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Author Topic: Is bitcoin a risky investment?  (Read 2961 times)
bozak
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May 23, 2013, 05:03:12 PM
 #1

Almost every article published to date that covers the topic of bitcoin as an investment takes it as a given that bitcoin is a risky investment.  "Only invest what you can afford to lose" is a common sentiment even on the bitcoin forum.

Although I agree that bitcoin should/can be considered a risky investment depending on the context, I submit that a small bitcoin investment is actually a conservative/risk lowering investment for most US investors.  This conclusion is reached when you consider the full context and diversification of the average investment portfolio in the US.  It looks a little something like this: stocks, bonds, real estate, cash and cash equivalents, and precious metals, typically in that order based on the relative weight of the investment.  Note that all of these assets are directly linked to US dollars other than precious metals and real estate.  If we make the assumption that diversification lowers risk, it also makes sense that the average US investment portfolio should not be overly weighted towards US dollar denominated assets.  Sure the US dollar is the world's reserve currency and therefore has a "low-risk" tag currently associated with it, but that doesn't mean it makes sense to have almost all investment assets directly tied to the US dollar.  Proper diversification includes diversificatoin into other asset classes, including non-flationary currencies such as bitcoin.  Considering the potential that non-government backed crypto-currencies have to disrupt the monetary system, even if one believes that the probability is small of a wide scale disruption, it still makes sense to have some assets (i.e. bitcoin) that would benefit from such a disruption. 

I'll admit that bitcoin fits the classic definition of a riskly investment.  However, I would argue that for an investor that currently has a high allocation of stocks and bonds, an investment in bitcoin would actually lower risk for the complete portfolio rather than raise it as it is commonly assumed.

Therefore, I no longer think it is appropriate to broadly classify bitcoin as a "risky investment" to US investors.  It is certainly not a non-risky investment, but all such labels should be taken in the context of a given investors full investment portfolio.   

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May 23, 2013, 08:34:54 PM
 #2

You make a very interesting and valid point. Investing in bitcoin can certainly be seen as a hedge against a certain type of risk (sudden collapse of the dollar). But if you assume that the risk of the dollar's sudden demise is small compared to all the other risks out there (a point many on this forum would argue!), doesn't it still make sense to consider bitcoin a "risky investment" ? Lots of things could go wrong:

- some technical flaw could crop up
- could be replaced by a better cryptocurrency or alternate payment system
- could be outlawed by some New World Order
- WW III could put us back into the stone age (in which case both the dollar AND bitcoin might fail)
- perhaps all us geeks are just overenthused

When I advise people to buy a few hundred or thousand $ worth of bitcoin and hold for 5 years I usually tell them to imagine the following odds:

4/5 chance you will lose your entire investment
1/5 chance your investment will increase by a factor of 100 or more, maybe much more (I have seen calculations putting the value of one btc in 5 years at $100,000 to $1,000,000 )

and then decide how much to invest. (I have no calculation behind those odds btw, they're just my gut instinct.)

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maz
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May 23, 2013, 08:40:08 PM
 #3

Bitcoin is my first and only investment. I've never understood stocks enough to put money in them but with bitcoin I genuinely believe in it. Which has compelled me to invest in it.
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May 23, 2013, 08:47:39 PM
 #4

I bought about $5k worth when it was under 10. People who are new to bitcoin keep telling me "you should sell it! At least half of it!!" and I just nod my head.

I do in fact sell off little pieces of it here and there, so even if it crashes to zero I will come out ahead, but right now I plan to hold what I have for the long haul.

I also convert a small amount of by btc investment to various alt cryptos in case one of them shoots through the roof.

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May 24, 2013, 05:55:11 PM
 #5

everything is risky
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May 25, 2013, 02:22:33 AM
 #6

No. And yes.

http://en.wikipedia.org/wiki/Financial_risk

Portfolio theory (risk management) is predicated on diversification, so if you don't have some bitcoin then your 'basket' is unbalanced and therefore at higher risk.
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May 25, 2013, 01:39:26 PM
 #7

I think most of the authors want to avoid consequences.

Don't forget that most of the people are just ignorant/stupid. If the author wouldn't mention that it's risky there would be an angry mob saying that they lost money because X Y Z article recommended investing in BTC.

That's how things work among humans Smiley






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May 25, 2013, 03:38:12 PM
 #8

Of course. Whilst the currency is here to stay, the value could collapse tomorrow. Imagine if the U.S. government decided to make it illegal, for example.

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May 25, 2013, 05:16:57 PM
 #9

Bitcoin has a natural market in places like Silk Road and that won't go away.  So the coins will always have value. As knowledge that you can get heroin for resale without having to pledge your left testicle spreads, we can expect that value to be higher than Bitcoin is worth today.  If you put your cash in a savings account here in the UK, you actually get a negative return so Bitcoin is not so risky.

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Lethos
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May 25, 2013, 05:33:41 PM
 #10

Buying anything that has a flexible value, regardless of it being stock, options, digital currency like Bitcoin or gold, all carry risk.
And as some found out the hard way, keeping it in an bank carry's risk too.

Is it a risk you feel comfortable taking, could you afford to lose it all?
Like with all investments, see it as money you can enjoy to have more of, but afford to lose completely.

Me personally, I plan to always have at least some of my "savings" in the form of Bitcoin.
I buy and sell occasionally depending on the needs at the time. Over time it has proven to be a very profitable medium to store my savings.
Like some I bought mostly when it was valued at £5-10. I sold some when it was between £100-200, so it proved to be very good for me in the space of a year. I mined and was paid in Bitcoins for the rest in between that.

