mattee2264

What is the truth behind these reports that a lot of the run up has been the result of manipulation on the Asian exchanges through flooding the market with Tether which is falsely treated as being convertible into Bitcoin? Details seem a bit sketchy but the extent of the run up over the last month or two does feel a bit artificial. And for the long term thesis of bitcoin as a store of value how do you handicap the risk that a better form of digital gold is created? Or is your view that bitcoin is good enough for that purpose and being seasoned and surviving for so long will continue to give it an edge over upstarts? How constrained by regulations etc are institutions from entering the market in a big way to stem the price fall? I'm guessing there is no issue for hedge funds who you'd imagine might get interested in scooping up coins at the bottom.

The first paragraph lost me. I thought the futures exchange is cash settled so why would that bring any institutional demand? I thought it is just a medium to bet on the price via derivative contracts. Can't you buy fractions of bitcoins on these coin exchanges? And I think some people are using their credit cards to buy. And you can get personal loans at very cheap interest rates. And while bitcoin has been very popular with the younger generations the price rise and media attention is probably drawing in older and wealthier retail investors wanting a piece of the action. And as we know in financial markets people love to buy high and sell low. And I think a lot of hedge funds have been getting on board because it is the hottest thing in town and they arent as constrained in what they do so lack of regulation isnt such a big deal for them. Although I guess they could flip if they figured the easier money was made shorting. But is your prediction that these more recent entrants will use the futures exchanges to start a "little short" or simply sell the big blocks they've amassed sending the market into freefall?

SharperDingaam not sure I fully understand your argument. If the only natural buyers remain retail investors without access to derivatives then the status quo is unchanged and so long as there are more people wanting to buy than there are people wanting to sell then the price will go up even if some existing owners decide to cash in. Of course this dynamic works in reverse and a rush to the exits en masse would be a scary thing with or without derivatives although derivatives can of course magnify things.

Continuing my train of thought for me the dot-com bubble seems a better parallel than the tulip bubble. Right now you have a multitude of cryptocurrencies many of which will turn out to be worthless or exposed as frauds or fakes. Some could well turn out to have some enduring value as an asset class and form some sliver of a standard institutional portfolio as "digital gold". Just as some of the dot.coms would prove to have profitable business models. But it is not only a question of "if" it is a question of "when" and that is where things like the time value of money come into play and a high discount rate is obviously warranted for something like this. With the dot.com bubble some of the good businesses not only grew into their elevated 1999 valuations over time they actually surpassed them. Take Amazon. It took it 10 years to get back to its 1999 high but now it is 10 times that level. And its superiority as a business and dominance of their category did not save it from dizzying falls as the bubble burst. Those who correctly understood the trend of increasing penetration of online sales, the likelihood that Amazon would capture more than its fair share of this growing market etc as well as expand into new categories etc etc weren't saved from losing a lot of money in the short term.

Surely if the value of these cryptos as a medium of exchange is avoidance of need for a middleman then speed is not a huge issue. They wouldn't be replacing the debit/credit card networks but rather the bank transfers. Even in developed countries with bank transfers you are talking same day or payments within a few hours and that really isn't much of a hurdle to beat. And for international transfers it is even more of a hassle.

https://ftalphaville.ft.com/2017/12/07/2196526/what-happens-when-bitcoins-market-cap-overtakes-world-gdp/ Interesting article on the FT to the effect that the market structure even with the advent of futures trading could see prices go a lot higher.

Given the concentration of users as well as the lost coins what is a rough estimate of the number of free floating bitcoins? I would imagine that the institutionalization of bitcoin would make it a lot easier for large holders to unload their coins onto the market and this supply response would weaken the bull case of increased institutional demand driving the price up a lot higher.

What is the significance of the futures contracts being launched on the CBOE and soon the CME (with perhaps exchanges in other countries to follow)? My understanding is that easily tradeable derivatives available to institutions allow big levered bets in both directions and being cash settled they could avoid the complications of actually owning bitcoins and associated custody issues etc. Has leverage been much of a feature in the run up to date? Presumably some of the bitcoin brokerages allow you to buy on margin. And of course there is little to stop people taking out a personal loan and promptly putting it into bitcoin. My issue with the flight to safety store of value argument is the volatility. Do you see the institutional liquidity/futures markets increasing or reducing that volatility?

