“Bitcoin has no underlying rate of return,” said Bogle, 88, who started the first index fund in 1976. “You know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it.”
Didnt quite understand this quote - is he down on gold too?
Bogle advocates buying broad stock and bond indexes[1], so yes, he's down on gold too. But that doesn't stop Vanguard from offering a precious metals and mining fund [2] or actively managed funds[3].
Note that the Vanguard Precious Metals and Mining Fund (VGPMX) invests in companies that pursue "mining of or exploration for precious and rare metals and minerals" and that it's not a fund that invests in gold itself. Some investors say you should invest in gold because ... reasons ... but that's not what VGPMX does.
At the end of the day asset managers' offerings will reflect investor demand even if it disagrees with the personal outlook of firm leadership. Also worth noting that Bogle has been retired for a while and likely has little influence over Vanguard's product offerings.
That's what I've been realizing latey: there is something to support Bitcoin, and that something is the blockchain. The reason banks and big financial companies are interested in it is not for its speculative value. They are interested in the fact that it is both decentralized and immutable. As long as financial corporations are willing to exchange Bitcoin for USD, then Bitcoin is a reasonable store of value.
There's also value in Bitcoin because it's a good entry point into other cryptocurrencies that could turn out to be better general-purpose exchange media, like Litecoin.
It's a bit like US Treasury Bonds. Nobody buys them for the tiny rate of return they offer, but they have genuine, valid use as a financial instrument. Normal people, however don't typically buy them, and normal people probably shouldn't be buying Bitcoin either unless they have some spare cash to gamble on it.
Nah. Banks and big financial companies interested in the blockchain will spin up their own version without tying it to the unstable mess of bitcoin. e.g. https://ripple.com/
And people do by treasury bonds for their rate of return, when the investment must be as riskless as possible.
There's no point to a decentralized database like a blockchain when you run it from a handful of centralized chokepoints which are easily censored or pressured by political actors. You may as well just use a SQL database that everyone syncs up periodically. Bankcoins like Ripple are pointless.
People buy treasury bills when they care more about return OF capital than return ON capital. Bitcoin and gold are also solid assets in this regard, particularly because they are bearer assets that don't represent a liability or promise-to-pay by some third party.
And yet, banks and financial institutions are vastly preferring blockchains that have been uniquely developed for their needs. There's very little appeal in simply accepting the transaction costs and times in bitcoin when you can spin up a version with whatever spec and interoperability you desire.
If by 'return of capital' you mean a propensity for an asset to retain its value, bitcoin is utterly inappropriate. Even gold is far too volatile and is only rationalised on those grounds against (very) long tail risk.
Their "preference" for "blockchain" is borne out of political necessity. I say this not to trivialize it, but to explain.
Banks are massive, massive institutions, and it is hard enough to coordinate people and resources within them, much less across them.
Back-office operations are indeed cumbersome and a major cost-center, and there is much value to be captured in simplifying all of it. If "blockchain" can serve a Schelling point to help get right people in these institutions to talk with one another so as to get on the same page, then there's a chance that some progress can be made towards solving these problems.
It's "blockchain" because "blockchain" is the new hotness, that's all. Any real world, inter-dealer distributed ledger will, in all practicality, be more like a cluster of SQL databases backing some kind of state-machine replication protocol than a cryptocurrency.
Well sure. Banks prefer blockchains because it provides the properties of a SQL database that everyone syncs up with. And this complicated, sql database by another name is vastly vastly preferable to the stuff that banks are doing now.
Yes, the fact that blockchains act as a public database is way way better than the outdated stuff that banks spend billions of dollars on. But it is still not the 'innovative' and interesting part of blockchains.
I'd be tempted to agree with you if companies like Axoni aren't getting funded by many large banks, while Bank of America has file 20+ block chain related patents.
For -no interest- $20mil in funding and an industry work group seem like -interest-
> The reason banks and big financial companies are interested in it is not for its speculative value. They are interested in the fact that it is both decentralized and immutable.
None of the blockchain projects or proposals being worked on by enterprise financial institutions are decentralized. A decentralized ledger is conceptually antithetical to a small group of organizations which trust each other and want to retain control over the shared ledger.
It can be immutable, but for that matter I don't really think it's immutable in the same sense as a decentralized, permissionless ledger is. The organizations in charge of the blockchain can create a hard fork, which everyone participating with the organizations will have to abide by, because the blockchain is not decentralized.
In fact, what we actually have is a consortium of companies deploying distributed database structures and calling them blockchains. I'm sure there is a legitimately new innovation that can emerge from this sort of blockchain, but it won't be decentralization or immutability.
> They are interested in the fact that it is both decentralized and immutable
So like https://ipfs.io/ or various other append-only logs? Or the certificate transparency project?
The blockchain is the least efficient way to create a distributed append-only log if there are a fixed number of trusted actors publishing to it.
Banks can far more easily publish append-only logs of transactions without the extra noise of "mining" and comparing longest chains based on proof-of-work.
US Treasury bonds are backed by the military and economic might of a superpower, and the fact that it's an IOU that's almost bulletproof. That's a really big part of their value. It's the safest investment possible which is why governments funnel money into treasuries.
