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But a stock represents ownership of a real company that (hopefully) will make profits that can be distributed as a dividend or be used to grow the company and i

But a stock represents ownership of a real company that (hopefully) will make profits that can be distributed as a dividend or be used to grow the company and increase the value. A Bitcoin is totally speculative and has virtually no useful purpose in the real world yet. You can’t actually buy stuff with it from stores, due to its niche status, high fees, slow transactions, and wild price fluctuations. Looking at it that way, it’s clear that a stock is a much safer investment than a Bitcoin.

smabie 6y ago
It doesn't matter how safe an investment is. Uncorrelated alternative assets (metals, crypto, art, etc), when added to your portfolio, lower the total volatility (risk) and boost the risk adjusted returns. You can take a really crappy asset with low returns and high volatility (like gold) and add it to your portfolio to boost your risk adjusted return. In short, from a quantitative perspective, it never makes sense to look at a security or asset in isolation. Instead one must consider the total portfolio as a whole. Source: work as a quant trader tldr: If the question is "does crypto have a place in everyone's portfolio?" The answer is emphatic an "yes". And indeed, we are quickly moving towards a world in which crypto is held by most institutional investors. Even at this early stage, the institutional flows into btc is staggering. And it will only increase with time. From my vantage point as an insider, btc is here to stay. full stop
- brokencode 6y ago
  Sure, maybe put a few percent of your portfolio in it. But my point is that Bitcoin is highly speculative and risky compared to pretty much any other kind of investment. Even gold has industrial uses and isn’t simply a token of value like Bitcoin. I will concede though that there is a huge market of derivatives which often seem pretty unusual and risky to an amateur investor such as myself, so maybe Bitcoin isn’t that different from some of those investments. I don’t know a lot about that market, other than that it played a large role in the Great Recession, which is a dubious distinction.
  - smabie 6y ago
    Then you probably won't be pleased to hear that crypto derivatives are far more popular than actual hard crypto :) Most people are unaware, the the derivative volume of btc is yuuuge compared to the spot volume.
- thekyle 6y ago
  One of the most common critiques of modern portfolio theory is that it defines risk by volatility rather than downside risk. While a stock will never have price-to-book multiple less than 1 (unless fraud has occurred) a cryptocurrency has no such limit on how far it can fall.
  - smabie 6y ago
    Well a crypto currency can only fall 100%, so it's not unlimited. Moreover, some stocks do actually have a P/B ratio below one, for example Deutsche Banks PB is currently around 0.3. You could instead look at downside deviation instead of volatility, but in my experience standard volatility and upside/downside deviation look very similar for most securities. This is somewhat paradoxical for me personally, but it is what it is.
  - Blammar 6y ago
    I just wanted to point out that stocks have had price to book multiples less than one, per various comments by Buffett and Benjamin Graham. Also, for another example, there are funds that sell at a discount to the total value of shares held by the fund.
    - repsilat 6y ago
      > stocks have had price to book multiples less than one It's not even that unusual, or newsworthy. It's pretty common for banks, basically the rule for European banks. I'm still not convinced the numbers are "real" though. As I understand it, there are a few main arguments as to why "buy and strip" price arbitrage doesnt happen, and I'm not sure which is/are true: - Regulatory barriers. JPM or Apple can't just buy Deutsche Bank because lawmakers won't allow it. - They're too big to be bought out out by (European?) private equity, or controlling stakes aren't available. - That's not real book value. Try to wind it down and it'll evaporate. Maybe there are more. I understand that dividends and buybacks are currently limited by regulators in Europe, and that closes one valve for the price arbitrage, but still...

smabie 6y ago

It doesn't matter how safe an investment is. Uncorrelated alternative assets (metals, crypto, art, etc), when added to your portfolio, lower the total volatility (risk) and boost the risk adjusted returns. You can take a really crappy asset with low returns and high volatility (like gold) and add it to your portfolio to boost your risk adjusted return. In short, from a quantitative perspective, it never makes sense to look at a security or asset in isolation. Instead one must consider the total portfolio as a whole. Source: work as a quant trader tldr: If the question is "does crypto have a place in everyone's portfolio?" The answer is emphatic an "yes". And indeed, we are quickly moving towards a world in which crypto is held by most institutional investors. Even at this early stage, the institutional flows into btc is staggering. And it will only increase with time. From my vantage point as an insider, btc is here to stay. full stop

brokencode 6y ago
Sure, maybe put a few percent of your portfolio in it. But my point is that Bitcoin is highly speculative and risky compared to pretty much any other kind of investment. Even gold has industrial uses and isn’t simply a token of value like Bitcoin. I will concede though that there is a huge market of derivatives which often seem pretty unusual and risky to an amateur investor such as myself, so maybe Bitcoin isn’t that different from some of those investments. I don’t know a lot about that market, other than that it played a large role in the Great Recession, which is a dubious distinction.
- smabie 6y ago
  Then you probably won't be pleased to hear that crypto derivatives are far more popular than actual hard crypto :) Most people are unaware, the the derivative volume of btc is yuuuge compared to the spot volume.
thekyle 6y ago
One of the most common critiques of modern portfolio theory is that it defines risk by volatility rather than downside risk. While a stock will never have price-to-book multiple less than 1 (unless fraud has occurred) a cryptocurrency has no such limit on how far it can fall.
- smabie 6y ago
  Well a crypto currency can only fall 100%, so it's not unlimited. Moreover, some stocks do actually have a P/B ratio below one, for example Deutsche Banks PB is currently around 0.3. You could instead look at downside deviation instead of volatility, but in my experience standard volatility and upside/downside deviation look very similar for most securities. This is somewhat paradoxical for me personally, but it is what it is.
- Blammar 6y ago
  I just wanted to point out that stocks have had price to book multiples less than one, per various comments by Buffett and Benjamin Graham. Also, for another example, there are funds that sell at a discount to the total value of shares held by the fund.
  - repsilat 6y ago
    > stocks have had price to book multiples less than one It's not even that unusual, or newsworthy. It's pretty common for banks, basically the rule for European banks. I'm still not convinced the numbers are "real" though. As I understand it, there are a few main arguments as to why "buy and strip" price arbitrage doesnt happen, and I'm not sure which is/are true: - Regulatory barriers. JPM or Apple can't just buy Deutsche Bank because lawmakers won't allow it. - They're too big to be bought out out by (European?) private equity, or controlling stakes aren't available. - That's not real book value. Try to wind it down and it'll evaporate. Maybe there are more. I understand that dividends and buybacks are currently limited by regulators in Europe, and that closes one valve for the price arbitrage, but still...