A better question might be: How is anything an investment? If the stock market is priced efficiently, it is as much a gamble as Bitcoin. The stock market is of course not perfectly efficient, but it is likely extremely efficient relative to the knowledge of your average retail investor. Which means that buying Bitcoin or other cryptos is no more a gamble than any stock market investment with a similar volatility.
I also think the stock market is not "investing" but think it's safer to invest.
1. There's more government regulation and less manipulation.
2. New money is constantly flowing in, via 401K's and pensions. Most people aren't even aware they're invested in the stock market.
3. The government cares so much about the stock market doing good. Look at how Trump brags about the booming market. If it goes in a funk, the government will think of ways to prop it back up.
That said, without any of those 3 things, stocks are just as a gamble as bitcoin.
People say "past is not a predictor/indicator of the present", yet they love to say "stocks return 7-8% annually, and you should just invest in an index to enjoy such returns". Why? That's such as a huge assumption that everyone takes for granted.
> People say "past is not a predictor/indicator of the present", yet they love to say "stocks return 7-8% annually, and you should just invest in an index to enjoy such returns". Why? That's such as a huge assumption that everyone takes for granted.
Well, you're leaving out something something about the company putting your money to use to increase efficiency or output something something and something something about dividends from the proceeds, none of which you have with cryptocurrencies. (Though it may be disputable whether those are truly the reasons behind the historical returns of stocks and thus good reasons to expect it to continue, even if you wouldn't guarantee the exact numbers, or if those are simply motivated reasons that may or may not be reliable future indicators...)
Other than the IPO, when you buy stock you aren’t providing capital for companies to use though, right? and most companies do not pay dividends at all.
This is a common misconception. Companies often raise capital by selling more stock, and by buying stock you increase the amount they are able to charge.
Yep. No argument from me there. Most mainstream stocks are safer investments than cryptos, along a number of axes (volatility, counterparty risk, regulatory risk, etc..). But cryptos are still very much investments.
> If it goes in a funk, the government will think of ways to prop it back up
I don't disagree with the second statement. I guess what you're saying is that there is manipulation (talking about government intervention in this case) but overwhelmingly in the "right" direction?
Sure, yeah, the market is systematically manipulated to my benefit, and those manipulations are done in a largely transparent manner. That makes it a more attractive investment target than a market which is not.
What separates investing from gambling is the expected return for everyone is greater than zero.
AKA buy stock at 100$ and sell it at 100$ does not mean you broke even. You could have gotten 10$ in dividends. Now that positive may be small and some people may lose money, but that's allowed as long as the expected returns end up positive.
Bitcoin's can't have a net positive return because they only way to add money into the system is via coin buyers. Further because of transaction costs it's inherently negative sum.
Some cryptocurrencies generate the equivalent of "dividends", especially those based on Proof of Stake systems. For example, holding Neo generates Gas equivalent to a 3-6% annual return[0], and Stellar (given free to HN readers a few years back[1]) has "inflation" equivalent to around 1% annual return[2], to name two that Robinhood will be listing.
So are Berkshire Hathaway shares not investments, because you need to sell them to end up with money? What about a savings account with compound interest, or an ETF with automatic dividend reinvestment - do they not count as investments either, because you have to do something with them to get money out?
Don't forget that investing in the stock market is still something of a gamble, because the return for everyone is not guaranteed to be greater than zero - a company can go bust leaving the shareholders with nothing.
Berkshire Hathaway is something of an exception as the vast majority of successful company's pay dividends. Clearly, buying a single stock is risky. But if you buy a basket of stocks and those stocks pay dividends then the only way to lose money is for the socks to be worth significantly less money when you sell them thus making it a positive sum game.
PS: Berkshire Hathaway still returns money to shareholders via stock buybacks. Which preform similar functions the difference is simply related to taxes. They can and are likely to at some point issue dividends.
If I buy a lump of gold, and attempt to sell it to someone else later at a higher price, that is pure speculation. Gold is gold is gold. That lump of gold is going to be the same lump of gold a year from now or a hundred years from now. You might as well have buried the money in a backyard for all the change of affected in the world.
If I take that same money and invest it in a business -- the business is going to take that money and create something new. Hopefully what it creates will be worth more than what you invested, but in any case your investment has changed the world in some way.
I think a cryptocurrency is probably something in between that, because your 'investment' is actually ultimately going to miners who will expand the network, so you are actually building something new in a sense by investing in cryptocurrency. However I'm not sure that building the bitcoin network out is a net positive for the world.
> If I take that same money and invest it in a business -- the business is going to take that money and create something new.