Bitcoin just has the power of faith in the network and that liquidity will exist when you want to cash out. Neither of which is certain.
Bitcoin really doesn't have any support. Exchanges don't have close to the liquidity needed to allow everyone to withdraw their coins in fiat currency.
I've heard many people say this, and it seemed sensible enough at first. But on further thought, I sincerely can't make sense of it.
Dollars are just green pieces of paper. We accept them for goods and services because... everyone ELSE agrees to accept them for goods and services. It's circular.
How is the might of the US military relevant here? If you lived in South Korea, would you accept the South Korean won, or would you refuse your salary because their military is too weak compared to the United States? I would take my salary in South Korean won because all of my neighbors and strangers will take it in exchange for goods and services. Circular.
The circular argument that cryptocurrency has value has turned into a self-reinforcing cascade. Ironically, because of network effects, the more users and speculators there are in Bitcoin, the more utility it actually has, because others will accept it as money. This - and the human tendency toward envious imitative buying - causes the price to rise even further.
Cryptocurrencies are easier to secure and transfer than gold, which we only think has "value" because it's shiny and rare. Yet gold is worth $8 trillion. Why not crypto?
(caveat: Bitcoin could fall precipitously in the short, medium, or long term. My argument is that cryptocurrency - Bitcoin, Ethereum, or something else - will be more valuable than gold in 10 years or so.)
The enduring "value" of the US dollar -- for people who live/work in the US, anyway -- is more that it's the only currency you can pay your US taxes in. Its legitimacy as a currency for everything else stems from that.
>>How is the might of the US military relevant here?
Say tomorrow, a large portion of poor in the US, decide to teach the top 0.1% a lesson. They decide to stop trading in dollar, and start their own currency. They would also make it impossible for the current wealthy to liquidate their existing wealth in the new currency. What do you think will happen to the US economy in this situation?
What we are talking about is basically a group deciding to decimate the entire economy and start over. The only way to stop these people is using some kind of police/military kind of a force.
> ... everyone ELSE agrees to accept them for goods and services. It's circular.
If you think about it, there is nothing circular about US dollar's supremacy. If you reside in the US, you are bound by the Legal Tender law -- meaning, by law, you have to accept US dollars as a valid payment for meeting financial obligation. The US dollar is also the defacto reserve currency of the world. All important commodities, for instance oil, are priced and traded in USD -- though there have been a number of bilateral agreements between oil-producing nations and consuming nations (eg, Iran-Turkey, Russia) to breakout of this, the USD still rules the day. If you want to understand how the US dollar became the reserve currency of the world, you do necessarily have to understand the WW2 (ie, military conflict), the Brettonwood agreement that came after the war, the collapse of the agreement in the 70's, and what US has been doing militarily and diplomatically to maintain their dollar hegemony since, but, in short, it isn't just about some arbitrary blind trust in the US dollar by the world (or circular reasoning) that we ended up with the system that we now have.
> How is the might of the US military relevant here? If you lived in South Korea, would you accept the South Korean won, or would you refuse your salary because their military is too weak compared to the United States? I would take my salary in South Korean won because all of my neighbors and strangers will take it in exchange for goods and services. Circular.
IMO, this is a terrible example to demonstrate your point. In case of national security threat or economic crisis, it's not uncommon to see smart monies fleeing to gold or other safer currency (eg, Swiss Franc, Japanese Yen, or USD). South Koreans are less likely to hold their own currency if the US decides to withdraw all 30K US troops and break any agreements in place to militarily assist the South in case of military conflict.
> How is the might of the US military relevant here?
If I understand correctly, it's because nobody's going to come and steal our resources. Of course, given the relative peace in the world, probably nobody is going to steal South Korea's either....
Cherry-picking two dates doesn't really tell us much. Volatility year-over year would be useful to see, and, as they say, past performance is not an indicator of future earnings. A decision to invest (or not invest) in gold should be based on your current expectation of the future.
Ah come on. We both know that the basic claims about gold are true:
1) Gold returns, over the very long term, are roughly in line with S&P500 returns (but ... we're talking decades, as in plural).
2) in the short term Gold returns are essentially zero. With both the good and bad that comes with: almost no volatility, and when there is volatility, it's sudden large jumps up.
The one that isn't well known:
3) Most governments prevented this investment from working when it mattered by (in the US case) outlawing gold. Other governments did different things with similar results.
So Gold is a great investment, IF you're willing to wait 20+ years at least, and of course assuming you trust the government (the exact opposite of what most gold bugs will tell you).
1) is hilariously off base. S&P500 has averaged about 10% nominal return, annual, since 1928. Gold returned a little under 5% nominal over the same period.
S&P500 has only 10% return if you ignore a number of things
a) your pick of the moment. You might be tempted to pick today as a neutral point in time. Of course, it's not. The S&P500 is at a complete all-time-high. It's literally never done this well, ever. Gold is not doing so well. In fact, gold has done quite poorly for about 5 years now, and perhaps a bit better over the last year (despite central bank interventions to keep it down I might add). Comparisons at this time, will of course be skewed towards the S&P returning more. In 2012 Gold would have been the outperforming asset, and trust me on this one: it will be again. When ? Good question.
