To Bit or Not to Bit: What Should Investors Make of Bitcoin Mania?

Written by Dimensional Fund Advisors LP & Gerald E Gasber, CFP®, CIMA®, CPFA.

Bitcoin and other cryptocurrencies are receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios.

Cryptocurrencies such as bitcoin emerged only in the past decade. Unlike traditional money, no paper notes or metal coins are involved. No central bank issues the currency, and no regulator or nation state stands behind it.

Instead, cryptocurrencies are a form of code made by computers and stored in a digital wallet. In the case of bitcoin, there is a finite supply of 21 million,(1)  of which more than 16 million are in circulation.(2) Transactions are recorded on a public ledger called blockchain.

People can earn bitcoins in several ways, including buying them using traditional fiat currencies(3) or by "mining" them—receiving newly created bitcoins for the service of using powerful computers to compile recent transactions into new blocks of the transaction chain through solving a highly complex mathematical puzzle.

For much of the past decade, cryptocurrencies were the preserve of digital enthusiasts and people who believe the age of fiat currencies is coming to an end. This niche appeal is reflected in their market value. For example, at a market value of $16,000 per bitcoin,(4) the total value of bitcoin in circulation is less than one tenth of 1% of the aggregate value of global stocks and bonds. Despite this, the sharp rise in the market value of bitcoins over the past weeks and months have contributed to intense media attention.

What are investors to make of all this media attention? What place, if any, should bitcoin play in a diversified portfolio? Recently, the value of bitcoin has risen sharply, but that is the past. What about its future value?

You can approach these questions in several ways. A good place to begin is by examining the roles that stocks, bonds, and cash play in your portfolio.


Companies often seek external sources of capital to finance projects they believe will generate profits in the future. When a company issues stock, it offers investors a residual claim on its future profits. When a company issues a bond, it offers investors a promised stream of future cash flows, including the repayment of principal when the bond matures. The price of a stock or bond reflects the return investors demand to exchange their cash today for an uncertain but greater amount of expected cash in the future. One important role these securities play in a portfolio is to provide positive expected returns by allowing investors to share in the future profits earned by corporations globally. By investing in stocks and bonds today, you expect to grow your wealth and enable greater consumption tomorrow.

Government bonds often provide a more certain repayment of promised cash flows than corporate bonds. Thus, besides the potential for providing positive expected returns, another reason to hold government bonds is to reduce the uncertainty of future wealth. And inflation-linked government bonds reduce the uncertainty of future inflation-adjusted wealth.

Holding cash does not provide an expected stream of future cash flow. One US dollar in your wallet today does not entitle you to more dollars in the future. The same logic applies to holding other fiat currencies — and holding bitcoins in a digital wallet. So we should not expect a positive return from holding cash in one or more currencies unless we can predict when one currency will appreciate or depreciate relative to others.

The academic literature overwhelmingly suggests that short-term currency movements are unpredictable, implying there is no reliable and systematic way to earn a positive return just by holding cash, regardless of its currency. So why should investors hold cash in one or more currencies? One reason is because it provides a store of value that can be used to manage near-term known expenditures in those currencies.

With this framework in mind, it might be argued that holding bitcoins is like holding cash; it can be used to pay for some goods and services. However, most goods and services are not priced in bitcoins.

A lot of volatility has occurred in the exchange rates between bitcoins and traditional currencies. That volatility implies uncertainty, even in the near term, in the amount of future goods and services your bitcoins can purchase. This uncertainty, combined with possibly high transaction costs to convert bitcoins into usable currency, suggests that the cryptocurrency currently falls short as a store of value to manage near-term known expenses. Of course, that may change in the future if it becomes common practice to pay for all goods and services using bitcoins.

If bitcoin is not currently practical as a substitute for cash, should we expect its value to appreciate?


The price of a bitcoin is tied to supply and demand. Although the supply of bitcoins is slowly rising, it may reach an upper limit, which might imply limited future supply. The future supply of cryptocurrencies, however, may be very flexible as new types are developed and innovation in technology makes many cryptocurrencies close substitutes for one another, implying the quantity of future supply might be unlimited.

