018100000
Sep 09, 2017	4229.81	4308.82	4114.11	4226.06	1386230000	70017200000
Sep 08, 2017	4605.16	4661	4075.18	4228.75	2700890000	76220200000
Sep 07, 2017	4589.14	4655.04	4491.33	4599.88	1844620000	75945000000
Sep 06, 2017	4376.59	4617.25	4376.59	4597.12	2172100000	72418700000
Sep 05, 2017	4228.29	4427.84	3998.11	4376.53	2697970000	69954400000
Sep 04, 2017	4591.63	4591.63	4108.4	4236.31	2987330000	75955500000
Sep 03, 2017	4585.27	4714.08	4417.59	4582.96	1933190000	75841700000
Sep 02, 2017	4901.42	4975.04	4469.24	4578.77	2722140000	81060600000
Sep 01, 2017	4701.76	4892.01	4678.53	4892.01	2599080000	77748400000
Then you can calculate the returns. There is no earnings or dividend, so the only return is capital return or loss from price changes. I calculated daily and 30-day returns.

Daily Returns

Code: Select all

Date		Daily Return
Sep 16, 2017	-0.34%
Sep 15, 2017	15.30%
Sep 14, 2017	-18.74%
Sep 13, 2017	-6.01%
Sep 12, 2017	-0.73%
Sep 11, 2017	0.93%
Sep 10, 2017	-2.44%
Sep 09, 2017	-0.06%
Sep 08, 2017	-8.07%
Sep 07, 2017	0.06%
Sep 06, 2017	5.04%
Sep 05, 2017	3.31%
Sep 04, 2017	-7.56%
Sep 03, 2017	0.09%
Sep 02, 2017	-6.40%
Sep 01, 2017	4.01%
Monthly Returns (30-day)

Code: Select all

Date		30-Day Return
Sep 16, 2017	-16.31%
Sep 15, 2017	-16.89%
Sep 14, 2017	-24.56%
Sep 13, 2017	-10.23%
Sep 12, 2017	1.41%
Sep 11, 2017	7.12%
Sep 10, 2017	12.94%
Sep 09, 2017	24.98%
Sep 08, 2017	26.52%
Sep 07, 2017	34.50%
Sep 06, 2017	36.05%
Sep 05, 2017	36.17%
Sep 04, 2017	30.23%
Sep 03, 2017	58.26%
Sep 02, 2017	63.25%
Sep 01, 2017	80.47%
These are theoretical returns with no trading costs. There would probably be Bid/Ask spreads and commissions if someone actually traded bitcoin. Maybe it is as much as 3 or 4 per cent? I don't really know. I know there are transaction fees to the bitcoin miner, which depends on the size of the transaction in bytes, when spending bitcoin.

Here are summary statistics for daily and 30-day return

Code: Select all

Stat	Daily Return	30-Day Return


MIN	-23.37%		-48.43%
MEAN	0.30%		12.26%
MEDIAN	0.19%		4.30%
MAX	42.97%		466.07%
SD	4.31%		46.99%
Thoughts? Ideas?
Any conclusions that can be drawn?

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nisiprius
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Re: Bitcoin Return and Investing Ideas

Post by nisiprius » Mon Sep 18, 2017 6:17 am

A late acquaintance of mine played the lottery regularly. Her daughter described this acquaintance as having a "gambling addiction" and said that she spent so much on lottery tickets that it affected her household budget. About four years before she died, she hit a high-six-figure jackpot. I'm not privy to her lifetime financial records, but I think it is almost certain that she got a higher internal rate of return on her lottery "investments" than I did in my Vanguard funds. When she got the jackpot, she elected the lump sum rather than the annuity; another choice I wouldn't have made myself, but it seems she was right about that, too.

A problem with hindsight is that of course you are always looking at the things that paid off spectacularly, whether it be bitcoin or Digital Equipment Corporation (intentional choice rather than Microsoft). In real life, the people who really made out were people who got in at a time when the "investments" were poorly known, obscure, hard to invest in--and looked like really bad ideas. Furthermore, the things that looked like bad ideas that hit the jackpot looked about the same as lots of things that looked like really bad ideas and really were.

The people who really profit from bubbles are the people who are able to get in early because they started them. I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.

In my opinion, the right question to ask is not "how would you have done if you'd invested in bitcoin in 2010." It is this: supposing you enjoy putting some of your money in speculative, near-gambling things like bitcoin. Suppose it is 2010 and you are casting around, seeking "opportunities" for stuff to risk your money on. What is the full range of opportunities that would have been open to you, and what are the chances you would have been able to identify and choose bitcoin rather than something else?

(Also, how many of the people who missed out on bitcoin, and fantasize that they would have invested in it if only, are about to lose their money on initial coin offerings in new cryptocurrency startups?)
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Re: Bitcoin Return and Investing Ideas

Post by AlohaJoe » Mon Sep 18, 2017 6:24 am

nisiprius wrote:
Mon Sep 18, 2017 6:17 am
I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.
Satoshi Nakamoto hasn't spent any of his bitcoin earnings since January 2009. It is all still in bitcoin. Due to how bitcoin works, everyone would know if he spent it. It would also likely breach his anonymous veil and let the world know who it is.

If Satoshi Nakamoto is fabulously rich, it isn't from bitcoin :)

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Re: Bitcoin Return and Investing Ideas

Post by Valuethinker » Mon Sep 18, 2017 6:27 am

nisiprius wrote:
Mon Sep 18, 2017 6:17 am
A late acquaintance of mine played the lottery regularly. Her daughter described this acquaintance as having a "gambling addiction" and said that she spent so much on lottery tickets that it affected her household budget. About four years before she died, she hit a high-six-figure jackpot. I'm not privy to her lifetime financial records, but I think it is almost certain that she got a higher internal rate of return on her lottery "investments" than I did in my Vanguard funds. When she got the jackpot, she elected the lump sum rather than the annuity; another choice I wouldn't have made myself, but it seems she was right about that, too.

A problem with hindsight is that of course you are always looking at the things that paid off spectacularly, whether it be bitcoin or Digital Equipment Corporation (intentional choice rather than Microsoft). In real life, the people who really made out were people who got in at a time when the "investments" were poorly known, obscure, hard to invest in--and looked like really bad ideas. Furthermore, the things that looked like bad ideas that hit the jackpot looked about the same as lots of things that looked like really bad ideas and really were.
The internet, and investing in internet companies, was the classic example of a good idea, not a bad idea.

However stock selection mattered, and so did timing. You made money on Netscape post IPO (I think). If you'd invested in Google at IPO, Facebook, Amazon, Ebay -- why you have made a lot of money. Apple was a dog for quite a long time, but you've made many x times your original investment. I think this is what Larry Swedroe is referring to with Small Cap Growth stocks, the right skew? i.e. the average expected return is negative (or below market anyways) but there are these "lottery ticket" stocks.