Only if you're buying at the IPO. Most of the time, you're just buying stock from another person and the company gets zilch. The service you're providing to the company is just better information about its ability to raise additional capital from selling equity.
For some cryptocurrencies, you are providing a service to the miners by adding liquidity and pricing information, but given the volume trading on crypto exchanges, there is simply not enough currency being mined for even a tiny fraction of it to be going directly to miners as a counterparty. For a currency like Ripple, that is completely pre-mined, you don't even have that.
The company is also a shareholder and can pay out dividends or buy back stock to increase the price. One pays you directly, and the other increases your stake by diluting the pool of outstanding shares. Both are direct results of actions taken by the corporation, and both create something new: cash and equity, respectively.
I have trouble seeing what this has to do with my comment, which was specifically on the notion that investing money by buying a company's stock somehow helps the company, which is true only in the very narrow sense that I indicated.
Which would change nothing as gold is not an investment.
Also, if you 1 one bitcoin you can only sell less than 1 bitcoin from transaction fees. Remember, someone needs to spend real money maintain servers and that money is constantly being removed from the coin ecosystem.
Untrue. You can sell someone the private key to your wallet. That's free. If you're not going to classify commodities or real estate as investments, then sure, I guess bitcoin isn't an investment. But it's as much an investment as any commodity or real estate is.
real estate pays a dividend in the form of use of that land.
If I own a house I get to use the house today and still have a house tomorrow. With a field I could grow crops and then still have a field next year.
Commodities are an interesting 3rd thing. But, closer to buying something from a wholesaler than an investment as they represent actual goods (ie Oil) that will be sent somewhere. Think of it like this, if you buy coffee contract you get coffee which can be sold off. However it's a physical thing and it's got a physical expiration date, if you keep it in a pile somewhere for 10 years you end up with dirt.
Bitcoin provides a service though - a service that has demonstrable economic utility. Specifically: international value transfer. There are existing mechanisms for this (western union, swift) and they have costs. The sum of those costs is a reasonable way to think about Bitcoin's theoretical value by substitution, because it costs bitcoin to move bitcoin. And therefore if Bitcoin were to replace all other intl. value transfer mechanisms, the sum of those two sets of costs should be comparable.
Owning bitcoins don't facilitate these transactions by third party's. The service can create value but don't let the name of the service be confused with the coins.
You could speculate that the utility created will increase the value of the coins you hold. However, unlike mining there is no connection between buying a coin and enabling other people to do these transactions.
Smart contracts absolutely can, just like regular contracts can. A bank granting a line of credit backed by future sales unsold gas station inventory is money showing up from 'thin air'. Move that to a smart contract and you've got money - that is, a promise to deliver future real value - getting generated.
Try and write a loan on Etherium via a smart contract.
I apply, get eth, cashing out by selling it to someone else, then get hit by a buss or just ignore you.
Now, in what way can the system enforce that loan?
If you can get the eth from someone that gave me money then they are not going to give me money in the first place. If you say, sue someone in the real world that's fine. But, the smart contract did not actually do anything. If you say I need to put up eth as collateral then you did not give me a loan.
I don't know much about ETH, but would it be possible to write a contract using an escrow concept? I.e., there would be a wallet that eventually would pay out to one party in one circumstance, and to some other party in some other circumstance. (If you want to get complicated, it could even blend payouts among multiple parties.) We wouldn't have to trust you not to get hit by a bus, because the value wouldn't be in your wallet.
If they went to the work of creating digital contracts and didn't consider escrow, that seems to be a fairly significant omission.
Ah, ok, I think now I better understand the point you made above. I can accept that value per se is only created by one or more parties, but the coin itself can make it easier for them to do so profitably.
First of all, yes they can. Proof of stake coins pay dividends. Second of all, dividends from companies don't show up 'from thin air'. They show up from the economic activity of the company. Which is facilitated by their capital investments. Just like staking in cryptos.
Lets say I Buy '1,000' tokens including a 10 token payment for a transaction fee for 1$. Now A had 1,000 tokens and now has 1$, I have 990 tokens and another group get's 10 tokens. But, notice that other person(s) got tokens not money.
If I got to keep 1,000 tokens or someone else get's those 10 tokens nothing changes because nobody who has tokens got any money. The only way people with tokens get money is if they sell some number of tokens minus a fee to someone else. It does not matter of all 10 tokens go to a miner, or miners get 5 tokens an 5 go to 'investors' or what not.
It's still a (edit: negative sum game) and contracts don't change anything about this.