Do I personally see it as Risky? I did when I started, but I don't any more. I doubt I'll ever have a huge stash, as I like to diversify.
In return I've made massive returns as it's value grows, as more people find out how useful Bitcoins are;
I have no doubt trends will continue to go up over all.

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May 26, 2013, 02:43:02 AM
 #11

I think that the long-term prospects for most fiat currency is dismal as well.  I imagine a Weimar Germany-like scenario where the value of the dollar crashes.  The Euro isn't much better if you look at its health.

Everything has risk.  Even the knowledge and skills that a person could use to create wealth can be lost due to dementia or injury.  The question is, what at the moment do you have the most trust in?

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May 26, 2013, 07:59:13 AM
 #12

Almost every article published to date that covers the topic of bitcoin as an investment takes it as a given that bitcoin is a risky investment.  "Only invest what you can afford to lose" is a common sentiment even on the bitcoin forum.

Although I agree that bitcoin should/can be considered a risky investment depending on the context, I submit that a small bitcoin investment is actually a conservative/risk lowering investment for most US investors.  This conclusion is reached when you consider the full context and diversification of the average investment portfolio in the US.  It looks a little something like this: stocks, bonds, real estate, cash and cash equivalents, and precious metals, typically in that order based on the relative weight of the investment.  Note that all of these assets are directly linked to US dollars other than precious metals and real estate.  If we make the assumption that diversification lowers risk, it also makes sense that the average US investment portfolio should not be overly weighted towards US dollar denominated assets.  Sure the US dollar is the world's reserve currency and therefore has a "low-risk" tag currently associated with it, but that doesn't mean it makes sense to have almost all investment assets directly tied to the US dollar.  Proper diversification includes diversificatoin into other asset classes, including non-flationary currencies such as bitcoin.  Considering the potential that non-government backed crypto-currencies have to disrupt the monetary system, even if one believes that the probability is small of a wide scale disruption, it still makes sense to have some assets (i.e. bitcoin) that would benefit from such a disruption.  

I'll admit that bitcoin fits the classic definition of a riskly investment.  However, I would argue that for an investor that currently has a high allocation of stocks and bonds, an investment in bitcoin would actually lower risk for the complete portfolio rather than raise it as it is commonly assumed.

Therefore, I no longer think it is appropriate to broadly classify bitcoin as a "risky investment" to US investors.  It is certainly not a non-risky investment, but all such labels should be taken in the context of a given investors full investment portfolio.  



Very good point. If indeed it is a small allocation to bitcoin (5%) then it is true that it does not raise the risk, but lowers the risk of the overall portfolio. However, if it is a big allocation (50%), even when that is only due to value increases, then the overall risk is higher than a traditional portfolio, hence why keeping the bitcoin exposure small is crucial if it is safety that you are aiming for.

Your insight is a very strong argument for people with capital to buy some bitcoin. Price is irrelevant to buy that 5% bitcoins as an insurance not taken is more risk. Tomorrow bitcoin price can crash or explode, you never know. If it crashes and you have small allocation, it's a small loss that will be recovered by the other assets, but if it explodes, and you don't have it, it can be a huge loss that is not recovered by the other assets.
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May 26, 2013, 10:18:55 AM
 #13

an investment that can lose 2/3 to 3/4 of its value in a couple of trading days, I'm sorry, but that's a high risk investment. An investment with such limited liquidity that even in the event of a panic, woud still take a few days to liquidate any substantial amount, that's a high risk investment. And an investment that's got such a short track record that how it correlates with other asset classes is, again, high risk.

Note that just because an investment is of the high risk category, that doesn't mean that it's inappropriate for anyone to invest in, it simply means that one should expect more volatility from it than from "lower risk" investments.
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May 26, 2013, 10:19:22 PM
 #14

Bitcoin is NOT an investment, and it would be much better if nobody sees it as such.
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May 26, 2013, 10:21:54 PM
 #15

Bitcoin is NOT an investment, and it would be much better if nobody sees it as such.

I think Bitcoin is the best investment opportunity I have ever seen.  If you see one that's better, let me know - I'd be very surprised.

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May 27, 2013, 06:30:06 AM
 #16

Bitcoin is indeed a risky investment if you want to consider it that. The way I've viewed it for a few months now is that either Bitcoin or another digital currency is going to rise to extreme importance over the next few decades. Bitcoin is of course is poised to become this currency in my opinion, no competing currencies seem to have as big of a following/support and I doubt major companies such as google would want to get involved with digital currency and quite frankly I'd probably only trust a "google currency" other than bitcoin.

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May 27, 2013, 06:45:26 AM
 #17

...I doubt major companies such as google would want to get involved with digital currency...
What makes you think big companies would want to miss on a cryptocurrency mega trend? Companies like Google, Amazon (Amazon Coin), Facebook etc. are in best position to establish their own currencies.
I just hope the masses of people are smart enough to trust a real, decentralized cryptocurrency. Not a "virtual fiat" currency.
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May 27, 2013, 12:59:17 PM
 #18

Bitcoin is NOT an investment, and it would be much better if nobody sees it as such.

I think Bitcoin is the best investment opportunity I have ever seen.  If you see one that's better, let me know - I'd be very surprised.

I agree, but it's not a sure thing and there is certainly risk involved.
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May 27, 2013, 07:33:59 PM
 #19

I have 90% of my assets in bitcoin.

And no, I don't think it is risky. Quite the opposite in fact.
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May 28, 2013, 01:05:08 AM
 #20

I have 90% of my assets in bitcoin.

And no, I don't think it is risky. Quite the opposite in fact.

More than 5% in anything, is riskier than a balanced portfolio.
Though Bitcoin could qualify for more than one asset class.

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