But if you'd invested in 1999 in say Ebay, AOL (Time Warner), Yahoo ... leading lights of the sector. Plus "safe" stocks like Dell, Cisco, HP, Intel, Microsoft, Lucent, Nortel -- a strategy of selling shovels in a Gold Rush, perhaps Worldcom, Global Crossing? -- you wouldn't have done that well (except for Microsoft). I know plenty of people who pursued precisely this "safe" strategy.

Disruption is now so well understood a concept that the likes of Facebook and Google buy up interesting early stage companies before they ever get to IPO. Instagram. WhatsAp. SNAP IPO anyone? That's not been a great one. Twitter?
The people who really profit from bubbles are the people who are able to get in early because they started them. I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.
And yet, like any gold rush, many failed. But I agree with the general principle.
Last edited by Valuethinker on Mon Sep 18, 2017 6:34 am, edited 1 time in total.

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Re: Bitcoin Return and Investing Ideas

Post by Valuethinker » Mon Sep 18, 2017 6:28 am

AlohaJoe wrote:
Mon Sep 18, 2017 6:24 am
nisiprius wrote:
Mon Sep 18, 2017 6:17 am
I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.
Satoshi Nakamoto hasn't spent any of his bitcoin earnings since January 2009. It is all still in bitcoin. Due to how bitcoin works, everyone would know if he spent it. It would also likely breach his anonymous veil and let the world know who it is.

If Satoshi Nakamoto is fabulously rich, it isn't from bitcoin :)
Perhaps he has gone into business with D.B. Cooper? ;-).


https://en.wikipedia.org/wiki/D._B._Cooper

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Re: Bitcoin Return and Investing Ideas

Post by Valuethinker » Mon Sep 18, 2017 6:33 am

grayfox wrote:
Mon Sep 18, 2017 6:05 am

These are theoretical returns with no trading costs. There would probably be Bid/Ask spreads and commissions if someone actually traded bitcoin. Maybe it is as much as 3 or 4 per cent? I don't really know. I know there are transaction fees to the bitcoin miner, which depends on the size of the transaction in bytes, when spending bitcoin.

Here are summary statistics for daily and 30-day return

Code: Select all

Stat	Daily Return	30-Day Return


MIN	-23.37%		-48.43%
MEAN	0.30%		12.26%
MEDIAN	0.19%		4.30%
MAX	42.97%		466.07%
SD	4.31%		46.99%
Thoughts? Ideas?
Any conclusions that can be drawn?
Thank you for this very interesting data.

I just can't see Bitcoin as an appropriate "asset". It has too many features of rank speculation aka gambling for me. And too many similarities to the dot com bubble (in terms of the hype, and the way the social epidemic seems to be spreading). Also I am too aware of monetary and banking conditions in China (in a general reading sort of awareness) and I see this as a symptom of same, and I can see the endgame for same.

You can do Contracts For Differences (CFDs) in the UK on cyber currencies. Thus, potentially, there's another way of making money on this.

The "selling picks and shovels to gold miners" strategy is, I think, Nvidia. And there's another play-- there was a poster here who had really done his/her homework-- another hardware play, can't think of it.

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Re: Bitcoin Return and Investing Ideas

Post by rmelvey » Mon Sep 18, 2017 6:40 am

Apart from the spectacular returns, which are unlikely to repeat themselves to the same degree, the near zero correlation with stocks/bonds/commodities is very attractive. Integration with the traditional finance sector is very slow and so I predict the low correlations to remain for a long time. Low correlation and high volatility is actually a very nice combination because a small % weighting can cause a material change in a portfolio's return profile. The best way to take advantage of this is by maintaining a fixed portfolio % and rebalancing, but this takes nerves of steel because rebalancing on the way down with Bitcoin is very difficult psychologically. However, when you rebalance systematically you are providing liquidity to a global market and bearing significant risk which I think will be rewarded over the long term.

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Re: Bitcoin Return and Investing Ideas

Post by McGilicutty » Mon Sep 18, 2017 6:56 am

grayfox wrote:
Mon Sep 18, 2017 6:05 am
These are theoretical returns with no trading costs. There would probably be Bid/Ask spreads and commissions if someone actually traded bitcoin. Maybe it is as much as 3 or 4 per cent? I don't really know. I know there are transaction fees to the bitcoin miner, which depends on the size of the transaction in bytes, when spending bitcoin.
Another big cost to bitcoin is the potential for getting Gox'd. Many people have either been hacked and had their bitcoin stolen or left their money/coins on an exchange that got hacked (e.g., Mt. Gox). Further, some people just forget their passwords/keys and their bitcoin is forever frozen in the ether.

You can read about some of these stories here:

https://www.reddit.com/r/SorryForYourLoss/

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Re: Bitcoin Return and Investing Ideas

Post by McGilicutty » Mon Sep 18, 2017 7:28 am

This is an interesting thread on Mt. Gox:

https://news.ycombinator.com/item?id=15272152

The guy in the linked video says that for almost its entire existence Mt. Gox was insolvent. Who's to say if the shady exchanges that allow for trading of cryptocurrencies today are not themselves insolvent and the bitcoin 'price in dollars' is just a giant sham?

This post from the thread linked above pretty much nails my thoughts on bitcoin and cryptocurrencies in general:
As far as I'm aware, all the exchanges are being run by rank amateurs with effectively zero oversight or accountability. They're reinventing the wheel and re-learning all of the painful lessons that the real banking sector took centuries to learn. From what I've seen, they're applying the "move fast and break things" attitude to other people's money. I wouldn't trust any of them to look after my pocket change.

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Re: Bitcoin Return and Investing Ideas

Post by Valuethinker » Mon Sep 18, 2017 7:53 am

rmelvey wrote:
Mon Sep 18, 2017 6:40 am
Apart from the spectacular returns, which are unlikely to repeat themselves to the same degree, the near zero correlation with stocks/bonds/commodities is very attractive. Integration with the traditional finance sector is very slow and so I predict the low correlations to remain for a long time. Low correlation and high volatility is actually a very nice combination because a small % weighting can cause a material change in a portfolio's return profile. The best way to take advantage of this is by maintaining a fixed portfolio % and rebalancing, but this takes nerves of steel because rebalancing on the way down with Bitcoin is very difficult psychologically. However, when you rebalance systematically you are providing liquidity to a global market and bearing significant risk which I think will be rewarded over the long term.
Nisiprius has some good posts about the problem with uncorrelated assets. If you search through the Encyclopedia Nisipriusa, you might find.

Basically his point is that low correlation in and of itself doesn't help you much. You also have to have positive return. That's paraphrasing and deeply simplifying, so I encourage reversion to the source text (The King James Version, usually ;-)). But that's the gist of it.

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Re: Bitcoin Return and Investing Ideas

Post by nisiprius » Mon Sep 18, 2017 8:31 am

McGilicutty wrote:
Mon Sep 18, 2017 7:28 am
This is an interesting thread on Mt. Gox... The guy in the linked video says that for almost its entire existence Mt. Gox was insolvent.
And that's a big problem with bitcoin. We are constantly being exhorted about the importance of dealing only with "reputable" entities. But, until it crashed, Mt. Gox was one of the ones that was always described as "reputable" (much as Coinbase is today). It was the big name.

