Larry Swedroe: Bitcoin & It’s Risks

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

Post by Thesaints » Thu Dec 07, 2017 12:19 pm

Jonathan wrote:
Thu Dec 07, 2017 2:39 am
smesman wrote:
Wed Dec 06, 2017 2:51 pm
Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game.
You are assuming that bitcoin is a zero sum game.

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

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

Rather than flatly declaring asset classes to be zero sum games, or bubbles, or Ponzis, or tulips - the more responsible and accurate answer that we can give as Bogleheads is: "I don't know".
It has absolutely been a zero sum game, if you consider roundtrips in and out BTC, instead of fantastic valuations, which are just hopeful dreams until one actually exchanges BTC back into USD.
In fact, all currency trading is a zero sum game, excluding small cash rates differentials and fees.

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

Post by ulrichw » Thu Dec 07, 2017 3:46 pm

Jonathan wrote:
Thu Dec 07, 2017 2:39 am
smesman wrote:
Wed Dec 06, 2017 2:51 pm
Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game.
You are assuming that bitcoin is a zero sum game.

Bitcoin certainly hasn't been a zero sum game so far. As it stands, the average bitcoin investor has profited handsomely. In fact we've heard many positions describing genuine value that bitcoin and other cryptos bring to the financial ecosystem.
[...]
I think both of you are wrong :)

smesman: While Bitcoin most definitely is a zero sum game, as long as new entrants are entering the game (as they are right now), or existing entrants are putting more money in, the average person taking money out can make a profit. What is true is that everyone were to take their money out, on average, nobody would have made any money (since fees are mostly paid in Bitcoin, this even applies to service providers).

Jonathan: You're either misconstruing or misusing "zero sum game". Bitcoin is most definitely zero sum - Any dollar you take out has to come from somebody putting a dollar in. That doesn't mean that people can't have successfully made a profit so far, or even that the majority of people have profited from Bitcoin.

I would posit that despite the fact that Bitcoin is zero sum, its value *can* indefinitely increase. Why? Because the global economy will continue to increase - this means that there will be a continuous influx of money into Bitcoin, as long as people view it as a valuable entity. Because there is a fixed number of Bitcoin, this means that the value of Bitcoin could continue to increase.

To me, it feels like its perceived value has far outpaced its "real" value (if there is such a thing), but that doesn't mean that it has no long-term "real" value - value that could be realized by investors and value that might even exceed its current inflated value.

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

Post by Jonathan » Thu Dec 07, 2017 4:55 pm

ulrichw wrote:
Thu Dec 07, 2017 3:46 pm
Jonathan: You're either misconstruing or misusing "zero sum game". Bitcoin is most definitely zero sum - Any dollar you take out has to come from somebody putting a dollar in.
"Is bitcoin a zero sum game" is a common topic of discussion in bitcoin forums. I'm neither misconstruing nor misusing the phrase "zero sum game", just simply offering my opinion.

There are a variety of reasonable perspectives on both sides of this question, even when the concept of mining bitcoin is taken out of the equation.

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

Post by SEAworld9 » Thu Dec 07, 2017 5:26 pm

technovelist wrote:
Thu Dec 07, 2017 11:23 am
JCE66 wrote:
Thu Dec 07, 2017 11:13 am
Bogleheads.....Here is the part I just don't get about Bitcoin. The article was great!

How do I convert Bitcoin to currency? Meaning, let's hypothetically assume I have 1+MM in Bitcoin....how do I actually convert this to dollars in my bank account that I can spend on whatever?
You have to sell it to someone else.
or you can use it directly at one of the many (and growing list of) businesses who take bitcoin as payment: microsoft, re/max london, tesla, shopify, newegg, overstock, DISH, intuit, wordpress, certain subway franchises, expedia, LOT, etc.

or use bitcoin to buy gift cards from a place like gyft for any retailer, restaurant, or service company that has gift cards.

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

Post by smesman » Thu Dec 07, 2017 5:43 pm

SEAworld9 wrote:
Wed Dec 06, 2017 5:18 pm
a couple more thoughts: as bogleheads, we're not in the initial rounds of funding or issuance of shares. so the companies we "invest" in aren't really taking our cash to put to work. rather we're buying a fraction of ownership after it's changed hands multiple times over, in hopes that we can sell it at a higher price later. this sounds a lot similar to the mechanics with bitcoin and many other things people invest in.
Hrm yeah, that's a good point. When we buy stocks we're not directly investing in that company, we're just giving money to someone else who did that (and possibly who got it from someone else). Unless it's the company itself that is issuing (extra) shares. Although, ultimately, someone directly put money into the company though, which they are using to do stuff. If you compare that to say bitcoin, then it is a little bit different because it's more like you're buying a product (of a mining operation) than investing into the mining operation itself.
Jonathan wrote:
Thu Dec 07, 2017 2:39 am
smesman wrote:
Wed Dec 06, 2017 2:51 pm
Now if you take bitcoin or commodities or currencies, what will the average person in these markets make on profits? Zero (after inflation and over the long term). Because it is a zero sum game.
Bitcoin certainly hasn't been a zero sum game so far. As it stands, the average bitcoin investor has profited handsomely.
Most of the "profits" are paper profits that are based on the current bid. If a large percentage of bitcoin owners would try to sell most would sell at a loss.

Mathematically the only way all of the current owners could make a profit would be for them to sell their bitcoins to the next generation at a higher price and exit the market. Which could happen. And here then comes the question of what zero-sum means: I'd say these new investors would also be included in "the average person". So they will also need to sell it to the next generation at a profit (adjusted for inflation an after costs) ad nausea. Where is all this added value coming from from simply owning a bitcoin that is not providing any value to the world?

In contrast, stocks represent companies that are actually doing something in the world and are receiving payments so they are not a zero sum game.

