The domain experts in making money are hedge funds, investment banks, etc. They haven’t put much money into bitcoins, so if you think its a good investment you have to sincerely believe you are substantially better informed or more rational than they are, which seems unlikely.
I don’t know if this is typical, but I recently a professional trader stated in an email to me that he knew very little about Bitcoin and basically had no idea what to think of it. This may hint that the lack of interest isn’t based on certainty that bitcoin will flop, but simply on not knowing how to treat it and sticking to markets where they do have reasonably well-understood ways of making a profit, since exposure to risk is a limited resource.
Financial laws prevent hedge funds and investment banks from investing in “alternative assets” like Bitcoin unless they are formed into a licensed financial product. Individuals do not have to abide by these finance regulations.
Even so, Reuters reports that “Workers at Morgan Stanley and Goldman Sachs in London and New York have been visiting online Bitcoin exchanges as often as 30 times a day, according to documents seen by Reuters.” It seems that there is interest, but they are constrained in multiple ways that individuals are not. For example, the total value of all mined Bitcoins is on the order of ~$1 Billion—the entire value of the currency is trivial to them.
The domain experts in making money are hedge funds, investment banks, etc. They haven’t put much money into Bitcoins, so if you think its a good investment you have to sincerely believe you are substantially better informed or more rational than they are, which seems unlikely.
Consider:
You are walking down the street, and Warren Buffet is walking a few feet in front of you. You notice a five dollar bill on the sidewalk. Warren Buffet looks down, then keeps walking past it. Do you stop to pick it up? Maybe, maybe not. But the fact that Buffet knows more about making money is only one factor in the decision. You have different opportunity costs, different discount rates, etc.
visiting online Bitcoin exchanges as often as 30 times a day
That’s 30 visits total, right? That could just be a couple of workers (one of which was perhaps Fred Ehrsam?) checking the price a couple of times an hour, so it doesn’t seem to me like it represents much evidence of interest on the part of the firm as a whole.
Upvoted for the rest of the comment and the colorful Warren Buffet analogy.
They haven’t put much money into bitcoins, so if you think its a good investment you have to sincerely believe you are substantially better informed or more rational than they are, which seems unlikely.
Well, or that it’s not really worth their time to speculate on Bitcoin. The current market capitalization of Bitcoin is tiny compared to the markets that they’re interested in- and so even though there’s lots of price fluctuation, that doesn’t mean there’s lots of money to be made out of riding that wave. The highest daily trade volume was $34M; that’s a thousandth of a normal day on the NYSE.
The only good argument I’ve heard for buying bitcoin is “there’s a X% chance that one bitcoin will be worth 1/21M of the total cash savings supply of the world in the long term,” which is not the sort of thing hedge funds are interested in.
Thanks for writing this! I’d like to hear some second and third opinions. What are economists and other domain experts saying about Bitcoin?
The domain experts in making money are hedge funds, investment banks, etc. They haven’t put much money into bitcoins, so if you think its a good investment you have to sincerely believe you are substantially better informed or more rational than they are, which seems unlikely.
I don’t know if this is typical, but I recently a professional trader stated in an email to me that he knew very little about Bitcoin and basically had no idea what to think of it. This may hint that the lack of interest isn’t based on certainty that bitcoin will flop, but simply on not knowing how to treat it and sticking to markets where they do have reasonably well-understood ways of making a profit, since exposure to risk is a limited resource.
Financial laws prevent hedge funds and investment banks from investing in “alternative assets” like Bitcoin unless they are formed into a licensed financial product. Individuals do not have to abide by these finance regulations.
Even so, Reuters reports that “Workers at Morgan Stanley and Goldman Sachs in London and New York have been visiting online Bitcoin exchanges as often as 30 times a day, according to documents seen by Reuters.” It seems that there is interest, but they are constrained in multiple ways that individuals are not. For example, the total value of all mined Bitcoins is on the order of ~$1 Billion—the entire value of the currency is trivial to them.
Consider:
You are walking down the street, and Warren Buffet is walking a few feet in front of you. You notice a five dollar bill on the sidewalk. Warren Buffet looks down, then keeps walking past it. Do you stop to pick it up? Maybe, maybe not. But the fact that Buffet knows more about making money is only one factor in the decision. You have different opportunity costs, different discount rates, etc.
That’s 30 visits total, right? That could just be a couple of workers (one of which was perhaps Fred Ehrsam?) checking the price a couple of times an hour, so it doesn’t seem to me like it represents much evidence of interest on the part of the firm as a whole.
Upvoted for the rest of the comment and the colorful Warren Buffet analogy.
Buffett with two ts.
Well, or that it’s not really worth their time to speculate on Bitcoin. The current market capitalization of Bitcoin is tiny compared to the markets that they’re interested in- and so even though there’s lots of price fluctuation, that doesn’t mean there’s lots of money to be made out of riding that wave. The highest daily trade volume was $34M; that’s a thousandth of a normal day on the NYSE.
The only good argument I’ve heard for buying bitcoin is “there’s a X% chance that one bitcoin will be worth 1/21M of the total cash savings supply of the world in the long term,” which is not the sort of thing hedge funds are interested in.
I don’t think those guys are domain experts at understand the value of a new technology like bitcoin.