Now, no doubt there were people all along saying they didn't trust Mt. Gox, and after the fact doubtless some of them have said "I never thought Mt. Gox was reliable" and can point to dated statements of theirs saying so.. But the point is that you need deep personal knowledge of the cryptocurrency scene to invest safely--safely in the most basic sense of "not getting scammed."

If it were just Mt. Gox you could file that under "stuff happens," but there is way too much of that going on with bitcoin. Butterfly Labs, just to take one example, which turns out to be an outright swindle--people preordered the hot hardware and Butterfly Labs would build it and "test" it for months by mining and keeping bitcoin for itself, finally shipping it only when it was too obsolete to mine profitably.

When some general topic becomes "hot" you can be sure there are going to be a flock of scam artists out there hawking investments and tying them to a story about something that's in the news. For example, you can be sure that there are a host of marijuana-linked "investment opportunities" and a lot of them probably have an impressive business plan and haven't grown a single plant.

By the way, does anybody know the status of the SEC's reconsideration of the Winklevoss "COIN" ETF? Big news in April 2017; but nothing has penetrated to my level of awareness since then.
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Re: Bitcoin Return and Investing Ideas

Post by rmelvey » Mon Sep 18, 2017 9:01 am

nisiprius wrote:
Mon Sep 18, 2017 8:31 am
By the way, does anybody know the status of the SEC's reconsideration of the Winklevoss "COIN" ETF? Big news in April 2017; but nothing has penetrated to my level of awareness since then.
They are trying to get bitcoin futures first, because once there are futures it will be easier to get approval for the ETF. CBOE is working on it right now and they are working on having it rolled out before year end:
https://www.cnbc.com/2017/08/02/cboe-bi ... hange.html

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Re: Bitcoin Return and Investing Ideas

Post by aristotelian » Mon Sep 18, 2017 9:11 am

I don't think "return" is the correct term. You would not call it return if you bought Euro and the dollar went down.

I like Nvidia, AMD, and IBM as Bitcoin related stock plays that also stand to gain from other blockchain applications. Of course, I do not own any individual stocks and don't recommend this course of action.

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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Mon Sep 18, 2017 1:21 pm

grayfox wrote:
Mon Sep 18, 2017 6:05 am

Here are summary statistics for daily and 30-day return

Code: Select all

Stat	Daily Return	30-Day Return


MIN	-23.37%		-48.43%
MEAN	0.30%		12.26%
MEDIAN	0.19%		4.30%
MAX	42.97%		466.07%
SD	4.31%		46.99%
Back in 2/2014, I calculated the Monthly Total Return for S&P500 from Shiller Data. For comparison, Bitcoin 30-Day Return and SP500 Monthly Total Return:

Code: Select all

Stat	30-Day Return	SP500 Monthy TR

MIN	-48.43%		-26.19%
MEAN	12.26%		0.97%
MEDIAN	4.30%		0.80%
MAX	466.07%		51.35%
SD	46.99%		4.10%
SD/MEAN	3.8		4.2
SP500 Monthly return was about 1% while bitcoin 30-day return was about 12%.
Both have monthly volatility about 4x their mean.

:arrow: The main difference seems to be that bitcoin moved about 12x faster than S&P500. In other words, bitcoin moved up or down in a month what SP500 did in a year.

Bitcoin has had about 12x the Juice of stocks! :shock: :greedy

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Re: Bitcoin Return and Investing Ideas

Post by Jeff Albertson » Mon Sep 18, 2017 3:07 pm

The WSJ's James Mackintosh take:
https://www.wsj.com/articles/bitcoins-w ... 3?mod=e2tw
So is a single Bitcoin worth $500,000, $5,000, $500 or $0? I’m inclined to say $0, especially if Bitcoin’s value depends on it being adopted as a global digital currency to replace dollars. There is no chance whatsoever that Bitcoin can displace the dollar, for the simple reason that it is badly designed. Bitcoin can handle a pathetically small number of transactions, and uses an inordinate amount of electricity to do so, making it entirely unsuitable to replace ordinary money.

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Mon Sep 18, 2017 4:19 pm

AlohaJoe wrote:
Mon Sep 18, 2017 6:24 am
nisiprius wrote:
Mon Sep 18, 2017 6:17 am
I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.
Satoshi Nakamoto hasn't spent any of his bitcoin earnings since January 2009. It is all still in bitcoin. Due to how bitcoin works, everyone would know if he spent it. It would also likely breach his anonymous veil and let the world know who it is.

If Satoshi Nakamoto is fabulously rich, it isn't from bitcoin :)
Of the wallets we know are his. He could be spending many millions out of wallets we didn't know about.

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Re: Bitcoin Return and Investing Ideas

Post by rmelvey » Mon Sep 18, 2017 4:22 pm

Swelfie wrote:
Mon Sep 18, 2017 4:19 pm
AlohaJoe wrote:
Mon Sep 18, 2017 6:24 am
nisiprius wrote:
Mon Sep 18, 2017 6:17 am
I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.
Satoshi Nakamoto hasn't spent any of his bitcoin earnings since January 2009. It is all still in bitcoin. Due to how bitcoin works, everyone would know if he spent it. It would also likely breach his anonymous veil and let the world know who it is.

If Satoshi Nakamoto is fabulously rich, it isn't from bitcoin :)
Of the wallets we know are his. He could be spending many millions out of wallets we didn't know about.
Or he misplaced the private key and they are lost forever :?

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Re: Bitcoin Return and Investing Ideas

Post by Serje » Tue Sep 19, 2017 10:18 am

nisiprius wrote:
Mon Sep 18, 2017 6:17 am
A late acquaintance of mine played the lottery regularly. Her daughter described this acquaintance as having a "gambling addiction" and said that she spent so much on lottery tickets that it affected her household budget. About four years before she died, she hit a high-six-figure jackpot. I'm not privy to her lifetime financial records, but I think it is almost certain that she got a higher internal rate of return on her lottery "investments" than I did in my Vanguard funds. When she got the jackpot, she elected the lump sum rather than the annuity; another choice I wouldn't have made myself, but it seems she was right about that, too.

A problem with hindsight is that of course you are always looking at the things that paid off spectacularly, whether it be bitcoin or Digital Equipment Corporation (intentional choice rather than Microsoft). In real life, the people who really made out were people who got in at a time when the "investments" were poorly known, obscure, hard to invest in--and looked like really bad ideas. Furthermore, the things that looked like bad ideas that hit the jackpot looked about the same as lots of things that looked like really bad ideas and really were.

The people who really profit from bubbles are the people who are able to get in early because they started them. I hope Satoshi Nakamoto is fabulously rich, enjoying his wealth, and has invested it in something like municipals or Treasuries.