What do you think the chances are of some kind of shake out? Presumably the more recent buyers aren't blockchain fan boys with an almost religious faith in the technology and could be scared out of their positions. And I guess the options thing means traders can short it now and for the innocent there is nothing scarier than seeing easy gains evaporate. And for now at least it is in the interests of financial institutions to see this thing fail or at least for people to lose interest and stick to their 60/40 stock/bond portfolios. And yeah as I made clear in my original post I am fully aware these are speculative vehicles and 1% was about the amount I'd commit if I did decide to have a flutter.

Bitcoin is all over the papers and magazines. You now have adverts for crypto trading sites on the metro. It enters into everyday conversations. And the price has gone parabolic from $1,000 to almost $20,000 in just one year. I was interested in the summer but it had already had a good run and as it had a prior history of crashes I figured it would be safer to pick up a few coins once the price halved. But I never got my chance. So I figured I missed out. But another poster on here commented his friends were expressing similar sentiments and calling it a bubble. And the media coverage is also pretty skeptical. And it is still a bit of a hassle investing in these things. And fiduciaries certainly can't do it. And I don't think people are pulling money out of their tax sheltered pensions or remortgaging their houses to invest in these things (aside from a few crazies who obviously make headline news). And the market cap is still relatively low so it is not as if everyone is buying it. And it is still not institutionally recognized as a separate asset class. And maybe there are people thinking they missed it who willl be suckered in if prices continue to rise. Obviously it is pretty much impossible to value and for now at least these are primarily speculative vehicles. So you are playing the greater fool game. So it is crazy to invest more than you could comfortably afford to lose and take a philosophical approach about. But this game of enjoying a nice ride and then selling on to the next guy who also enjoys a nice ride etc etc can go on for some time especially in a global economy. And maybe the fact that it has become more mainstream and accessible means the game can go on a bit longer. In the past when it was less mainstream it seemed to make some progress and then crash when an obstacle to its adoption was presented. I dunno really I am just thinking aloud. But it is interesting when guys like Bill Miller and Murray Stahl are still on board and very bullish.

Lance what is your thesis on these deep sea drilling contractors. I was attracted by the deep discounts to book and the industry consolidation. And the contrarian in me is sceptical about the idea that shale will keep oil prices forever around the $50 mark. And depletion means that oil majors will eventually have to start replenishing their reserves with deep water likely to be a beneficiary. So eventually you will get a situation where demand and supply come into balance. But my worry is if that does not happen any time soon competition for scarce contracts as well as need to service debt will result in them entering into longish contracts that do not offer much in the way of profitability.

Agree that equity allocations are influenced by the level of the stock market. Humans extrapolate the recent past so believe the market will continue to go up or go down and act accordingly. So rebalancing doesn't happen to the extent it should and equity allocations are therefore cyclical. Even before indexing blue chips and growth stocks were over owned during bull markets. So I don't think that distortion is anything particularly new. And the concentration risk is much lower with a broader index than it was for narrower de facto indices such as the Nifty Fifty or the narrower sector concentrations such as the tech and communications stocks during the dot com bubble. And active fund managers because of career risk tend to diversify widely and approximate indices and favour respectable and glamour stocks (which tend to be overrepresented in indices as well) so the market landscape hasn't changed that dramatically. The S&P 500 market cap weighted has a P/E of around 25 and the S&P 500 equal weighted has a P/E of around 22. Converting to earnings yields that is 4% versus 4.5%. So not much of a difference and you can make a case that the tech giants over-weighted in a market cap weighted index have excess cash, better growth prospects, more investments going through the P+L etc. There is after all an advantage to being big in a globalized economy and for tech stocks where winners tend to take all. It is difficult to comment on small caps as P/E ratios are distorted by the prevalence of loss making companies but the WSJ pegs forward P/E ratios (based on operating earnings) at 20 in line with the S&P 500. So the picture I am seeing is more one of stocks generally being historically expensive as you'd expect in a low interest rate environment. So I don't think that it is easy to outperform the index simply by stock picking unless you have superior skill which by definition the average investor doesn't have. And I don't think it is obvious to lighten up on stocks and move to cash in anticipation of cheaper markets in the future. This only makes sense if you believe you will have the opportunity to get back in at a substantially lower market level. And all the while you are fighting the upward bias to stock market prices from earnings growth and inflation which will partially offset the benefits of any eventual P/E contraction meaning time is not on your side. It seems a good bet that interest rates will go up but how fast and how much is anyone's guess and the earnings yield on the S&P 500 still offers a cushion especially when you consider that S&P 500 earnings grow over time whereas the bond coupon is fixed.