Bitcoins and USD may both be tokens, but they are not the same token. The same is true of say WoW gold and ISK (EVE Onlines money). I can farm WoW gold all day, that does not turn into ISK unless someone is selling ISK.
What about stocks with no dividends (which constitutes the vast majority)? By your definition, only dividend investing and rental property investing is true investing.
I'm not disagreeing with you. In fact I almost agree with you, but your argument fails for most stocks.
Stocks with no dividends have some probability of paying a dividend (or doing a buyback) in the future. If you could prove that a company will never pay a dividend or do a buyback then its value would be zero.
this is turning to a very insane argument.. So if Buffet signs a iron clad legal contract that says no dividends ever for the duration of his company, it means the stock is worth 0?
If the dividend-less companies are profitable, then you can still expect the increased value to get returned to you through stock buybacks, or an eventual dividend or acquisition of the company in the future.
The difference is that with investing, you have a reasonable indication where your investment will end up in the future. Chances are, in 10 years Walmart is still going to be profitable and continue to pay out dividends. There's no telling what will happen to Bitcoin in the next week, let alone the next year, so it's a gamble to put your money in Bitcoin.
Do you not see how you are contradicting yourself?
"Chances are" alone, is an assumption. How is that any different from your speculation on Bitcoin. The only difference is longevity of the window period, otherwise it's the same principle.
There is always going to be some degree of uncertainty with any action. Just because a meteor can fall on your head if you walk outside doesn't make it a gamble to do so. There's a fine line between investing and gambling, but the extreme ends of the spectrum should be obvious.
I'd argue that the difference between investing and gambling is that gambling has known negative expected value, whereas investing is uncertain. If it is not known that the outcome of a gamble has negative EV, then a reasonable case can be made that it is an investment.
If the market is priced perfectly efficiently you will still make money because your capital is put to work. A perfectly efficient market just means you can't beat that intrinsic rate of return.
True. But that is irrelevant to the original point: Cryptos are as much investments as any stock or commodity. And anyway, that future expectation of profit ought to go into risk-free treasuries unless you want to gamble on a specific, higher risk asset.
Yes, but money in the future is valued at a discount today. So even if an asset is 100% sure to be worth $100 a year from today, the market will value it at slightly less than that because there's no sense tying up $100 in capital for a year unless you get some profit in return.
stocks give you ownership in productive companies. those companies on average go up in value and produce profits which they throw off as dividends (or re-invest to increase their market-cap).
so one difference then is that stocks have a justification for their returns given the variance you experience.
I would tend to subscribe to a similar view and think that no, gold is not really an investment. A hedge, a gamble perhaps. An investment is something that (hopefully) enables useful work and productive endeavour.
Putting money into a company in return for a share of ownership is an investment. A lot of stock market shenanigans are little more than gambling. Gold and crypto-currencies for the most part are speculation.
Although it's not always clear with ICOs if any form of ownership is conferred or what the relationship might be between future profits and token gains.
But yes, in principle.
--edit-- to be clear, I'm not trying to say one class of thing is better than the others, just that to me the words have different meanings.
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
-Ben Graham, from chapter 1 of The Intelligent Investor
>If the stock market is priced efficiently, it is as much a gamble as Bitcoin.
Well... we're just shoving a poor definition of investment off onto a poor definition of gamble. If potential drawdown could be considered part of the risk of 'investing' )or 'gambling') then Bitcoin is definitely more of a gamble.
If the stock market is perfectly efficient, standard financial theory says that equity has a positive expected return (relative to the risk free asset).
Correct that it's not entirely luck, at the moment its price is being propped up by Bitfinex. Whenever BTC value starts to dip below 10K USD, they just print more Tethers (USDT) and start buying up coins at above market price...and there's a new upswing.
blackjack tables are based on supply and demand. the margins on blackjack are ~51% in favor of house. if they don't get enough traffic, a swing could take the house. So if there isn't enough demand, than it's not financially feasible for the house to play those odds.
Bitcoin isn't backed by an asset. It's not really backed by anything other than people's expectation that it is worth something now (and it will be worth more in the future).
This is true even for the miners, since they would not build out infrastructure and burn energy if bitcoin was worth zero.
Imagine a raffle where tickets cost $1. After the winner is drawn, the house agrees to buy back the first few losing tickets for $0.99, the next few for $0.98, and so on until they work down to $0. The players don't stand to lose everything in a moment, but it's still pretty clearly gambling.
When you put money into blackjack you're not buying an asset. A crypto coin is an asset that can be held. Just like a share of a company, or a dollar itself.
yes but it's a bad analogy because the odds are known and if you don't win the lotto the ticket is worth nothing. all bitcoins are equally valuable ( fungibility ).