In my opinion, the right question to ask is not "how would you have done if you'd invested in bitcoin in 2010." It is this: supposing you enjoy putting some of your money in speculative, near-gambling things like bitcoin. Suppose it is 2010 and you are casting around, seeking "opportunities" for stuff to risk your money on. What is the full range of opportunities that would have been open to you, and what are the chances you would have been able to identify and choose bitcoin rather than something else?

(Also, how many of the people who missed out on bitcoin, and fantasize that they would have invested in it if only, are about to lose their money on initial coin offerings in new cryptocurrency startups?)
Very good point!

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Re: Bitcoin Return and Investing Ideas

Post by 30sep16 » Thu Sep 21, 2017 1:37 am

You can get price history back to July 2010 here:
https://www.coindesk.com/price/

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Re: Bitcoin Return and Investing Ideas

Post by 30sep16 » Thu Sep 21, 2017 1:43 am

rmelvey wrote:
Mon Sep 18, 2017 6:40 am
Basically his point is that low correlation in and of itself doesn't help you much. You also have to have positive return. That's paraphrasing and deeply simplifying, so I encourage reversion to the source text (The King James Version, usually ;-)). But that's the gist of it.
I don't think that's true. I think a zero return asset that's uncorrelated can increase the return of the positive return asset. Imagine a simple, extreme example:

Asset X goes up and down but has a zero return over the long run. But it has a -1.0 correlation with the stock market. Let's say you have a 50/50 AA with stocks and asset X.

Now, the stock market crashes by 50%, and X spikes by 50% as it is has a -1.0 correlation with the stock market. Your AA is now 25/75 stocks and asset X. You rebalance, buying stocks at their low point using free money asset X just handed you at the right time to buy stocks.

So X may have a zero return over time. But if it spikes and gives you money to put into other assets at their low points, the overall return of the portfolio can go up.
Last edited by 30sep16 on Thu Sep 21, 2017 1:50 am, edited 1 time in total.

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Re: Bitcoin Return and Investing Ideas

Post by 30sep16 » Thu Sep 21, 2017 1:45 am

aristotelian wrote:
Mon Sep 18, 2017 9:11 am
I don't think "return" is the correct term. You would not call it return if you bought Euro and the dollar went down.
Bitcoin is currently functioning like a rapidly accelerating store of value, and not much like a currency. I'll take the former over the latter! Some other cryptocurrency will probably take its place with superior technology for transactions, and Bitcoin will probably become known as a store of value instead.

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Re: Bitcoin Return and Investing Ideas

Post by 30sep16 » Thu Sep 21, 2017 1:54 am

nisiprius wrote:
Mon Sep 18, 2017 8:31 am
McGilicutty wrote:
Mon Sep 18, 2017 7:28 am
This is an interesting thread on Mt. Gox... The guy in the linked video says that for almost its entire existence Mt. Gox was insolvent.
And that's a big problem with bitcoin. We are constantly being exhorted about the importance of dealing only with "reputable" entities. But, until it crashed, Mt. Gox was one of the ones that was always described as "reputable" (much as Coinbase is today). It was the big name.

Now, no doubt there were people all along saying they didn't trust Mt. Gox, and after the fact doubtless some of them have said "I never thought Mt. Gox was reliable" and can point to dated statements of theirs saying so.. But the point is that you need deep personal knowledge of the cryptocurrency scene to invest safely--safely in the most basic sense of "not getting scammed."
It doesn't take "deep personal knowledge of the cryptocurrency scene" to know that you should not keep your Bitcoins on an exchange. You buy them there, but you do not OWN them until you transfer them to a private wallet to which you hold the keys, not an exchange. That's Bitcoin 101 and you'll encounter if in your first 15 minutes of looking at the market.

Why the scare tactics with misinformation?

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grayfox
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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Thu Sep 21, 2017 4:59 am

30sep16 wrote:
Thu Sep 21, 2017 1:37 am
You can get price history back to July 2010 here:
https://www.coindesk.com/price/
Thanks. I will try to take a look at their data.

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tadamsmar
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Re: Bitcoin Return and Investing Ideas

Post by tadamsmar » Thu Sep 21, 2017 5:28 am

Bitcoin returns are like capital gains, you are suppose to pay taxes on them. That would need to be factored into the analysis of returns as with normal investing.

There's some uncertainty about the status of 1031 like-kind exchanges for bitcoins. 1031 holds for commodities. But not all US government agencies have consistently behaved as if they really believe that bitcoins are commodities.

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grayfox
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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Thu Sep 21, 2017 5:31 am

:?: Where is the source of Bitcoin's Return?

Looking at the numbers, there has been a positive return if you held bitcoin. Using the numbers from coinmarketcap.com:

Apr 28, 2013 $134.21
Sep 16, 2017 $3,625.04

the value of 1 Bitcoin in USD has increased 27x in 4-1/3 years.
And, except for a few downdrafts, the trend has generally been up.

So what has been the source of the past return? Can it be expected to continue into the future?

Return from Stocks
I can understand the return from owning stocks. You have a share in a company that owns productive assets and makes useful things.

E.g. A company owns cutting and sewing machines, and a building, which all cost something to acquire, but that can be used to make shirts. They have to pay for materials, labor, energy, etc. Then they sell the shirts for more than their expenses and show a profit. Maybe the Return-On-Assets ROA is 20%. Let's say that for every $100,000 in assets they make 1,000 shirts which they sell for $40 each and which cost them $20 to in Materials, Labor and Overhead to produce, yielding $20,000 in profits per year.

The company pays part of that $20,000, say $10,000, to the owners as a dividend each year.
If you bought the assets for $100,000 then you collect $10,000 per year forever.
Return-on-Investment ROI = 10%.

With stocks, we can see where the profit is coming from, where the dividend is coming from, and where the return is coming from. Alles ist klar.

But what about Bitcoin?
When you buy bitcoin you own no productive assets. You own no buildings or machines. Nothing useful is produced.
No revenue. No ROA. No profit. No dividend.

With no profit or dividends, how can there be a ROI that is sustainable?

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Thu Sep 21, 2017 8:42 am

grayfox wrote:
Thu Sep 21, 2017 5:31 am
:?: Where is the source of Bitcoin's Return?

Looking at the numbers, there has been a positive return if you held bitcoin. Using the numbers from coinmarketcap.com:

Apr 28, 2013 $134.21
Sep 16, 2017 $3,625.04

the value of 1 Bitcoin in USD has increased 27x in 4-1/3 years.
And, except for a few downdrafts, the trend has generally been up.

So what has been the source of the past return? Can it be expected to continue into the future?

Return from Stocks
I can understand the return from owning stocks. You have a share in a company that owns productive assets and makes useful things.