Which will be the best investment for the next 10 years. The asset that's never ever been up this high, or the asset that has systematically kept it's value for 7000 (not a typo) years, but has been going down quite a bit for the last 5 years ? Much more difficult question isn't it ?
I think it's quite a safe bet to say that gold will, firstly, have much worse returns than the S&P500 over the next month or two, and much better returns than the S&P500 over the next 2-5 years.
When it comes right down to it, it's effectively a bet on government policy. If the FED restarts Yellen's "competitive devaluation" craze of 2011 (which is definitely a possibility), gold will have an amazing performance. Again, not going to happen over the next 2 months. Very likely going to happen within the next 5 years.
b) transaction costs from buying and selling when the index gets modified, which are not counted in the index (they are counted in things like SPY, which does indeed systematically underperform the index).
c) (closely related to b) the fact that quite a few stocks got thrown out when they either went bankrupt or the stocks dropped enough. This is not reflected in the index, but of course anyone actually invested would get dented in the process, more so than for transaction costs.
The trouble is there is no true answer to how much the S&P500 returned over the past century to an actual investor. One thing's for sure: it would be less than the index, and (especially in the earlier part of the century) significantly so.
The yield is a pretty big thing to miss. Also gold and stock prices are anti-correlated, with gains in the former chasing weakness in the latter. This makes cherrypicking dates pretty easy to do.
It's not cherry picked, and the S&P prices have been adjusted for dividends. I'm pretty sure that if you pick two other intervals, both assets will perform equally well.
Edit: yes, there is some selection bias in my intervals:
1970s: gold beats SP500 by a mile
1980s: gold stagnates, SP500 soars
1990s: same as 80s
2000s: see 1970s
2010s: so far, SP500 is ahead.
Conclusion: you need a VERY long investment horizon to compare these two assets.
Here is Warren Buffet's similar argument against gold from his 2011 annual investor letter [0]. The argument also applies to Bitcoin and other assets that are driven more by speculation than productive income streams:
"The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.
As “bandwagon” investors join any party, they create their own truth – for a while. Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B."
Edit: If you enjoyed the above excerpt, I'd recommend reading it in context, pp. 17 (start at the heading) through end of 19. I've excerpted only the middle part on gold, but he also explains the dangers of holding cash, and further explains why he favors productive investments.
The thing about, say, cropland is that you can't take it with you. If the area where you own that cropland suffers from political instability or a government that decides to confiscate it for whatever reason, that land investment is effectively worthless. I believe it was fairly common for some religious and ethnic minority groups to keep some of their wealth in gold exactly because they could carry that with them if they were forced to flee.
Imagine you are living in the past, when gold had only industrial, probably jewelry use, and you invent the concept of money. Would you buy the gold then? Hint: industrial use accounts for maybe 1% of the price of gold.
That is what is happening with bitcoin, people realize it can have monetary use and buy it to capture the difference between intrinsic value (zero) and future monetary value. Of course, this can fail badly if bitcoin won't be used as money.
Additionally, there is a positive feedback mechanism that can be deadly for fractional reserve fiat currencies. People get credit, buy bitcoin, this inflates the fiat supply and drives bitcoin price higher, alluring more people to repeat the process. This process is called hyperbitcoinization.
Current price of bitcoin is ~9.9k total supply is well over 17 million. lets call it 10k and 20 million. We're sitting at ~ 0.2 trillion. For that you could buy paypal, square, moneygram and Western Union and still have plenty left over.
That's fairly surprising. Bitcoin alone is within striking distance of the market cap of visa.
I wonder if Bitcoin has more utility (potential) compared to gold though?
For example, if you purchase SaaS products with Bitcoin, you don't need to trust that the service provider or their merchant provider will handle your personally identifiable information with care (eg. billing info), because you didn't have to provide the information.
Perhaps there are other utility uses for Bitcoin that will eventually lead to demand based on something more than fear?
I'd love to see a write up, there are some that are well known to be lost, and plenty of stories of lost bitcoin. I'd love to a hard amount for the first and some estimates for the second.
Gold is certainly the ideal model for something like Bitcoin but in terms of projectable value gold has time on its side. I will happily invest in Bitcoin when its history as a store of value and a medium of exchange is measured in millennia.
> Gold is certainly the ideal model for something like Bitcoin
I disagree. I don't think Bitcoin should strive to be a store of value like Gold is. Today most Gold investing is just based on fear, because people see a government misbehaving and lose faith in its ability to maintain the value of its fiat and then flee to something that still has some properties useful in monies.
This is no where near the main usefulness of Bitcoin though, which IMHO are: its extremely divisible, portable, efficient and has cheap transaction costs. Its also by far the most free in terms of your ability to enter into a transaction with anyone the world over, regardless of what a particular government thinks about that transaction.
> I will happily invest in Bitcoin when its history as a store of value and a medium of exchange is measured in millennia.
The history of Gold as a medium of exchange and store of value has virtually no bearing on whether or not you should invest in it in 2017.
Gold pays no dividends, has no interests, does not appreciate over the long term, and can't protect against incident forms of inflation. On top of all that, it has none of the above mentioned technological advantages Bitcoin brings.
