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Comment by davidgerard | Hacker News Reader

(author here) This is targeted to the general public, who do actually need Finance 101, because they really don't know what they're getting lured into by the mindlessly positive articles and headlines in the mainstream press. Mostly written by people who don't understand either.

I actually consider it seriously unethical to market cryptos as an investment to retail investors - they just do not understand the insane levels of risk, including the actual exchange as a threat. And yes, I know what Bitcoin's pitch is. I still think it's unethical in practice, and this bubble is going to show why.

Market cap makes more sense for a stock, because it's in the range of the value for a company, and a whole company is something that does get bought and sold. This idea doesn't make any sense for a crypto.

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But at the end of the day, how is it different from the current equities market? (aside from immature tools and imperfect infrastructure that is just shaping up). Stock market can tank 50% like it did in 2009 (together with the real estate market) and your average investor will be screwed just the same. Even tech and fundamental analysis gurus cannot explain the endless bull market we're on, how is getting lured into stock market with positive press today is any different than BTC? Currently both are different forms of gambling imho.

But the stock market - in general - has ridiculously profitable and powerful entities behind it. No matter what happens to investor confidence, ownership of Apple is going to be very valuable because they generate a ridiculous amount of profit.

Cryptos, on the other hand, are entirely based on investor confidence.

It's not a given that Apple will continue to generate insane profit. Apple will remain very valuable because it has tangible assets that can be sold (book value). So with a total lack of investor confidence, the price floor of Apple shares should be book value - debts.

Cryptocurrencies aren't backed by tangible assets, so the price floor is 0.

I'm not sure a neat definition of a price floor always holds in practice. Wasn't Yahoo at some point valued less than their tangible assets/stake in Alibaba?

I suspect that it’s a bad idea to make investments based on how high the cost floor of the investment is.

Cryptos imho are equal to gold not stocks

Investing actually achieves something.

When I make an investment in a company I'm providing capital that that company can use in various ways.

In return I become an (very small) owner of the company. I get a say in how it's run (voting rights), and I get a share of the profit (in dividends).

If you hold on to a stock like coca cola for 30 years, never looking at the stock price, and never sell, you'll actually make money.

Yes there's risk, coca cola could go out of business. But that's pretty unlikely, and if you're not willing to take that risk, consider using a diversification strategy. Buy some passively managed ETFs.

Even with the crisis, in the long run, you would've made money. Investing is not gambling, it's not a zero sum game and the fundamentals of it have some basis in reality.

Whatever is happening with Bitcoin right now makes no sense. Eventually things like this have to realign with reality.

1. the stock market, other than the IPO is a secondary market. You are not providing capital to the company but just paying another trader for his shares.

2. The majority of stocks do not provide (and will never) dividends and the majority of buyers have no voting rights.

but you are right. For practical purposes, the stock market is not pure gambling. There are institutions that make it legitimate. Such as the SEC, pensions, 401ks and brokerage firms. And the fact the government cares so much about it going up (because it funds so many pensions and social security might go away)

But lets not fool ourselves in thinking the stock market is a virtuous piece of infrastructure. The vast majority of stock holders dont know anything about the conpanies they invest nor how stocks even work. They invest blindly in it through mutual funds or 401ks.

This isn't entirely true. If secondary market trades increase the value of the stock then the company can sell some of their stock to get more funding, or can borrow at better terms.

Similarly, buying and holding Bitcoin has a range of effects that help the network and generate real wealth. Bitcoin is a services company, a payment network, a bank, and investment vehicle, a reflection of wealth in that economy, a notary, a liberated, sound money and a protest - all disguised as a get rich quick scheme.

Almost no companies today are selling stock to grow the company. Tesla is a big exception. Somehow we have gotten to a place where there is lots of capital wanting to invest in something that will make returns, but few people/companies wanting to work with large sums of capital to try new business ideas.

> Almost no companies today are selling stock to grow the company

Public market performance influences IPO performance. IPO performance directly knocks on future managements’ decisions around going public or raising a private round. The performance of those moves influences early-stage capital availability through multiple channels. Equity markets, broadly, are complicated, but they are an essential component to fuelling firm creation and growth.

Not to challenge your argument itself, and I know you’re not the author who commented above, but I really dislike this kind of “argument-swapping.” I see it a lot, for a lot of issues, but especially for issues that are complex and not deeply understood by most people, like Bitcoin, corporate finance, etc.

It starts with an easily-digestible and shareable argument, like “Bitcoin prices and market cap are a lie.” Then someone points out that, yes, perhaps many people misunderstand basic concepts in finance like spread and market cap, but that applies to any asset or currency or security.

