Bitcoin - steer clear or not?

Danger of getting too nerdish. So a pause to explain the Sharpe Ratio in "lay person's" terms.
The concept is that one should expect over time to earn more on risky assets than on government bonds, for example. This excess return is known as the Equity Risk Premium. Risk is measured by the "volatility" of price movements. A typical stockmarket index would have a volatility between 15% and 20% per annum.
The Sharpe Ratio is the ratio of the Equity Risk Premium divided by the Volatility. It is an historic concept rather than a forward looking projection. It can vary significantly over time and over time periods even for the same asset class.
Gemini (a member of the AI family) suggests that a Sharpe Ratio of 1.0 is a target. Seems high to me.

Additions or corrections to that explanation most welcome.
 
letitroll said:
Whats the problem with BOI buying back shares
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Nothing, its the cancellation of those for circulation. I think roughly, BoI took out 10% of its shares out or circulation. I assume it boosts the share price accordingly.

In any case, with a 414% rise in 5yrs you labelled BoI the most "the most mundane thing"??

You should spread that chart over 20yrs if you really want to see what "mudane" looks like! :rolleyes:
 
Duke of Marmalade said:
The concept is that one should expect over time to earn more on risky assets than on government bonds, for example.
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That doesn't make sense unless include "...or expect to lose more over time". Otherwise where is the risk?

@letitroll seems to think that high risk, highly volatile assets should produce more earnings over time too. The potential for high losses is what makes a risky asset high risk.

Take these beauties from the vaunted S&P 500 over the last 52 weeks. Chronic returns.
1770677711798.webp
 
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Sister Sara said:
I think roughly, BoI took out 10% of its shares out or circulation. I assume it boosts the share price accordingly.
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Not necessarily.

Share buy backs, in principle, don't change the value of the company. They can if they reveal other information, perhaps it means that they aren't investing that money.

Image a corporation with 1 million shares at €1000 each. That gives the corporation a value of €1 billion.

If the company buys back 10% of its shares, that will be 100,000 shares at €1000 each. That costs the corporation €100 million.

This drops the value of the corporation to €900 million. However, there are 900,000 shares outstanding after the buy back. This works out at €1000 per share, so no change.

The fundamental effect is that the buy back makes the corporation less valuable since it has to drain a bank account, take a loan, or issue bonds. That is drop in value is exactly canceled out by the reduction in shares.
 
@LarryScott its the cancelling of those shares that I'm referring to. It's the opposite of a share split.

Buybacks shouldn't drop the value. They may spend cash reserves of €100m but they obtain an assets (the shares they just bought) valued at €100m.

The company is still valued at €1bn with 1million shares, but by cancelling those shares after the buyback there are now only 900,000 shares issued increasing the price of the share from €1000 to €1111 per share. The value of company hasnt changed just the market price of the share. It costs more more to obtain 1 share, but its a 10% bigger slice of the company than when there were 1m shares.
 
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Sister Sara said:
The value of company hasnt changed just the market price of the share.
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I don't agree.

Case 1: Initial
Assets
Other: €900 million
Cash: €100 million
Shares: €0
Total: €1 billion
Issued Shares: 1 million
Value per share: €1000

Case 2: Share bought
Assets
Other: €900 million
Cash: €0 million
Shares: €100 million
Total: €1 billion
Issued Shares: 1 million
Value per share: €1000

Case 3: Share cancelled
Assets
Other: €900 million
Cash: €0 million
Shares: €0 million
Total: €900 million
Issued Shares: 900,000
Value per share: €1000

The effect of the buy back makes the company worth 10% less and have 10% less shares. It all balances out.

This assumes that the shares are obtained at market price. If they pay more than the shares are worth, then they are wasting money and the final value will be lower.
 
@LarryScott thanks for that, I will go with that :)

@letitroll you off the hook on the BoI share cancellation.

You just need to explain:

1. Why a 400% increase is share price is 'mundane'? If you are referring to the activities of the bank I would challenge that bitcoin, stripping away the hyperbole of its price, is far, far more mundane.