Regarding future demand for bitcoins, there is a non‑zero probability(5) that nothing will come of it (no future demand) and a non-zero probability that it will be widely adopted (high future demand).

Future regulation adds to this uncertainty. While recent media attention has ensured bitcoin is more widely discussed today than in years past, it is still largely unused by most financial institutions. It has also been the subject of scrutiny by regulators. For example, in a note to investors in 2014, the US Securities and Exchange Commission warned that any new investment appearing to be exciting and cutting-edge has the potential to give rise to fraud and false "guarantees" of high investment returns.(6) Other entities around the world have issued similar warnings. It is unclear what impact future laws and regulations may have on bitcoin's future supply and demand (or even its existence). This uncertainty is common with young investments.

All of these factors suggest that future supply and demand are highly uncertain. But the probabilities of high or low future supply or demand are an input in the price of bitcoins today. That price is fair, in that investors willingly transact at that price. One investor does not have an unfair advantage over another in determining if the true probability of future demand will be different from what is reflected in bitcoin's price today.


So, should we expect the value of bitcoins to appreciate? Maybe. But just as with traditional currencies, there is no reliable way to predict by how much and when that appreciation will occur. We know, however, that we should not expect to receive more bitcoins in the future just by holding one bitcoin today. They don't entitle holders to an expected stream of future bitcoins, and they don't entitle the holder to a residual claim on the future profits of global corporations.

None of this is to deny the exciting potential of the underlying blockchain technology that enables the trading of bitcoins. It is an open, distributed ledger that can record transactions efficiently and in a verifiable and permanent way, which has significant implications for banking and other industries, although these effects may take some years to emerge.

When it comes to designing a portfolio, a good place to begin is with one's goals. This approach, combined with an understanding of the characteristics of each eligible security type, provides a good framework to decide which securities deserve a place in a portfolio. For the securities that make the cut, their weight in the total market of all investable securities provides a baseline for deciding how much of a portfolio should be allocated to that security.

Unlike stocks or corporate bonds, it is not clear that bitcoins offer investors positive expected returns. Unlike government bonds, they don't provide clarity about future wealth. And, unlike holding cash in fiat currencies, they don't provide the means to plan for a wide range of near-term known expenditures. Because bitcoin does not help achieve these investment goals, we believe that it does not warrant a place in a portfolio designed to meet one or more of such goals.

If, however, one has a goal not contemplated herein, and you believe bitcoin is well suited to meet that goal, keep in mind the final piece of our asset allocation framework: What percentage of all eligible investments do the value of all bitcoins represent? When compared to global stocks, bonds, and traditional currency, their market value is tiny. So, if for some reason an investor decides bitcoins are a good investment, we believe their weight in a well-diversified portfolio should generally be tiny.(7)

Because bitcoin is being sold in some quarters as a paradigm shift in financial markets, this does not mean investors should rush to include it in their portfolios. When digesting the latest article on bitcoin, keep in mind that a goals-based approach based on stocks, bonds, and traditional currencies, as well as sensible and robust dimensions of expected returns, has been helping investors effectively pursue their goals for decades.

[1]. Source:

[2]. As of December 14, 2017. Source:

[3]. A currency declared by a government to be legal tender.

[4]. Per Bloomberg, the end-of-day market value of a bitcoin exceeded $16,000 USD for the first time on December 7, 2017.

[5]. Describes an outcome that is possible (or not impossible) to occur.

[6]. "Investor Alert: Bitcoin and Other Virtual Currency-Related Investments," SEC, 7 May 2014.

[7]. Investors should discuss the risks and other attributes of any security or currency with their advisor prior to making any investment.


The Value of Diversification

Written by Bob Veres & Gerald E Gasber, CFP®, CIMA®, CPFA, CFS.