There are arguments to be made for Gold but they are in its utility in modern industry, etc.
People have been saying that governments are going to shut down bitcoin ever since it was invented. And yet here we are.
There are even conspiracy theories that the US government itself created bitcoin, for the same reason that the US navy labs invented Tor. To provide people in other countries with censorship resistent tools.
>This is no where near the main usefulness of Bitcoin though, which IMHO are: its extremely divisible, portable, efficient and has cheap transaction costs. Its also by far the most free in terms of your ability to enter into a transaction with anyone the world over, regardless of what a particular government thinks about that transaction.
Those were/are all the main uses for gold for much of human history. Bitcoin has improved on or has potential to improve on those, but its relative volatility puts gold to shame.
>The history of Gold as a medium of exchange and store of value has virtually no bearing on whether or not you should invest in it in 2017...There are arguments to be made for Gold but they are in its utility in modern industry, etc.
I would argue the history of gold is the only reason to invest in it. It is extremely overvalued compared to its industrial and commercial uses. However its history shows it is a decent diversification vehicle to protect against loss of value of fiat currencies. This applies to the doomsday scenarios you alluded to in your comment as well as the less drastic economic downturns.
>This is no where near the main usefulness of Bitcoin though, which IMHO are: its extremely divisible, portable, efficient and has cheap transaction costs. Its also by far the most free in terms of your ability to enter into a transaction with anyone the world over, regardless of what a particular government thinks about that transaction.
This is exactly whats wrong with bitcoin and people who like it. Its certainly very arguable whether its efficient and cheap compared to whats already commonplace but putting that aside... you think tax evasion and tax fraud are features inherent in bit coin.
You can smuggle cash, gold and goods to any country you want and skip out on the taxes and regulations. That's not some futuristic innovation.
> I will happily invest in Bitcoin when its history as a store of value and a medium of exchange is measured in millennia.
So is USD out for you too, then? It's not even 300 years old yet. If you mean fiat currency in general, that's also out, as we haven't had that for multiple millennia yet either.
People invest in USD? What does that mean? Currency speculators might arbitrage USD if they think the exchange rate is inaccurate but nobody holds USD because they think the value will go up long term. Holding fiat currency means you lose money constantly due to inflation.
Pretty sure the point was to highlight that people hold faith in the value of USD as a currency in spite of its youth, not to discuss its merits as a long-term investment.
>nobody holds USD because they think the value will go up long term
People can and do implicitly invest in USD. For example, I might use an FX hedge on a foreign investment to protect against foreign currency volatility in favor of exposure to USD because I have more faith in its value during the lifespan of my investment.
>Holding fiat currency means you lose money constantly due to inflation
Sure, but it's also protected against losses in a market downturn. Cash is outperforming if market returns are negative and in excess of inflation loss (which becomes more likely as poor market performance slows inflation). Not arguing that people should hold cash out of fear, but your characterization of cash seems a little simplistic.
> I might use an FX hedge on a foreign investment to protect against foreign currency volatility
I sort of think that's an abuse of the term "invest". Sure you're investing in some kind of instrument that is highly affected by the value of the USD, but you're not really investing in USD. You're not long USD by holding that investment. By that metric people who short Bitcoin or Bitcoin exchanges are also "investing" in bitcoin.
You are long USD if you believe USD will remain relatively stable while many other securities actually diminish in value for various reasons. Even if the investor is not ultimately correct, this qualifies as investing.
Investing involves risk management, not just positive returns, and hedging a long position with a position in something like USD is not comparable to shorting.
It means they prefer an investment which is relatively stable. I’m not talking about forex arb, I’m talking about investing in treasury bonds or USD ETFs.
Consider that it is very possible to invest in a financial security to reduce risk and hedge losses, not just to get a return on the capital itself. Investing encompasses a lot more than just literal value investing; this isn’t an abuse of terminology, your usage here is rather limited.
Yes, people do invest in USD. I looked up a random dollar fund (BB Cambial Dólar LP Mil), and its total return over the last 5 years was 73.92%. That's AFAIK significantly more than the accumulated inflation in the same period.
I think that's kind of an abuse of the term "invest". If you read their prospectus it's clear that they are looking for foreign currency arbitrage opportunities:
> The applications of the FIs must have at least 80% of their PL represented by
assets directly related or synthesized via derivatives to the variation of the North
American. The applications, together with those of the FIs invested in assets or
of public or private issuers, other than the UF, and
assets traded abroad, are limited to 50% of PL. The FIs will be able to operate in
derivative markets with the sole purpose of protecting positions held in cash until the
such limits, provided that they are referenced in assets and / or financial indicators aligned
to your goal. The fund may invest in FIs which apply a maximum of 10% of
financial assets traded abroad.
I'm sorry, but I'm not seeing where in that list says it is looking for arbitrage opportunities. What you quoted is just the list of restrictions on the kinds of investments the fund can make. The "targets" part, which you didn't quote, says the returns should attempt to follow the USD. And it seems to be working: the total return over 5 years was 73.92%, while the USD over 5 years increased 73.95%. That is, had I bought USD 5 years ago and sold it now, the return should be about the same as that fund. Which is the point: it's simpler to invest on that fund (or others like it) than to buy USD directly.