2. Why compare a bank stock price to a crypto currency? Can't someone have shares in BoI and have money in bitcoin?
 
Sister Sara said:
That doesn't make sense unless include "...or expect to lose more over time".
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Oh dear! I should have known better than to use sleight of (statistical) hand with you :confused:
So you have forced me to go nerdish.
Consider the flip of a coin and let's say the house will let you win 2 if Heads come up whilst you are only staking 1. Just to emphasise the model clearly - you have a 50% chance of winning 2 and a 50% chance of losing 1. The nerds will say we have an expectation of 50% x 2 + 50% x (-1) which equals +0.5. That is a positive expectation of 0.5. I should have said in my earlier post "expectate" but there is no such word, even the nerds stop short of coining that term.
(Note as an aside that in our model you would expectate +0.5 but there is no chance that you would ever actually finish with +0.5; it is either +2 or -1.)
So that was the first bit of sleight of hand in the phrase "expect to win more over time". The second sleight was "over time".
In our model the nerds would put a figure on the "risk" behind the expectation. This is a measure of the expectation (yep that term again) of by how much your outcome will deviate from +0.5. They use squares and square roots with their wand and come up with a figure of 1.5. They call it the Volatility of the outcome.
And here is where there is actually some real magic. If you play that game of tosses 100 times your expected overall win is 100 x 0.5 = 50. But your volatility only scales with the square root of the number of tosses and would be 10 x 1.5 = 15.
Now on an expectation of +50 and a Volatility of 15 there would be very little chance indeed of making a loss. "over time" is sleight of hand for rolling the stockmarket dice many times. That is why some argue that long term savers like pension funds get a free lunch. The markets price in a positive expectation to compensate for the short term volatility but over time the volatility becomes dwarfed by the positive expectation.

By the way - a fantastic exhibit.
 
Duke of Marmalade said:
Note that bitcoin would be hopelessly unable to fulfil this role in a modern economy - the volume of the medium of exchange utility must flex for maximum efficiency.
So with the euro project it is somewhat like all these countries working off the same electricity grid
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Yes that was the problem when currencies were fixed to gold, gold wasn't allowing economies to flex and expand.
However using your electricity grid analogy the Irish government through their highly restrictive green energy regulations are also restricting the expansion of Irish economy and connecting new houses to the grid. A new housing estate in portlaoise built s year ago is still awaiting connection to the grid. That was unheard of a decade ago.
Wind energy can only goto a maximum of 60% of grid capacity so they need to be building stable dispatchable power stations which they haven't been building.
Yes theoretically Ireland can connect to continental grid but that will only provide a small proportion of capacity.
So Ireland effectively is restricting its economy causing inflation by not allowing electricity grid to grow with population and economic growth.
 
Sister Sara said:
seems to think that high risk, highly volatile assets should produce more earnings over time too. The potential for high losses is what makes a risky asset high risk.
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Nope not my point.

Volatility adjustment returns are a way (not a perfect way) to quantify how much risk you took to get a given return.

Volatility does not guarantee returns in the same way that more risk does not guarantee return.....in both cases the point is e-ante one should be compensated for both....which is to say....why invest in something with the expected vol of BTC when similar or better returns can be achieved in assets with less vol. Thats the point.

The point applied to BTC with this 1yr, 3yr, 5yr lookback period is that the returns achieved in the asset relative to its volatility means holders are making poor absolute returns relative to alternatives (SPY,QQQ) and making truly abysmal returns when one considers the volatility of the asset they hold.

Sister Sara said:
Why a 400% increase is share price is 'mundane'?
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The mundane comment was in regard to buying in 2021 (instead of a punt on BTC) a duopoly banking provider (BOI) in a country with only two real scaled banks. You bought a narrative driven digital asset in existence for only 17yrs with outrageous levels of volatility which was exciting I'm sure OR you could have bought a boring (mundane) bank - Bank of Ireland an institution in existence for 242yrs and one of only two dominant providers of banking services on the island of Ireland. You decided to buy BTC.....got mediocre returns, outrageous levels of volatility, paid high fees to acquire it, will pay high fees to eventually sell it...all while you could have bought shares in BOI for 0% commision and made x10 the return....or as discussed previously bought SPY or QQQ.....cut your volatility by 75% and tripled your returns.