Then someone else joins in with a completely unrelated argument, like “yeah, but Bitcoins don’t actually do or represent anything, whereas stocks do.” Even assuming this is a valid argument, it doesn’t change the invalidity of the first argument. But I fear that all too often people see the entire exchange as if it’s a sequence of related claims, and thus feel inclined to believe and share the initial talking point as if it was somehow corroborated by the later unrelated argument.

What about forex trading?

Even then, if Coca-Cola goes out of business, and the stock is delisted (so the price is effectively zero or close to it), you still own 1 millionth or whatever of the company, and the company has actual tangible and intangible assets (including its name, which in Coca-Cola’s case would be one of its most valuable) that can be liquidated to recoup value to the owners. If Bitcoin goes to zero, there’s no backing store of value to sell — you own a number whose entire value in other monetary units is based on people wanting to buy it, not on any asset or guarantee backing it.

As companies become more highly leveraged, this becomes less and less true. For really highly leveraged companies, you're basically just speculating on their future growth because there will be nothing left to sell after the creditors and bondholders get in line ahead of you.

Because of inter-exchange protocols (FIX / FAST) to share the order book, that isn't happening with bitcoin, hence the spreads (between exchanges) and associated arbitrage opportunity.

I have been invested in Bitcoin since the very early days. This bull run can be explained, in fact it was predicted by many. I'd be happy to address any questions.

So no questions then.

The major difference from the current equities market, as described in the fine article (the latter half of it), is that in the Bitcoin market you see common manipulative practices that are illegal and also mostly eliminated from the current equities market.

Investing: http://www.macrotrends.net/1319/dow-jones-100-year-historica...

Speculating: http://www.macrotrends.net/1333/historical-gold-prices-100-y...

Which one do you think bitcoin is? Well I'll tell you, it's the second.

  Market cap makes more sense for a stock, because it's in the range of the value for a company, and a whole company is something that does get bought and sold. This idea doesn't make any sense for a crypto.

I always wondered about that. Especially since people (and hucksters, trying to sell their wares) refer to Bitcoins as crypto currency.

I'm not a financial wiz kid, but market cap for a currency doesn't make any frigging sense to begin with.

Sure, you can count the amount floating around for a currency on various levelse (ususally expressed in mx) but I never felt that it makes sense to define this as "market cap".

The whole situation really reminds me of the Dutch tulip mania (https://en.wikipedia.org/wiki/Tulip_mania, the first speculative bubble in history).

At least with your "investment" there you were able to plant pretty flowers. Here, I fear, that a lot of small investors will get burned very, very badly.

All the headlines I see in mainstream media talk about Bitcoin being a risk, the likelihood of it bursting at any moment, etc. I can't remember a single mainstream article I would say is mindlessly positive.

There is only one word suitable for describing bitcoin: scam

The vested interest has been very successful in obscuring this basic fact, usually by conflating it with a bunch of other unrelated matters (decentralized infrastructure, fee-less money transfer, easy international trade...etc)

I penned a tongue-in-cheek layman description of bitcoin that alludes to the basic scaminess of it: http://blog.codesolvent.com/2017/12/the-bitcoin-scam-needs-t...

Of course the problem is that major parts of your argument apply to the Federal Reserve system also, as well as nearly all other fiat currencies such as the Euro, Pound, Yuan etc.

So exchanging fiat Euros for fiat Bitcoin means what, exactly?

No it doesn't apply to them. This is a popular argument from libertarians but unfortunately it is a purely ideological argument that has no basis in reality.

The aforementioned currencies are backed by the value of their issuer's economies, those economies are real.

Establish the means by which my having a million dollars' worth of bills in my hand, can get at the value of the USA economy.

If I can buy an item from Amazon or Overstock.com via Bitcoin or via Yen or via USD, explain how there is an actual difference.

You have to pay your taxes with USD, so there's always a base demand for USD. Bitcoin has no intrinsic demand. It can go to zero because nobody needs it.

@patrick

Every American participating in that economy must pay taxes every year on their income. The taxes must be paid in US dollars, even if the economic activity uses a different currency or barter. Therefore Americans must come up with a quantity of USD proportional to the size of the American economy every year (or "go to prison"), and provided that the total amount of USD in existence is bounded (this part is the job of central banks) this places a floor on the value of USD. This story is necessarily simplified but I think essentially true.

There is an old saying that a language is a dialect with an army and a navy. Likewise, a fiat currency is a currency with a taxing authority.

Gold, on the other hand, is just valuable because it is expensive to produce and has a long history of being valuable. So that model can work.

So when Japan said they would accept Bitcoin for payment of taxes ... ?

"So when Japan said they would accept Bitcoin for payment of taxes ... ?"