E.g. A company owns cutting and sewing machines, and a building, which all cost something to acquire, but that can be used to make shirts. They have to pay for materials, labor, energy, etc. Then they sell the shirts for more than their expenses and show a profit. Maybe the Return-On-Assets ROA is 20%. Let's say that for every $100,000 in assets they make 1,000 shirts which they sell for $40 each and which cost them $20 to in Materials, Labor and Overhead to produce, yielding $20,000 in profits per year.

The company pays part of that $20,000, say $10,000, to the owners as a dividend each year.
If you bought the assets for $100,000 then you collect $10,000 per year forever.
Return-on-Investment ROI = 10%.

With stocks, we can see where the profit is coming from, where the dividend is coming from, and where the return is coming from. Alles ist klar.

But what about Bitcoin?
When you buy bitcoin you own no productive assets. You own no buildings or machines. Nothing useful is produced.
No revenue. No ROA. No profit. No dividend.

With no profit or dividends, how can there be a ROI that is sustainable?
You did stock source analysis. Now we can extend that to ETFs and options and it gets cloudier. Then futures, futures options and finally short vix futures, and vix options. We are deep into weird multi-order derivative territory now but vix options do have value. Bitcoin is a pretty deep derivative.

The value is that people want to transact, either directly (I give you a dollar you give me an apple) or through arbitrarily complex contracts (I work to generate IP for you which is then assigned over to you for licencing, you.pay salary, some insurance and I retain royalty right....). Traditionally, throughout history this required a trusted mediator, which ultimately boils down to "somebody has a weapon and will MAKE people behave for whatever definition of behave the person with the weapon believed." In our rather civilized society that means courts that can forcibly lock somebody up if they don't do what the judge decides. The issue here is that courts and other weapon wielding mediators aren't always consistent and are often not impartial. It would be of great value if we could enter into transactions and they could be mediated automatically and impartially and weaponry didn't even need to be involved. That right there is where Bitcoin or any other crypto currencies basic value comes from. It replaces banks and courts. Now how that value gets tokenized is a fascinating mechanism that took some serious thinking outside the box and is documented in Satoshi's white paper here: https://bitcoin.org/en/bitcoin-paper. I highly recommend reading this. It is fairly short and concise and very approachable to the layman.

It's actually mathematically proven that you CANNOT have an unmediated transaction system. It hinges on an unsolvable problem called "The Byzantine Generals Problem" which is a parable of 3 generals that have the simplest case of this problem. The brilliance of this "solution" is that although we can't solve the problem, if we make casinos and all gamble with each other we can make it too expensive to be a problem in the first place (no lie, that wackiness is actually the solution). Bitcoin is the "chips" that are used in that casino. So it's a very odd derivative whose base value is derived by the replacement of mediation with an inherently incorruptable new mechanism.

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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Thu Sep 21, 2017 9:50 am

Swelfie wrote:
Thu Sep 21, 2017 8:42 am

You did stock source analysis. Now we can extend that to ETFs and options and it gets cloudier. Then futures, futures options and finally short vix futures, and vix options. We are deep into weird multi-order derivative territory now but vix options do have value. Bitcoin is a pretty deep derivative.

The value is that people want to transact, either directly (I give you a dollar you give me an apple) or through arbitrarily complex contracts (I work to generate IP for you which is then assigned over to you for licencing, you.pay salary, some insurance and I retain royalty right....). Traditionally, throughout history this required a trusted mediator, which ultimately boils down to "somebody has a weapon and will MAKE people behave for whatever definition of behave the person with the weapon believed." In our rather civilized society that means courts that can forcibly lock somebody up if they don't do what the judge decides. The issue here is that courts and other weapon wielding mediators aren't always consistent and are often not impartial. It would be of great value if we could enter into transactions and they could be mediated automatically and impartially and weaponry didn't even need to be involved. That right there is where Bitcoin or any other crypto currencies basic value comes from. It replaces banks and courts. Now how that value gets tokenized is a fascinating mechanism that took some serious thinking outside the box and is documented in Satoshi's white paper here: https://bitcoin.org/en/bitcoin-paper. I highly recommend reading this. It is fairly short and concise and very approachable to the layman.

It's actually mathematically proven that you CANNOT have an unmediated transaction system. It hinges on an unsolvable problem called "The Byzantine Generals Problem" which is a parable of 3 generals that have the simplest case of this problem. The brilliance of this "solution" is that although we can't solve the problem, if we make casinos and all gamble with each other we can make it too expensive to be a problem in the first place (no lie, that wackiness is actually the solution). Bitcoin is the "chips" that are used in that casino. So it's a very odd derivative whose base value is derived by the replacement of mediation with an inherently incorruptable new mechanism.
I can understand where the return for stock Mutual Funds and ETFs comes from. They are just baskets of stocks. If one stock has value, then a basket of many different stocks has value. What mathematical property is that: If A>0 and B>0, then A+B>0.

Source of bond and bond funds return is also obvious since they pay interest that is some fixed percent of the value, like 2% p.a. So it grows at 2% per year.

Once you get to futures, futures options, and beyond, the source of return is beyond me. I recall that there was a lot of handwaving about CCFs having various sources of return. Never understood any of it. And 10 years later, that didn't work out so well, did it?

Now I will grant you that bitcoin can have value. If people find bitcoin useful for something, like transactions, replacing court system, or really for anything, then it will have value and a market price. Just like a dollar has value because people find it useful.

Personally, I find US Dollars and Euros quite useful for buying stuff. Bitcoin, not so much.

:idea: But having value and having a source of return are two different things. A dollar bill or an ounce of gold has value, but neither have a source of return. 1.00 ounce of gold will never grow into 1.01 ounces of gold. The only thing that changes is how much of something else you can exchange for it.

Dollars waste away at ~2% p.a. Gold just seems to have huge fluctuations in exchange rates. With fixed amount of bitcoin, 21 million BTC, perhaps bitcoin has the potential to become become more valuable over time, i.e. deflationary. Is that a bitcoin's ultimate source of return, that it is fixed supply?

:arrow: To summarize, I agree that bitcoin definitely has value. But as an investment, does it have any source of return?

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Thu Sep 21, 2017 10:34 am

grayfox wrote:
Thu Sep 21, 2017 9:50 am
:arrow: To summarize, I agree that bitcoin definitely has value. But as an investment, does it have any source of return?
I don't think it does have a source of return, just an innate value. The miner's pick up the returns in transaction fees when the holder spends, so that doesn't affect the value of the coin itself. IMHO, the coins are a commodity, like gold. They exist, they are valuable, but they don't produce return by themselves (but can be utilized to do work which does produce a source of return).