The Value of Diversification

It's not always easy to grasp the value of diversification—why, in other words, it's better to own many stocks inside a mutual fund than one or two stocks on their own. But recent research conducted by Arizona State U. finance professor Hendrik Bessembinder offers some insight.

Bessembinder is not afraid of numbers. He calculated every one month return of every U.S. common stock traded on the New York and American Stock exchanges, and the Nasdaq exchange, since 1926. Even though nearly half of the 25,782 stocks that have been in existence over this time period lasted 7 or fewer years, this still accounted for 2,524,849 individual monthly returns from July 1926 through December 2015.

What did Bessembinder find? Among other things, only 4% of the listed stocks accounted for the entire lifetime dollar wealth creation of the U.S. stock market since 1926. In other words, all the market returns came from only 86 top-performing stocks out of nearly 26,000. If you owned some of those stocks, mixed with the vast majority of stocks whose companies underperformed or went out of business, you got decent returns. If you decided you could pick your own handful of stocks, there is an almost overwhelming chance that you would have missed out on the small number of winners.



Catchphrase Investing

Written by Jim Parker, VP Dimensional Fund Advisors & Gerald E Gasber, CFP®, CIMA®, CPFA.

The financial media is drawn to catchphrases, acronyms, and buzzwords that can be sold as the new thing. FAANG (Facebook, Apple, Amazon, Netflix, and Google) is the latest of these. But does this constitute an investment strategy?

For journalists, commentators, and marketers, acronyms like FAANG are useful. They fit easily into headlines and they appeal to a feeling among some investors that their portfolios should match the "zeitgeist" or spirit of the age.

But as we'll see, investment trends tend to come and go. This is not to downplay the transformative nature of new technologies and the possibilities they present. But as an investor, it is wise to recall that all those hopes and expectations are already built into prices.

The FAANG acronym has become particularly popular in 2017 as returns from the five members of the unofficial club have far outpaced the wider market. Exhibit 1 shows the total year-to-date returns of the FAANG members compared to the S&P 500.


Such is the public interest in the tech giants that the parent company of the New York Stock Exchange recently launched the NYSE FANG+TM Index that includes the quarterly futures contracts of the FAANG members apart from Apple (hence only one "A"), plus another five actively traded technology growth stocks.

So, does this mean, as some media gurus suggest, that you should reweight your portfolio around these tech names? After all, these companies have fundamentally reshaped traditional sectors like newspapers, television, advertising, music, and retailing.

For investors, there are a few ways of answering that question, none of which involve denying the significant influence Facebook, Amazon, Apple, Netflix, Google, and other technology names are having on our lives.

Firstly, market leadership is constantly changing based on a myriad of influences, including shifts in the structure of the global economy, commodities, technology, demographics, consumer tastes, and supply factors. Trying to build an investment strategy by anticipating these forces is like trying to catch lightning in a bottle.

In the 1960s, the then often-quoted Nifty Fifty of solid, buy-and-hold blue-chips included such names as Xerox, Eastman Kodak, IBM, and Polaroid, all of which were disrupted in one way or another by newer, more nimble competitors in the following decades.

By the late 1990s, the media was full of stories about the dot‑coms, companies that were building new businesses using the transformative power of the internet. A handful of those companies (Amazon, for instance) fulfilled their promise. Many others (retailer, prototype social network, and pet supplies firm were just three examples) crashed and burned.

In the mid-2000s, the focus turned to companies with a large exposure to the so-called BRIC economies, an acronym based on the fast-growing emerging economies of Brazil, Russia, India, and China.

Several financial services companies even set up BRIC products, with mixed degrees of success. One investment bank, having argued that the superior growth for emerging economies justified a bias to stocks exposed to these markets, ending up closing its BRIC fund in late 2015 after years of poor returns.1

So, while individual sectors each can have their time in the sun, it is not clear that weighting your portfolio toward an industry currently in favor is a sustainable long-term strategy.

A second way of looking at this issue is that accepting it is difficult to pick winning sectors does not mean you should exclude these zeitgeist stocks in a diversified marketwide portfolio. You can still own them, but you do so by casting a much wider net.