Gold does not produce anything, unlike stocks which yield dividends, or land which yields crops. And yet it's a wonderful investment over the very long haul. From 1972 to 2015, BOTH gold and the S&P went up 17-fold.
Moreover, investors flee to gold in times of panic. If you hold 50%-50% gold and stocks, one will tend to up when the other goes down, letting you sleep at night.
Money laundering. Illicit transactions. Any number of things government money stored in banks is not much good for. How big a market is that? I'm guessing much, much bigger than most people think.
You do ask how people ran their drug-and-weapons enterprises before bitcoin. You'd guess it was through shady lawyers, corrupt banks, tax oases and webs of mailbox holding companies all the way down. That's proven working. But with bitcoin you are stuck with the dozen shady exchanges. Any normal criminal would think it's too risky.
Isn't this like saying Uber can't compete with taxi companies because the old model is proven to work? I'm not able to tell you whether it's true or not, but the claim here is that Bitcoin removes a lot of the friction in illicit markets, so that you don't need to be a Colombian Don to sell cocaine.
The Black market in countries like India is large enough beyond our comprehension. Large enough that its mixed so well into everyday life, taking action on it could cause massive economic distress.
Bitcoin is the next step in the game for these kind of things. Its like a dream come true.
You jest, but go read bitcointalk.org's archives from a few years ago (and before) and I think you'll find that's exactly the purpose it seems expected to fulfill.
Gold has practical uses in industrial applications and electronics. It also has a floor, which is the cost to mine and ship. Gold has a minimum theoretical value although I'm unsure off the top of my head how low that might be.
Bitcoin's only value is what people will pay for it and has nothing backing it up.
Bitcoin is unlike a currency in that it is difficult to have a transaction, today, using bitcoin. That will hopefully change, but that is how things are today.
I was referring to the time it takes to complete a bitcoin transaction in which confirmation lags significantly behind that of transactions in currencies around the world.
Investors like him and Buffet see gold as something just sitting there. if you buy a company, they will increase earnings, market share etc.
Gold just sits on a vault--which is a great thing for rich people to use a small % of their wealth for. Just in case.
Gold has other uses and a 5000+ year history. Compare it to hundreds of coins out there
Sounds to me like he is just rambling a bit there at the end.
Gold actually does have some intrinsic value—it's useful. It's stable, nonreactive, resistant to corrosion and conducts electricity. It's been used as a value store since antiquity above others particularly because it is stable and noncorrosive. The conducive properties are just an added benefit we now have a use for. A gold coin from a hundred years ago is still a gold coin. A Bitcoin from today may not be a Bitcoin as we know it a few years from now. And if it is, it may be difficult to transact.
Bitcoin, on the other hand, really has no use. There was this idea that it might be used to speed up transactions but as we saw leading up to the fork, that's not guaranteed. Anyone with enough capacity can basically seize control of the currency, so it's anything but stable. I think things like Ripple have a far higher value proposition than Bitcoin today—more of what Bitcoin once was.
Well, the use case for Bitcoin is decentralized, censorship resistant, electronic transactions.
Ripple is run using a different consensus algorithm, and is effectively managed by a central authority.
The point of Bitcoin has very little to do with speeding up transactions, all though this isn't a negative.
The point is sending transactions that are very difficult to censor. And yes, it does a very good job of this as there are a whole lot of transactions that governments would love to censor, but they AREN'T being censored, right now.
> Sounds to me like he is just rambling a bit there at the end. Gold actually does have some intrinsic value—it's useful
Actually I think you are misunderstanding him? He isn't saying that gold doesn't have intrinsic value; he's saying it doesn't inherently generate more value.
> Anyone with enough capacity can basically seize control of the currency, so it's anything but stable.
The amount of resources required to execute this attack is moving higher at a rapid pace. Also, a 51% attack can gum up new transactions and potentially double spend, at least until people realize the attack is happening and stop signing new transactions. It can't rewrite blocks from the distant past to send everyone's coins to the attacker's address.
Large public companies that are unlikely to ever issue dividends or be acquired also fit this description. For those companies, there is no legit expectation of an investor capturing the underlying cash flows, other than on the capital gains from the market price of the stock being gauged against the current P/E consensus (or valuation metric of your choice.)
But yet there AMZN, GOOG, and others sit, responsible for a large part of the return in Bogle's revered index funds.
This is slightly specious. There is an expectation that AMZN or GOOG will eventually issue dividends or repurchase shares, and there's noting fundamentally preventing them from doing so. There's no way to form a valuation otherwise.
"Expectation" means that there is some probability <1 that they will return cash to investors on any given day. You have a finite time alive. It's not academic to conjecture that there's a very high probability that you, as an investor, will never see a yield on the capital of your investment.
If you knew with 100% there will never be a buyback or dividend by AMZN while you are a holder of their stock, arguably you are making the same trade as someone buying bitcoin or gold: expecting someone else to come along (who perhaps expects to have a longer lifespan) to pay you more for the stock than you did.