Thanks for the thoughtful response Cigarbutt. In response to your questions: Questions: -When something is true most of the times, is there a risk that you end up thinking that it is true all the time? I'd definitely agree. Just because something has always happened in the past doesn't mean it will happen in the future. Obviously value investors are on safer ground using the broad sweep of past experience rather than extrapolating current conditions as the "new normal". But things do change and the past is not necessarily prologue. -Do you imply that we have reached some kind of plateau in terms of margins, multiples and interest rates? I think plateau is the wrong word to use as the economy and markets never reach a steady state. But arguments that markets are overvalued do seem to rely a lot on the notion that margins, multiples and interest rates will revert towards historical means. Bruce Greenwald has a pretty interesting viewpoints on margins: https://www.valuewalk.com/2016/11/columbias-bruce-greenwald-corporate-profits-sustainable/ Also you have companies like Amazon and other tech companies holding off on monetizing their market dominance as they try to become even more dominant and a lot of investments are going through operating expenses which depresses margins. Regarding interest rates technology and globalization have deflationary effects so could keep inflation below historical norms justifying interest rates not much above current levels. Commodity prices may also be kept low by efficiency improvements, shale technology, a more service oriented economy etc. Also if we are in a slower growth world that will also keep interest rates low. Lower more stable growth deserves to be valued a lot more highly than higher but more cyclical growth as it makes stocks more bond-like. Buffett made the comparison between a no-growth company selling for 40 x earnings (IE US treasuries!) and the current stock market valuation. As Greenwald points out in his article services are less cyclical than manufacturing. And the equity risk premium which depresses market multiples is influenced by psychology so as long as investors are comfortable with higher multiples and willing to accept lower returns (but still favourable with bonds) they can stay high. Also with the dominance of index investing there are perhaps far fewer valuation sensitive investors out there! And technology companies make up about a quarter of the market and sell for high P/E multiples because of things like operating expenses including investments in growth and these companies generally pursuing revenue growth over earnings growth sacrificing current profitability. Of course there are counter arguments you can make. And margins, interest rates and valuations are difficult to predict for this reason. But for the same reason it is difficult to say with any real certainty whether or not the market is overvalued or not. Or that even if it is overvalued that it will crash as opposed to treading water until earnings catch up. So saying no to the S&P 500 just seems a bit risky to me.

Dollar cost averaging is going to be suboptimal simply because over most 5-10 year periods the direction of the general market is upwards so your average cost is likely to be higher than lower than a lump sum investment. Plus you are missing out on dividends. The models that show the market to be overvalued tend to be based upon the idea we have to revert to mean profit margins and interest rates and valuation multiples. But even then they do not imply negative returns or that the market is going to crash or that cash is a better option. They just simply say it is a low return environment going forward and a valuation headwind means that returns on stocks might lag the returns on underlying businesses. But if the models are wrong and there have been structural changes in the economy that mean higher profit margins and valuation multiples and lower interest rates can be maintained then markets are probably fairly valued and prospective returns are healthy enough that if you sit it out in cash you may never get the chance to re-enter at a lower market level and by dollar cost averaging you would end up paying a much higher average cost than the current market level. And if the economy really takes off and people become very optimistic then we could easily see the market go up another 50% over the next 3-5 years which will be psychologically very difficult if you have a high cash allocation. And when markets are valued based on the prevailing psychology and difficult to predict economic fundamentals there isn't really a scientific basis for trying to time the market especially considering the risks of missing the market altogether if you are wrong