Really, they are more similar to GLD than gold itself: a tokenized ETF invested in rolling futures contracts on the price of some not-yet identified physical gold.
grayfox wrote:
Thu Sep 21, 2017 9:50 am
Personally, I find US Dollars and Euros quite useful for buying stuff. Bitcoin, not so much.
IMHO that's like me saying that I find my broker useful for buying my vanguard funds but that fiber cable to the NYSE not so much. Bitcoin is an industrial strength transaction system. Most people rarely have an need to enter into a contract that is truly irrevocable even if the entire power of the US military wanted to stop it. Most people don't WANT to enter into contracts like that because we make mistakes, have customer service issues, etc. It's the root cause of so many questions like "I forgot the password to my bitcoin, how do I recover it? What do you mean I can't, that's my retirement?!?" or people clicking on a link in their email and POOF, virus takes away their life savings because all it needed was that password and it entered into an IRREVOCABLE contract to transfer everything and there is ZERO intermediary and no way that the system can reverse a transaction. That's so extremely useful to ensure that JP Morgan and Bank of China can settle up even if their governments are hostile towards each other, but way to much power for the hands of Joe trying to pay his power bill. That said, it can be idiot proofed eventually to be pretty safe for most people to use routinely in small amounts, but we aren't there yet.

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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Thu Sep 21, 2017 12:32 pm

Speaking of the value of bitcoin, this blogger presents some ideas about How to Value Bitcoin.
One way to value Bitcoin is to think about what markets it might affect the most and what share it could take in each of those markets.
He thinks that bitcoin could be applied in four markets: remittance, e-commerce, the black market, and gold markets. Then it's just a simple matter to make a W.A.G. about what market share bitcoin could take.

Then you have to guess at how long it will take, and which discount rate to apply to the future value. That gives a Present Value.

IMO the discount rate is not that important unless you are trying to value it today. I'm more interested in how big the market cap can eventually reach, and when.

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Re: Bitcoin Return and Investing Ideas

Post by tadamsmar » Thu Sep 21, 2017 2:12 pm

You can earn interest on bitcoins. At least that is what google searches indicate.

So there is apparently a form of return that is not what we normally refer to as speculation.

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Re: Bitcoin Return and Investing Ideas

Post by 30sep16 » Thu Sep 21, 2017 2:17 pm

tadamsmar wrote:
Thu Sep 21, 2017 2:12 pm
You can earn interest on bitcoins. At least that is what google searches indicate.

So there is apparently a form of return that is not what we normally refer to as speculation.
Yes, but there is a lot of risk in those investments. I've looked into them. There is less risk in just holding it.

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Thu Sep 21, 2017 3:31 pm

tadamsmar wrote:
Thu Sep 21, 2017 2:12 pm
You can earn interest on bitcoins. At least that is what google searches indicate.

So there is apparently a form of return that is not what we normally refer to as speculation.
That's not a return from bitcoin though. That's a return on the time value of money. You can earn interest on anything you are willing to loan, even a tractor, that doesn't mean that the tractor is growing in value.

One theoretical source of return though is this (I had forgotten about it). There is a hard limit of 21 Million coins. There are 2 deflationary pressures: Bitcoin market growth and loss of currency (lost keys). This means that if the markets that utilize it continue to grow (which they normally should even after adoption reaches an equilibrium just because world markets grow) then that increases real (not nominal) value. So Bitcoin should appreciate on average in value at some rate greater than inflation. This is not an innate property of cryptocurrency in general, but specific to Bitcoin since the 21 Million limit is arbitrary and not relevant to the technology. Ethereum for instance has no set limit and will be inflationary assuming coin generation outstrips market growth.

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Re: Bitcoin Return and Investing Ideas

Post by Jeff Albertson » Thu Sep 21, 2017 3:50 pm

Couldn't some well grounded firm (say Citibank, Credit Suisse, Amazon, Google, or some central bank) sponsor a cyber-currency? They could guarantee a fixed price of $1 per coin. Anyone who needed a cyber-currency to trade would surely prefer that coin (safety, stability). The sponsor would gain because they would be sitting on interest free cash from the coin sales. Other coins wouldn't have much reason to exist except possibly for illegal transactions. At that point there would be little resistance to making the possession of those coins illegal.

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Thu Sep 21, 2017 5:07 pm

Jeff Albertson wrote:
Thu Sep 21, 2017 3:50 pm
Couldn't some well grounded firm (say Citibank, Credit Suisse, Amazon, Google, or some central bank) sponsor a cyber-currency?
Yes they could and they have. These are called Stable Coins which is a term used to refer to a blockchain token that attempts to hold its value as equal to a non-blockchain entity. Doing this effectively is a very open problem. The most prominent of these is called Tether and 1 Tether attempts to equal 1 USD, but there are many others with different world currencies being the most popular thing to tie value to.
Jeff Albertson wrote:
Thu Sep 21, 2017 3:50 pm
They could guarantee a fixed price of $1 per coin. Anyone who needed a cyber-currency to trade would surely prefer that coin (safety, stability). The sponsor would gain because they would be sitting on interest free cash from the coin sales.
How is a big problem. It could be physically backed. Tether uses this solution. How does the market know it is physically backed? You can trust the counterparty, but they have a conflict of interest and could be stealing the money for personal gain (Tether's backers are accused of this). You could audit, but now you have to trust the auditor and maybe the auditor is being bought or is corrupt in other ways. You could threaten with criminal law, but even such laws could be changed for political gain. Anyway you cut it, possession has corruptible counterparty risk which is the very thing cryptocurrency was invented to eliminate. So that's out.

We can use what is called an Oracle, which is a blockchain contract that is fed information from an outside source to answer questions when queried like "what is Bitcoin worth in Dollars?" or "What is the time?" But who supplies the information? Are they corruptible?

bitUSD uses a kind of future's contract which is, if I recall correctly basically the bet that 1 USD will equal 1 USD in a month or so. It's a pretty safe bet. The thing is, if the contract begins selling for more than 1 USD plus the risk free rate then people will short the contract, bringing the price back in line and vice versa. (It's more complicated than this, and I forget some details). But the problem hear is the clearing house. The clearing house needs an Oracle and so here again is counterparty risk. But really, this one is my favorite and seems to me like it may be the most secure with maybe some augmentation from the other proposals.

You can use voting committees. But then, we have problems of corrupt committees. No matter how we cut it, we are left with that exact counterparty risk we had in the first place which is the reason Bitcoin was invented and is the ONLY known solution that eliminates the counterparty risk. So the only perfect solution to the problem we have in tethering this coin being Bitcoin itself, so not all that much of a solution. With anything we do here we end up with an extremely slow, expensive and difficult to scale clone of VISA, which is not new technology and infact inferior to what we have currently.
Jeff Albertson wrote:
Thu Sep 21, 2017 3:50 pm
Other coins wouldn't have much reason to exist except possibly for illegal transactions.
Except that the other coins are the only ones that can be trusted. In addition to the above problem (They simply can't be trusted) these Stable Coins are tethered to a currency whose very value can be unpredictably manipulated by the generator of the currency itself. The US Government can print more money, or restrict/flood bonds as an attack against the holders of the cryptocurrency. Another counterparty risk bitcoin eliminates completely.