Note: I am not arguing that buying AMZN is a bad idea, I am saying that the argument that there is no "underlying rate of return" for bitcoin is a poor argument coming from someone who is also telling investors to buy those stocks, many of whom will certainly never see direct yield on their investment, just capital gains.
>arguably you are making the same trade as someone buying bitcoin or gold
I think the difference here is that people can intuitively justify changes in the value of a stock regardless of buybacks and dividends because company performance is a tangible, measurable factor (even if only by proxy of flawed but useful metrics). The value of gold is more vaguely determined by market perception/speculation (e.g. gold doesn't have quarterly earnings reports with detailed accounting). Ultimately something has value as long as people believe it has value, but I think the discomfort from folks like Bogle comes from the lack of a rigorous method for valuation vs. assets like equities.
Bitcoin is not a traditional investment, it is a speculative one.
Blockchain technology is not proprietary to bitcoin, so given this is fungible what value are you pricing in when buying bitcoin? Access to use bitcoin...
Bitcoin is becoming a value store. With slow transaction confirmation and high fees, what are the real-world applications for Bitcoin supposed to be now? And for those applications, are there not other cryptocurrencies more specifically targeted at being better at that application?
Price is based on supply and demand. It's only deflationary if demand stays the same. But if people stop believing bitcoin is going to MOON, then demand can/will fall.
nothing at the moment, it's being used as a speculative investment. I imagine in time the volatility will reduce as other cryptocurrencies become more mainstream and actually used for real-world purposes.
Reduce volatility by having its price approach zero? What use is Bitcoin if another cryptocurrency wins? Where can you find the greater fool to sell your Bitcoins to if it has no practical purpose and has been superceded by other currencies.
The increased price makes the system more valuable because it increases the amount of funds that can be transferred through and decreases the cost of that transfer (more order depth for getting into and out of bitcoin).
Today, it's feasible to send $1M with Bitcoin. A few years ago, there wasn't enough market depth to do that very efficiently.
The other 'killer app' is companies/organizations holding all of their funds in a transparent, public way by making their addresses known. I think there will be a lot of value in this, but we're probably a decade away from the space maturing.
Bitcoin has the best security model. In 10 years does a single massive ledger make more sense than transactions at the edges? The value proposition of Bitcoin has always been transaction scalability by elimination of charge backs. With a fundamentally irreversible ledger as a base layer, networks and services will develop around it that provide whatever combination of speed, fees, and liquidity you're looking for.
The biggest red flag is it's clear the exchanges don't have the liquidity for everyone to cash out. Since there are no banks to provide credit lines it's entirely dependent on people getting into the market to provide the fiat currency to cash out.
A run on these exchanges will destroy the value of bitcoins and cause a panic.
The way the system works provides little in any sense of a line of liquidity. Unlike normal banking the exchanges operate ledgers where the fiat currency they have on hand is directly tied to how many people have put fiat currency into the exchange network. Given the extremely rapid rise of the price of BTC, it's extremely unlikely they have anywhere close to the amount of fiat currency if large numbers of people cash out.
Exchanges are not market makers. They don't have to be able to allow everyone to "cash out", they are not banks.
Exchanges provide a venue for buy-sell to meet. If someone wants to "cash out", someone has to want to "cash in". Lately every time the price dropped folks saw it as the time to buy more, or just "finally buy bitcoin, because it'll go up soon".
A big crash happens when the equilibrium shifts drastically, when more people wants to get out than get in, it'll crush the price (because more people wanting to get out will lead to even more people wanting to get out).
Isn't the "value" of a currency in it's relative stability over time? That is, the confidence by those who use it that it will be exchangeable for roughly the same amount of goods and services today, tomorrow, six months or a year from now (accounting for nominal inflation, of course).
If you accept that premise of what a viable currency should be, then it seems like the volatility of Bitcoin and other cryptocurrencies have thus far made them failures. I mean, if a national currency had similarly rapid changes in value, wouldn't we see financial chaos, riots, and revolution?
The second link does nothing to refute the idea that bitcoin, as an investment instrument, is purely speculative. The author simply argues that bitcoin is unique among money-like assets.
The first link describes the hypothetical utility of bitcoin, but does nothing to explain a natural reason that bitcoin should have returns or appreciation. In fact, since the author describes bitcoin as a "medium to store wealth," the assumption should be that every buying transaction has an opposite selling transaction, which means there would be little to no overall price impact from any of the described activities.
I wouldn't scramble to dismiss what Jack Bogle says. He may be 88, but he has earned a reputation as a clever, knowledgeable, and decent fellow.
"There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it.”
Genuinely asking, isn't this the plan for many people? How is bitcoin different than other commodities or property in this regard? Would Bogle say the same thing about those investments?
There is a big difference. If you buy wheat futures and nobody wants to buy them, you can take delivery of a bunch of wheat. If you buy investment real estate and nobody wants it, you can live in it, or build things on it. If you buy stock in a random Fortune 500 company and nobody wants it, you can take possession of a bunch of desks or factories or inventory or whatever their deal is. And if you take possession of a bunch of US currency you can be assured that you'll be able to use it to settle debts or pay your taxes as long as the US government is around and has better guns than everyone else.