Not going to burn up anymore time on this.....you are not a returns driven person.....you are attached to BTC not because you want to make good absolute risk adjusted eturns, your attached to BTC because you want to predict the end of the monetary system and be proven right....you have a cassandra streak and BTC is your I 'told you so'. It's very common in the BTC community....lots of people want to predict the end of the world and hedge against it....BTC is a nuclear fallout bunker in your mind and I know that comes with great comfort.
 
Duke of Marmalade said:
So you have forced me to go nerdish.
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I beg your pardon that was not the intention. I was more honing in on @letitroll savvy investing advice and with the benefit of his hindsight, who could argue? :rolleyes:

letitroll said:
your attached to BTC because you want to predict the end of the monetary system and be proven right....you have a cassandra streak and BTC is your I 'told you so'.
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On the contrary. I don't want the end of the monetary system to end any more than I want my house to be burnt down.

That I have taken a position on both, insurance on the house and bitcoin in the event that the € monetary system should up-end on itself one day - there is already precedent for it in its relatively very short lifespan!
If you choose to ignore that that is your business. I'm not suggesting bitcoin is the insurance, rather I see how it may prospectively be an insurance.
I see great utility in storing some of my wealth outside the central bank monetary system even with the volatility of bitcoin.

This is a very rational, logical position to have, imo.

letitroll said:
all while you could have bought shares in BOI for 0% commision and made x10 the return
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Wow! you knew this in 2021! You could foretell? I am impressed!!

Tell me,
letitroll said:
a narrative driven digital asset in existence for only 17yrs with outrageous levels of volatility which was exciting I'm sure OR you could have bought a boring (mundane) bank - Bank of Ireland an institution in existence for 242yrs
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not much would have changed for either in the 5yr time blocks from 2016 - 2020, and 2011 to 2015 with regards the narrative driven digital asset and the mundane bank? Would it?

So if we were to apply your analysis to bitcoin and BoI over all those 5yrs blocks how would your figures look then, in each 5yr block, and in the entirety?

letitroll said:
Not going to burn up anymore time on this
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Yes. Its absurd. You are effectively choosing your own narrative with the benefit of hindsight and calling out "I told you so".

You have no idea if I have Bank of Ireland shares or not.

As for BTC, I have followed it for the best part of 15yrs now. I have bought and sold many times out of greed and fear, out of optimism and enlightenment and out of downright skeptcism.

The only way to measure to the value of my bitcoin is to calculate from the cost of the outlay to purchase, the returns and the prevailing market price.

Roughly 70% of my bitcoin holding has been bought with gains made from ....bitcoin, over the years. The value at todays market prices is a multiple of the outlay.

Bitcoin is a volatile asset but I'm fortunate to be in a position where the risk is effectively negligible for me.

On the otherhand, how about you give us your
letitroll said:
1yr, 3yr, 5yr
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lookforward on returns for bitcoin and BoI? Or at least BoI (if its allowed here?)
 
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Not sure where to post this but the Financial Times has this report on how the Crypto industry braces for quantum computing threat due to the forecast that quantum computing will be viable and available by 2030 and will be capable of unscrambling the multiplications of prime numbers which underpin the technology. They reference a from Google which outlined the threat. Will that spell the end of Crypto currencies in general?
 
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Quantum computing is a real threat to Bitcoin only because Bitcoin is the hardest nut to crack. If the quantum teams can crack Bitcoin it proves they can crack virtually anything.

If quantum does crack Bitcoin the real issue then is not the 0.1% of weath stored in Bitcoin but the other 99.9% of Wealth that is stored with much lower encryption then Bitcoin.

And if quantum starts to threaten Bitcoin the protocol can be upgraded(granted this may be difficult to agree). But how could all operating systems for every other asset in the world move quick enough to fend off Quantum? They are not even thinking of the threat, at least the Bitcoin community is considering it.

So even though Quantum is a threat to Bitcoin, it's similar to a massive asteroid hitting the planet. Quantum will reset everything.
 
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