So why have Stable coins at all? Because they conveniently interact with the REAL cryptocurrencies and we can transact with them through the same APIs and use them in smart contracts. In order to exchange a USD for a Bitcoin I need to give a trusted third party my USD and hope I get a bitcoin. With a USDT I can secure the contract for exchange on the blockchain and ensure I get it. I still need to trust the counterparty for the coin itself, but at least I can secure the contract.
Jeff Albertson wrote:
Thu Sep 21, 2017 3:50 pm
At that point there would be little resistance to making the possession of those coins illegal.
As long as they have a valuable use that isn't provided elsewhere then they will be available on the black market. And these things are amazingly useful which is why the buzz about them is so huge. And given their ease of use and pervasiveness they would be about as legal as pot. Sure, it's illegal, but like that is stopping anyone. It would also drive wider adoption of the dark coins like Monero, which 1) Hurts many of the useful features of the technology. Not that Monero is bad, for its purposes it is best in breed and it has amazing uses that other coins cannot do effectively. But it cannot do for instance what Ethereum is best of breed in. 2) It would drive the entire crypto economy into the deep dark. You could no longer see any transactions at all. You could see that something was happening, but with Monero you cannot see the balance of any address you do not own, or the origination, destination or amount of any transaction you yourself were not the sender or recipient of. The lawmakers don't really want to push laws that encourage everyone, including current law abiding people, to begin moving all money in the dark for no reason with no hope of auditing anything. That's a nightmare for tax collectors, anti-money laundering, contraband tracking... pretty much anything the government tries to do would be hampered severely if the world adopted Monero as the norm instead of Bitcoin or Ethereum, and the latter has some huge incentives to be the dominant norm over Monero if we don't pressure the market (But Monero has a trait that will keep it or something like it around for a long time: Privacy and Fungibility).

So why would you want to make them illegal anyway? So the current legal system could continue to monitor, control the movement of, reverse transactions and control the supply. Which is the very reason Bitcoin was invented.... to get rid of ALL counterparty risk, including those counterparties with good intentions because all counterparties are ultimately corruptible.

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grayfox
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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Fri Sep 22, 2017 1:11 am

tadamsmar wrote:
Thu Sep 21, 2017 2:12 pm
You can earn interest on bitcoins. At least that is what google searches indicate.

So there is apparently a form of return that is not what we normally refer to as speculation.
That sounds more like a loan, i.e. a promissory note, bond or something like that, only instead of lending dollars, the loan is made in bitcoin with promise to repay the principle plus interest in bitcoin. It would be as safe as the credit worthiness of the borrower.

Or maybe you could build it into one of those blockchain contracts so that it automatically repays the loan when the term is up. Then every loan would be 100% guaranteed to be paid back. How would that work? What if the borrower doesn't have it? That can't work.

It would be funny if the U.S. Treasury started borrowing bitcoin and held bitcoin bond auctions.

But as another poster said, interest received from lending is not a return on holding bitcoin itself.

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grayfox
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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Fri Sep 22, 2017 1:21 am

Swelfie wrote:
Thu Sep 21, 2017 3:31 pm
One theoretical source of return though is this (I had forgotten about it). There is a hard limit of 21 Million coins. There are 2 deflationary pressures: Bitcoin market growth and loss of currency (lost keys). This means that if the markets that utilize it continue to grow (which they normally should even after adoption reaches an equilibrium just because world markets grow) then that increases real (not nominal) value. So Bitcoin should appreciate on average in value at some rate greater than inflation. This is not an innate property of cryptocurrency in general, but specific to Bitcoin since the 21 Million limit is arbitrary and not relevant to the technology. Ethereum for instance has no set limit and will be inflationary assuming coin generation outstrips market growth.
With fixed supply, bitcoin is expected to be deflationary. I'm not sure I would call that a return. It's more like all the fiat currencies are getting less valuable due to inflation and bitcoin will stay level. Kind of like how gold should approximately increase with inflation in the long term.

As far as the bitcoin supply shrinking due to loss of private keys, that would certainly make the remaining bitcoin more valuable. Loss for some; gain for others. But the value gained should equal the value lost. No net gain overall.

Just try not to be one of the careless people who lose their private key. (Probably easier said than done. If you are the kind of person who misplaces his keys or glasses, maybe cryptocurrencies are not for you! :) )

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Re: Bitcoin Return and Investing Ideas

Post by Swelfie » Fri Sep 22, 2017 4:15 am

grayfox wrote:
Fri Sep 22, 2017 1:21 am
Swelfie wrote:
Thu Sep 21, 2017 3:31 pm
One theoretical source of return though is this (I had forgotten about it). There is a hard limit of 21 Million coins. There are 2 deflationary pressures: Bitcoin market growth and loss of currency (lost keys). This means that if the markets that utilize it continue to grow (which they normally should even after adoption reaches an equilibrium just because world markets grow) then that increases real (not nominal) value. So Bitcoin should appreciate on average in value at some rate greater than inflation. This is not an innate property of cryptocurrency in general, but specific to Bitcoin since the 21 Million limit is arbitrary and not relevant to the technology. Ethereum for instance has no set limit and will be inflationary assuming coin generation outstrips market growth.
With fixed supply, bitcoin is expected to be deflationary. I'm not sure I would call that a return. It's more like all the fiat currencies are getting less valuable due to inflation and bitcoin will stay level. Kind of like how gold should approximately increase with inflation in the long term.

As far as the bitcoin supply shrinking due to loss of private keys, that would certainly make the remaining bitcoin more valuable. Loss for some; gain for others. But the value gained should equal the value lost. No net gain overall.

Just try not to be one of the careless people who lose their private key. (Probably easier said than done. If you are the kind of person who misplaces his keys or glasses, maybe cryptocurrencies are not for you! :) )
Should be more than just fiat losing value.

Let's say that Bitcoin is 1% of GDP for example. Fiat minting equals rate of GDP growth so inflation is zero. Bitcoin would have to lose market share at the rate of GDP growth to stay level against Fiat. But it's expected to stay at least constant so expected return of Bitcoin is at least equal to GDP growth.

But Fiat tries to inflate currently at 2%. This is in addition so expected return is GDP growth + inflation rate. This is the natural growth against Fiat of which you speak component which tends to be level in Real, but positive nominally.

Finally we have the key loss. This isn't just carelessness but intentional burn and unwilled death. So total expected return in a market where increased adoption rate is zero is GDP growth + CPI + Rate of burn. This should always beat inflation and almost always beat the risk free rate so I'd call it a positive expected return, albeit probably not a huge one. Might beat TIPS handily and certainly should beat gold.

That's before lending which isn't endemic to Bitcoin. If you lend risk free instead of idling in a wallet (stuffing mattress equivalent) on top of that you can add risk free and then you are solidly in positive rate territory. No mechanism to do that currently, but I can envision Treasuries that return Bitcoin instead of fiat.

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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Sat Sep 23, 2017 6:29 am

A positive real return for bitcoin due to the supply being limited to 21 million sounds kind of iffy to me.