Now like my example, bitcoin may be able to be a useful store of value: E.g. I get X bitcoin now for helping old people and have to return X bitcoin to receive the same amount of help when I'm old. But that is still zero-sum. If I instead receive 2X of help when I'm old that is unsustainable (unless innovation happens or people are dying at an increasing rate.)

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

Post by SEAworld9 » Thu Dec 07, 2017 5:48 pm

HomerJ wrote:
Thu Dec 07, 2017 1:19 am
SEAworld9 wrote:
Wed Dec 06, 2017 5:18 pm
a couple more thoughts: as bogleheads, we're not in the initial rounds of funding or issuance of shares. so the companies we "invest" in aren't really taking our cash to put to work. rather we're buying a fraction of ownership after it's changed hands multiple times over, in hopes that we can sell it at a higher price later. this sounds a lot similar to the mechanics with bitcoin and many other things people invest in.
Companies have human capital adding to their value. There is input into the system. They build things or provide services and make profits. That's why the economy and stocks grow.

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

we're assuming that all companies make profits though, and we know that's not true, especially in sectors that many of use are heavily invested in like tech. and we know that the market cap of a company is many times based on fanciful profits they haven't even created or realized yet, which is evidenced by P/E ratios. based on many comments i have read, it seems that many times this forward looking optimism/speculation in the form of an inflated stock price is ok/dismissed as long as its an equity that's in an index fund, but receives much more criticism it it's something else.

that said, i see everyone comparing bitcoin to companies/stocks, but at the same time saying that companies and bitcoin are nothing alike because one creates revenue and profits and the other does not. so it seems like we're comparing apples to oranges.

agree, bitcoin at the moment is more of a store of value with growing utility and a medium of exchange than a company with human who produce things. as a unit of measure it will need to become a lot less volatile.

if many are saying that bitcoin has no intrinsic value, then it seems that the real/actual value is the market value (i tend to think of market value as most important anyways; intrinsic value is a weird construct IMO), which are the prices at which people are trading it at at any given moment. i'm not sure how else you would get a "true" price.

one last thing to ponder: i interpret many bogleheads' reference to bitcoin as a "bubble" as negative because it has risen so fast. if that is the case, what would be an acceptable/slower growth rate that warrants investment consideration?

thanks again for the thoughts!

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

Post by Jonathan » Thu Dec 07, 2017 6:27 pm

Casting bitcoin as zero-sum generally relies upon another assumption: that bitcoin itself has no inherent value. Of course we must ask: Is gold a zero-sum game? And, don't forget that store of value is itself a value.

How about a brief respite for a shared belief?

Here's a crypto asset that I do believe may indeed be zero-sum, and a bubble, and have no value. Check out the new viral game called CryptoKitties. I believe it's up to a multimillion dollar market cap now, and it runs on the Ethereum network. And, you're gonna love this: it's all about trading virtual cats!

*Cough* Beanie Babies *cough*. Of course, mid-cough, I must note that some Beanie Babies still sell for thousands of dollars. In fact, I believe Beanie Babies may, even today, be the most valuable plush toys ever. And entertainment, which I suppose CryptoKitties provides, is of course a value.

Quick folks, start collecting your CryptoKitties right meow!

Image

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

Post by Lauretta » Fri Dec 08, 2017 9:44 am

The following point applies both to this specific article on bitcoin, and to the rest of the work my Mr Swedroe. I was puzzled to read that at BAM they 'pride themselves' on giving only advice 'based on evidence from peer-reviewed academic journals'. (the link provided by Swedroe at the end of his article is a blog by an academic).
As an academic myself, I know by experience that at least in my field (physics) peer-review doesn't say much about the value of a research piece. Peer review will exclude things that are clearly nonsense or that are not original work, or that go against established knowledge or assumptions, but a lot of extremely mediocre work can get published in peer-reviewed journals.
First of all there is the question of the impact factor of the Journal (you can publish very mediocre work if the impacat factor is low enough), then there is the question of the referees you get, a lot of them will be at least as concerned about you quoting their work as about the quality of your paper (we get many times referees reviews with suggestions to add some more articles in the references (the referee is anonymous but it's often easy to guess that the article they ask to add is theirs); then there is the question that just like there are exam techniques (to pass your exams succesfully) there are techniques to write up an article in such a way that it will pass the peeer-review process (these techniques have nothing to do with the quality of the work); then if an article is refused you can submit it to another journal (I have colleagues who keep submitting the same article half a dozen times till eventually they find a kind referee that will not refuse).

This academic paper on CAPM is also quite interesting: https://papers.ssrn.com/sol3/papers.cfm ... id=2980847

This at least is my idea, based on my experience of academia albeit in a different subject. Also, I have corresponded with a money manager (whose small cap fund has consistently beaten the Russel 2000) and I found instructuve what he had to say about academics for example in the excerpt below, where he wrote on the difference between outside observers and participants in the market.
'The outside observers tend to be sceptics. For instance, Fama & French set out to prove the efficient market hypothesis. Paul Samuelson was humiliated by Buffett on the same matter. The participants know the hypothesis is preposterous. Thus when an observer such as Siegel or Dimson & Marsh or Fama & French find something out, the particpants’ reaction is fairly disinterested because they already know. Fama & French and the Nobel Committee may be impressed with themselves for finding an anomaly of a couple of per cent but the participants are asking a different question which is ‘how much can we make?’ . That is why O’Shaughnessy, who does run money, is interesting. He spins the data until he takes us to the edge of the public domain. Beyond that is a rather more complicated world that I’m not privy to but we get glimpses when we we’re told Jim Simons closed fund for employees only compounded at 48% for a while and Buffett said that if he had a small amount of money he could compound it at 50%.'
When everyone is thinking the same, no one is thinking at all

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