> If you buy stock in a random Fortune 500 company and nobody wants it, you can take possession of a bunch of desks or factories or inventory or whatever their deal is
Not really, the value of the stock approaches zero, and when the company closes up shop I doubt you get anything at all as an investor. Assets would typically be sold to pay off outstanding debts.
More fundamentally, the value of a share of stock is tied to earnings. When companies accumulate capital beyond their horizon of their operational needs, they issue dividends.
Yes, companies can go out of business, but that's not the point Bogle is making. He's not saying stocks are riskless. He's saying that their valuations are tied to notional future earnings and the dividends they will generate.
Yes, there's really nothing that gives Bitcoin value beyond new investors being willing to pay more for it than previous investors. Most people don't transact using it and the network is far too slow to support that use case anyway. It is a "store of value" that loses or gains half its value every few months. The community is torn with 3 separate forks & some of the earliest Bitcoiners have gone all in on Bitcoin Cash. The majority of the hashing power is controlled by a few entities and is a far cry from the decentralization originally envisioned. The communities online no longer talk about Bitcoin as a useful tool. They just talk about getting rich off of it. coinmarketcap.com, a site only for checking the price of cryptocurrencies, is a top 500 site globally according to Alexa, meaning there are a lot of people checking the price of bitcoin, few people using it for anything.
In April 2011 Roger Ver bought enough bitcoin to drive the price up from $1.89 to $3.30. His company was the first to accept Bitcoin for payment. He paid for the first radio and billboard advertisements for Bitcoin. He funded BitInstant, Blockchain.info, BitPay, Ripple, and Kraken. He helped found the Bitcoin foundation. He started an online store that accepted only bitcoin. He essentially became a spokesman for Bitcoin.
Bitcoin is processing roughly an order of magnitude more transactions than Bitcoin Cash right now. Though the fact that Bitcoin Cash is only running at about 1/100th of its nominal capacity hasn't stopped the community cheering for another hard fork to increase that capacity limit further, presumably because its price is driven by speculation about how much it could do if anyone actually cared about it.
How is bitcoin different than other commodities or property in this regard?
The key distinction is that, mercurial though their price fluctuations may be - traditional commodities such as oil or real estate at least have some intrinsic value, and hence, an intrinsic floor to their valuations. Meanwhile, to the extent that any of these "coins" have such an intrinsic value - if they can even be thought of as "currencies" at all - it is extremely hard to pin down.
Which is Bogle's central point: to the extent that any of these instruments have "value", it's in the belief that ... that value will keep going up, and up, and ever up.
If I buy stock in a company, and the company pays dividends, I get the dividend income until I sell the stock. That is, I bought a future income flow. Same thing if I bought an income-producing property.
Raw land? Non-income-producing property? Gold? Not so much.
That is an interesting argument. These guys are selling financial products that are explicitly not pro bitcoin (yet). If they see value in bitcoin then they would probably pump them. That is most likely too soon. In a few years you will probably hear that bitcoin is a hedge against global instability. It might be rational for oil to trade in bitcoin. It's also a big way for the Chinese to get money out as well as the Russians. North Korea has nothing to lose with bitcoin unless it pisses off the Chinese and Russians.
> It’s “crazy” to invest in the digital asset, he added. “Bitcoin may well go to $20,000 but that won’t prove I’m wrong. When it gets back to $100, we’ll talk.”
Over the 7 years from 1993-2000, a portfolio of stocks with ".com" in the name far outperformed every other asset class out there. If you held that portfolio for the 7 years following, from 2000-2007, you would most likely go bankrupt.
The "most likely" in that statement is in the sense that you still need to eat, and so if all you've got are assets that are worth 1/100th of what you paid for them, you're probably pretty deeply in debt in the rest of your finances. In the dot-com boom, it wasn't uncommon for people to mortgage their homes to buy stocks, to quit their day jobs to day-trade stocks, or to owe hundreds of thousands in AMT on stocks that were worth less than the tax bill when it came due, all situations that could and did lead to bankruptcy.
Vanguard is almost singlehandedly responsible for returning trillions of dollars of costs, in the form of fees and underperformance by active managers, back to investors. Millions of investors have benefited.
What evidence is there that it isn't a bubble? People buy Bitcoin only because they think they can sell it higher. Eventually, you will run out of greater fools.
and what does that have to do with talking about an area with no domain knowledge?
there are plenty of esoteric and dubious assets in the vanguard obligatory diversification model. Get bitcoin in the 1% allocation right next to CDO-ABACUS-2007-SENIOR
Over the past 7 years, Bitcoin has outperformed every security and portfolio that Jack Bogle has recommended.
Same deal (give or take a few name and parameter changes) as with the preconditions for every speculative bubble - and crash - since the beginning of time, basically.
7 years is a tiny sample size if you are hoping to retire off it (unless of course you cash out your millions during that time). His advice makes sense if you are looking at a 30 year retirement horizon - it may not be there in 30 years.
Interesting.. the stock market will probably be there, just not necessarily the individual stocks you are currently invested in. Unless ICOs take off... now despite all of scams, ICOs allow a global stock market. Now maybe participating in that is dangerous.. maybe not.