I'm not able to find any reference to such a move, which I would think would be widely reported in English. So I suspect you may have your facts wrong. I read that Japan no longer collects sales tax on digital currency transactions, but that is not at all the same.

If, hypothetically, a major government accepted all tax payments and equivalents in XBT as well as their own currency, and credibly promised to keep doing so no matter what, they wouldn't so much be backing Bitcoin as "unbacking" their own currency. It would leave their citizens free to stop using fiat currency if they wanted, and if enough were eager to do that the value could go to zero. (In principle, that could be fine. In practice, contracts and other nominal rigidities would probably make the transition period... problematic)

If a major government decided to accept tax payments only in Bitcoin, they would be backing it in the sense intended.

(I'm not necessarily taking a bearish position on Bitcoin. Rather, I'm arguing that fiat currencies are not the right model for understanding its economics)

> Gold, on the other hand, is just valuable because it is expensive to produce and has a long history of being valuable. ...

Bitcoins are expensive to produce and if it hangs around very long it will have a long history also. So in the long run bitcoin could be a viable alternative to gold.

Gold is valuable by itself and there is only 80-90k tons of it ever (plus some amount in the oceans). Gold would be used everywhere in the electronics in pure form if it was priced and widespread as copper or iron.

Yes, of course, but those uses are not very important to understanding the current price of gold.

Likewise, I own a $100 billion Zimbabwean dollar bill as a curiosity, but that market doesn't put an important floor on fiat currency prices!

Bitcoin is not fiat; a fist currency is one whose value is based on its backing by a government (“fiat” specifically refers to the authoritative dictate of the State giving the currency value.)

The FT lexicon says:

Paper money or coins of little or no intrinsic value in themselves and not convertible into gold or silver, but made legal tender by fiat (order) of the government. [1]

Fiat money is an intrinsically worthless object, such as paper money, that is deemed to be money by law.

----

I will say that when Japan agreed to accept payment of taxes, with Bitcoin, they deemed it to be money.

Probably I could find examples in the U.S. government prosecutions of criminals who used Bitcoin, that had government lawyers advancing arguments that treated Bitcoin as money, but, I don't have them to hand.

> I will say that when Japan agreed to accept payment of taxes, with Bitcoin, they deemed it to be money.

I'm really interested in figuring out if this is true. What source is saying this? From what I can tell some taxes might apply to Bitcoin in Japan but in no way can you actually "pay" taxes in Bitcoin (you can obviously convert it to Yen first though).

The US government considers bitcoin a commodity. You will not find examples of them considering it a currency.

Crypto market cap doesn't mean the same thing as the market cap of a stock, but that doesn't mean it's meaningless. It approximates the total amount of wealth currently held in the form of a particular crypto, which is interesting to know in comparison to more traditional asset classes (stocks, bonds, gold, etc) as well as to other cryptos. If you also have some knowledge or an assumption about the velocity of money in the crypto, it also gives you an indication as to the total amount of commerce that can be facilitated by the crypto at its current valuation.

'approximate' is the key word as it's averaged over exchanges which is a big difference to standard market prices, as mentioned in the article:

> Quoting a number like “$19699.46” to seven significant figures when your data’s got a 5% spread would get your high school physics teacher slapping you upside the head. It’s entirely deceptive. It should say something like “$19,700 plus or minus $500 depending,” and that line graph should be a thick grey bar.

I don’t think the “average over multiple exchanges” thing really matters that much when we’re talking about the usefulness of market cap. The reason market cap isn’t a great measure of “total value at the moment” is because there certainly aren’t enough buyers willing and able to buy all Bitcoins or all Apple shares at the current market price.

True, but if someone tried to buy all the Bitcoins or Apples shares, the price would start to go up. Getting them all would cost more than the current market cap. This is why company buyout offers are always for more than the current market cap.

> It approximates the total amount of wealth currently held in the form of a particular crypto,

I don't see how it does anything of the sort.

* It's not the amount that was put in to it

* It's not the amount you could get out of it

It's a number that's easy to calculate and gets headlines, but I can't see what else it's good for in practical terms.

Perhaps with a tiny altcoin it would be worth 51%ing it. But for anything larger, or for an ICO token? What does this number actually do?

Say there's a crypto asset that isn't getting headlines. Its market cap is $100 million. Just knowing that, what do you know about the crypto?

Your criticisms about it not being the amount that came in or that can come out also apply to stocks.

If all I know about a crypto asset is that it has a market cap of $100 million, I know it's a very niche asset in comparison to bitcoin or ethereum. It's small enough it's reasonably likely to be a scam. For me personally, it's small enough that I'm not interested in learning any more, which has practical use because my time is finite.

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