For one thing, the limit is only imposed at about year 2140 A.D. So for the next 120 years, the supply of bitcoin will increase. From https://coinmarketcap.com/ Circulating Supply is now 16,582,550. Every 10 minutes another 12.6 coins are mined. That works out to 657,000 per year. The rate halves every 4 years, so the increase will slow down. For now, I would keep the idea that bitcoin may theoretically increase in value in my back pocket, and not count on it as a source of return.

IMO, a better approach to forecasting return over the next few years is the one from that blog post How to Value Bitcoin. For example, he estimates the size of E-commerce at $2 trillion. Just for the sake of argument, suppose bitcoin captured half of the market share for E-commerce. That would require a market cap of $1 Trillion. And suppose that happened in 3 years.

The current Market Cap is about $62 billion. $1 Trillion would imply about a 16x increase n 3 years.

What is PayPal's Annual Payment Volume? from https://www.statista.com/statistics/419 ... nt-volume/
2012 150.07 billion
2013 185.61 billion
2014 234.64 billion
2015 281.76 billion
2016 354.01 billion

Another market mentioned is Black Market = $15 trillion. 1/15 of black market transactions would also be $1 trillion market cap.

Would You Take This Bet?
Of course, one could make up any numbers for market share and when. It's all guesswork. But suppose the upside is 16x in 3 years, with a possible downside being total loss. Suppose that either outcome was equally likely.

Bet $1,000, in 3 years get back $16,000 or zero.
Bet $10,000, in 3 years get back $160,000 or zero.
Bet $100K, in 3 years get back $1.6 million or zero.

:?: Would any of those be a good bet? Does anybody think that such a bet is a risk worth taking?

(Obviously there would be a range of outcomes, but I'm just trying to simplify the decision process.)

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Re: Bitcoin Return and Investing Ideas

Post by am » Sat Sep 23, 2017 11:06 am

grayfox wrote:
Sat Sep 23, 2017 6:29 am
A positive real return for bitcoin due to the supply being limited to 21 million sounds kind of iffy to me.

For one thing, the limit is only imposed at about year 2140 A.D. So for the next 120 years, the supply of bitcoin will increase. From https://coinmarketcap.com/ Circulating Supply is now 16,582,550. Every 10 minutes another 12.6 coins are mined. That works out to 657,000 per year. The rate halves every 4 years, so the increase will slow down. For now, I would keep the idea that bitcoin may theoretically increase in value in my back pocket, and not count on it as a source of return.

IMO, a better approach to forecasting return over the next few years is the one from that blog post How to Value Bitcoin. For example, he estimates the size of E-commerce at $2 trillion. Just for the sake of argument, suppose bitcoin captured half of the market share for E-commerce. That would require a market cap of $1 Trillion. And suppose that happened in 3 years.

The current Market Cap is about $62 billion. $1 Trillion would imply about a 16x increase n 3 years.

What is PayPal's Annual Payment Volume? from https://www.statista.com/statistics/419 ... nt-volume/
2012 150.07 billion
2013 185.61 billion
2014 234.64 billion
2015 281.76 billion
2016 354.01 billion

Another market mentioned is Black Market = $15 trillion. 1/15 of black market transactions would also be $1 trillion market cap.

Would You Take This Bet?
Of course, one could make up any numbers for market share and when. It's all guesswork. But suppose the upside is 16x in 3 years, with a possible downside being total loss. Suppose that either outcome was equally likely.

Bet $1,000, in 3 years get back $16,000 or zero.
Bet $10,000, in 3 years get back $160,000 or zero.
Bet $100K, in 3 years get back $1.6 million or zero.

:?: Would any of those be a good bet? Does anybody think that such a bet is a risk worth taking?

(Obviously there would be a range of outcomes, but I'm just trying to simplify the decision process.)

I took the gamble because I can afford to lose. 75% bitcoin, 20% etherium, 5% litecoin for about .4% of portfolio that is 3 funder. I have invested for 10yrs using disciplined boglehead principles. Bitcoin could be worthless garbage but maybe not, especially the idea behind it. I recall sitting in a college computer lab in mid 90s on the internet thinking what clunky garbage this was, and had a friend agree. I can recall instances where the crowds were wrong in the past also. Think about how people reacted to index funds when Bogle came out with it.

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HomerJ
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Re: Bitcoin Return and Investing Ideas

Post by HomerJ » Sat Sep 23, 2017 11:45 am

grayfox wrote:
Mon Sep 18, 2017 6:05 am
Any conclusions that can be drawn?
You could make a lot of money if you owned a time machine?

Seriously, what other "conclusions" could one possibly draw from this data?

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grayfox
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Re: Bitcoin Return and Investing Ideas

Post by grayfox » Sun Sep 24, 2017 6:30 am

am wrote:
Sat Sep 23, 2017 11:06 am

I took the gamble because I can afford to lose. 75% bitcoin, 20% etherium, 5% litecoin for about .4% of portfolio that is 3 funder. I have invested for 10yrs using disciplined boglehead principles. Bitcoin could be worthless garbage but maybe not, especially the idea behind it. I recall sitting in a college computer lab in mid 90s on the internet thinking what clunky garbage this was, and had a friend agree. I can recall instances where the crowds were wrong in the past also. Think about how people reacted to index funds when Bogle came out with it.
OK, you chose to bet 0.4% of you portfolio on cryptos. I will change the question to "How much would you bet on bitcoin?"

There is something called The Kelly Criterion which allows one to calculate how much of your bankroll you should bet given the payoff and the chance of winning. This Simple Kelly Calculator does the calculation.

Using the same guess as before that the market cap will reach $1 Trillion, gives payoff odds of about 16 to 1 with the current Market Cap. Let's use your timeframe of 10 years. (Although a timeframe is not included in the Kelly calculation.)

If your chance of success is 10%, from calculator, Kelly criterion says that the optimal bet is 4% of your capital.
25%, bet 20%
50%, bet 46.67%
if your chance is only 5%, the optimal bet is -1.33%. In other words, you would not make this bet, or take the other side of this bet if you could.
Playing with the Kelly Calculator, it seems that about 6.25% chance of success is the breakeven. Optimal bet = 0%

Caveat: The Kelly Criterion may not be strictly applicable to a one-time bets like whether bitcoin goes up 16x or not. It's really good for situations where you can make many identical bets so that the Law of Large Numbers has a chance to work. So things like Roulette or cards or horse racing where bets are resolved in a short time and you can make hundreds or thousands of identical bets in a reasonable amount of time.

:arrow: If you believe that there is greater than 6,25% chance of Bitcoin Market Cap reaching $1 Trillion, it may be worth putting a small amount into bitcoin. The stronger your belief, the more you should be willing to put in.
:arrow: If you believe that the chance that bitcoin succeeds and reaches $1 Trillion is less than 6.25%, stay away.

:?: New Question: What do you think the chance is that Bitcoin will show some success in gaining market share in some Transaction Markets, and reaches at least $1 Trillion Market Cap within 10 years?

My answer is 10% chance or better.

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