>the stock market will probably be there, just not necessarily the individual stocks you are currently invested in
Part of the beauty of index investing - names can rotate in and out of your benchmark based on whatever criteria the index uses (e.g. market value) but you're not bound to a company that drops from the index (you are, however, exposed between the time it becomes ineligible and the next rebalance).
We'll see how well Bitcoin does during the next recession. Plenty of investments seem great when the markets and economy are doing well, but turn into disasters when the markets crash.
I wonder if a crash would be good for Bitcoin's price. I think it is a bubble but it seems like an asset that would gain traction in times of fear/uncertainty in the fiat economy.
I think it depends on the timing and scope of the crash. Given the current level of doubt, it's still a highly speculative asset that bears significant risk. History suggests a crash would spark a "flight to quality" in which people would likely dump bitcoin in favor of low-risk assets.
But that only happens if the company is insolvent or otherwise failing. If that isn't the case, new buyers would come in because the stock represents a share of something that has actual value. There is no such underlying asset beneath bitcoin. It's only value is speculative.
How do you do that? It seems hard to me to attach hard $ to volatility. If you go with a rebalancing approach like frequently done for lazy portfolios you'd likely benefit from volatility, would you not?
Are you insane? He built Vanguard, the most successful investment product in history. They have 3 trillion dollars of assets managed and literally invented the retail index fund. You think he doesn't follow every aspect of the financial markets?
The Bitcoin bet is that traditional financial markets have it wrong, or don't serve the market Bitcoin serves. You judge how likely that is to be true.
And yet that doesn't factor into the discussion. He built Vanguard on the entire concept of "traditional finance has it wrong". He's an insanely smart dude. I'm confident he understands the market dynamics of bitcoin more than the average person gambling on bitcoin.
I can see how this can be seen as bad. Just, I don't think he is familiar with underlying technology and that is why he can't see how this will work. In a way this is ageism and I accept your criticism. But I still don't think he is right and understand this correctly.
I appreciate not knee-jerk reacting to the criticism, but you didn't really accept it, you deflected it.
Again, you're making the argument that he doesn't understand Bitcoin well enough to have a valid opinion about it, and the basis of that argument is his age.
If you have evidence of things he's said or done that demonstrate a misunderstanding of the technology, that's fair game. What's not fair game is saying, "he can't possibly understand it because he's old".
He's the founder of Vanguard, but he retired from the CEO role 19 years ago. In addition, the ownership structure of Vanguard is through the funds themselves, which are owned by the customers. I'd be surprised if Bogle retains any interest at all in the company.
Maybe partly, but he has a point - without anything backing it, its volatility doesn't work well with traditional long-term investing strategies.
Vanguard investors are typically not high risk/high reward investors. They are low/med risk investors looking for a slower, steadier increase in their retirement funds, with many of them just putting money in index funds or target date retirement funds. Now, if you are not that kind of investor, and you have less aversion to risk, then his point doesn't matter to you. In which case, sure, go to town with Bitcoin.
The common sense for the wealthy investor should have been to invest 1% of his portfolio into bitcoin and other digital currencies. If he did that two years ago he'd get x15-30 returns, making Digital currencies over 10% of his portfolio. That would be the time to "cash out" or "scale out" the original investment back into traditional channels.
Is it late now? I think wait a bit and then start DCA that portion of your portfolio.
Digital currencies are something would have been great to invest in, in retrospect; but if you're in them now, continuously take profits, to make sure you come out ahead when normality kicks in.
There's no Bitcoin-only economy that requires you to use Bitcoin to operate in it, like currencies. There's too many competitor crypto-currencies, and the bar for competition is sufficiently low that it's unlikely that Bitcoin will be the long-term winner. That makes it a losing bet; maybe not this decade, but sooner or later.
Also, the slowness of Bitcoin transactions means that when the crash happens, and people start rushing out, they won't be able to get out very quickly. Hopefully people will see it as easy come, easy go.
> If he did that two years ago he'd get x15-30 returns.
Would he? If he put 1% of his portfolio into bitcoin, he'd have moved the bitcoin price into the 100s of thousands of dollars or millions by himself and then who would he find to buy them from him?
Why? Why was this common sense? What other things should people have invested 1% of their portfolio in? Is every thing that has the possibility of increasing in value dramatically worth investing 1% of my portfolio?
It's not a totally crazy idea to set aside a small portion of your portfolio for a bunch of long-shot investments that have huge upside potential (isn't that how seed funding works?). But I think practically speaking it'd be hard to come up with that list of assets in a rigorous way such that you expect some portion of them to succeed. (e.g. all crypto currencies? penny stocks? beanie babies? abstract art? water bottles, bullets, and cigarettes?)
Diversification. Preferably your portfolio will have a tech allocation and crypto could be part of it. Certainly there are many things that will appreciate ten folds in a year; and most things that don't.
Had I opted for diversification in my investment, I'd have seen my wealth even triple that now. And this is not in crypto only.
I think the question is: given that you can find at least 100 long shots out there, how could you know this was among the <= 100 that you should put 1%+ into?
Didnt quite understand this quote - is he down on gold too?