But all cryptocurrencies are not equally valuable, and there's no reason to think that all of any given crypto won't eventually equally be worth (arbitrarily close to) $0.
I can imagine a lottery where usually nobody wins anything but every now and then everyone who bought a ticket wins collectively. It's still a lottery.
With stocks, for example, I can make a prediction about a company's future performance, buy or short accordingly, and expect that if I am correct I will profit.
I may be wrong about my prediction, but if I am correct then I've got far better than chance odds of also being correct about the future price of the asset.
Without making any further predictions about the state of the world I can equally easily imagine the price of Bitcoin in 5 years being $100 or $100,000. Neither price feels "wrong" the way it would if, say, Google's stock price rose or dropped by an order of magnitude without the company changing anything.
A bitcoin is as real as anything else. It's ones and zeros stored in a distributed ledger on computers around the world. I'm sorry you're having trouble predicting the price, look up supply and demand. Either way it doesn't make it any less real.
I don't dispute that a Bitcoin is a real, discrete thing. What I'm arguing is that it's a self-contained thing. The price of a Bitcoin is not anchored to anything outside the Bitcoin ecosystem.
With other assets, there's a clear causal arrow leading from outside the system back in. If Google the company performs better, Google the stock will overwhelmingly tend to perform better. If Google the company folds, Google the stock will overwhelmingly tend toward being worthless. The asset is a proxy for something that isn't the asset.
Bitcoin doesn't appear to work the same way. There's no obvious not-Bitcoin that demand for Bitcoin is a function of. It's a proxy for itself, after a fashion. That doesn't mean it has no value, but it does feel uncomfortably self-referential when compared to almost any traditional asset class.
Crypto's value is derived from its usefulness as a currency. It has many advantages over current fiat systems. You can expect if it's practical adoption expands then it's value will go up.
Company has assets that can be liquidated. Even if people decide a company has no value there's still assets that can be liquidated to provide capital back to shareholders. If people decide a crypto is worthless, its worthless.
If you asked that question to Warren Buffett, he would probably point you to Benjamin Graham's distinction between investment and speculation:
"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
I think when he said " real-world value created through actual investments " - the underlying idea behind an investment is that you provide capital to someone who is trying to build a business that will hypothetically provide jobs and value to society. Putting money into something and taking more money out is a bastardization of the term in that interpretation. That is simply not the case here - this has simply been a mass wealth re-distribution event. People are basically printing and trading pokemon cards at this point.
Providing capital to someone does not only occur in the IPO stage. I'm not even sure how to go about refuting that statement; that's... not how finance works anywhere on the planet.
People do trade stocks with the expectation of stocks rising or falling in varying periods. People also hold stocks for long terms and then sell them afterwards. Just like cryptocurrencies!
However - it's just not the same. A share in a company has evolved and subjected to regulation for hundreds of years. An IPO is a highly regulated legal process involving investment banks and many lawyers (and that is how it should be - so that we don't have con artists running ICOs). It is sold by a company that generally provides jobs and services to society. It represents an actual piece of ownership in that company - if you have enough shares, you impact how that company is run. There are many other points I could make differentiating the two comparisons entirely.
First, let's ignore cryptos because I'm talking about IPO's only (albeit the thread is about cryptos)
"Providing capital to someone does not only occur in the IPO stage. I'm not even sure how to go about refuting that statement; that's... not how finance works anywhere on the planet."
First, I provided that statement in the context of the parent comment. In the equities market, providing capital occurs only in IPOs, not in the secondary market. When you buy Apple stock, you typically are exchanging money with another person who is selling it. You are not providing capital to Apple.
Second, you could've gone about refuting my statement by providing a counter-example. It's that easy. Otherwise you're simply just trying to put me down, and make me look like an idiot, without explaining why.
Yes, Apple is not receiving any money if there is a share transaction between two investors (duh?). However, providing capital to public companies or does not only occur in IPOs (edit: even if we restrict that with the clause: in an "equities market").
You're right, I could have provided a counter argument. However, at the same time, you should not make such an absurd, unqualified assertion that other people who lack knowledge and are reading these forums may read and assume to be true.
Investing connotes some kind of exchange for rights, usually equity. When you invest in say APPL, you are buying a stake of the company. Bitcoin, like the $US or € doesn't make anything. Bitcoin is not an investment, you're just speculating that it's exchange value will rise.
There are different definitions of ‘investment’. One is forgoing present consumption in the hope of increased ability-to-consume in the future. Another is purchasing a productive asset.