The more concentrated the portfolio, the more you are exposed to idiosyncratic forces related to individual stocks or sectors. Being highly diversified means you can still benefit from the broad trends driving technology or whatever is leading the market at any one time, but you are doing so in a more prudent manner.

Put another way, by diversifying you are not only reducing the risk of placing too much of a bet on one sector, you are improving the odds of holding the best performers. Look at Exhibit 2, which shows what would have happened if you had excluded the top 10% and top 25% of market performers in a global portfolio from 1994–2016.

We've seen that even professional investors can find it tough to pick which sector will lead the market from year to year.

It's true that technology companies like Amazon and Facebook have performed well recently. But it is worth recalling that current prices already contain future expectations about those companies. We don't know what future prices will be because these will reflect information we haven't received yet. Because no one has a reliable crystal ball, a better approach is to diversify. That way we increase the odds of being positioned in the next big winning sector without chasing hot trends or latching on to cute‑sounding acronyms.

1."Goldman Closes BRIC Fund," The Wall Street Journal, November 9, 2015.
2.The "All stocks" portfolio consists of all eligible stocks in all eligible developed and emerging markets. The portfolio for January to December of year t includes stocks whose free float market capitalization as of December t-1 is greater than $10MM in developed markets and $50MM in emerging markets and with non-missing price returns for December of year t-1. Annual portfolio returns are value-weighted averages of the annual returns on the included securities. The portfolios "Excluding the top 10%" and "Excluding the top 25%" are constructed similarly. Individual security data are obtained from Bloomberg, London Share Price Database, and Centre for Research in Finance. The eligible countries are: Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, and the United States. Diversification does not eliminate the risk of market loss. Past performance is no guarantee of future result

Ancient Adult Beverages

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Bob Veres.

People have been drinking alcoholic beverages for a very long time. Recently, a team of researchers found evidence of large-scale wine making in 6,000 BC—in clay vats big enough to hold 400 bottles of wine, in the Caucasus mountains in the modern nation of Georgia. The grapes came from vitis vinifera, the only grapevine species known to have been domesticated, and the grandparent of all 8,000-10,000 modern wine-making grape species.

This is the first evidence of large-scale production, but not the earliest archeological evidence of adult beverages. Traces of a concoction made from wild grapes, hawthorn fruit, rice beer and honey mead have been found on pottery from China that dates to around 7,000 BC.

More recently—as in, in the past few years—Patrick McGovern of the Biomolecular Archaeology Project for Cuisine, Fermented Beverages, and Health at the University of Pennsylvania Museum has been recreating ancient beverages. Among them: an ancient ale made with cacao, dated to 1400 B.C. in Honduras, and an early Etruscan ale based on residues found in 2,800-year-old tombs in central Italy. The Etruscans used malted heirloom barley and wheat, mixed with hazelnut flour, pomegranate and myrrh.

One of the most interesting is the Midas beverage, made in bronze vessels recovered from the Midas tomb in Turkey, which dates from 700 B.C. The ingredients included wine, barley beer, and mead. By adding some saffron as a bittering agent (hops were not available in the Middle East 2,700 years ago) the researchers produced a sweet, aromatic blend which Dr. McGovern describes as a little like white wine, with delicious, piquant qualities.

But Dr. McGovern points out that ancient beverages probably varied dramatically from one batch to the next. Different "vintages" would have been made up of whatever ingredients happened to be available, which means the alcohol manufacturers alternated between beer and mead along with wine, and sometimes producing mixtures of all of the above.



Savings Rates Decline

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & Bob Veres.

You don't hear much about America's personal savings rate these days, and the reason may be because the news is discouraging: collectively, the percentage of our income that we save is trending downward again, and may be about to hit record lows. The Federal Reserve Bank of St. Louis tracks the U.S. personal savings rate, going back to the late 1950s, when when people were setting aside a thrifty 11% of what they made. Americans achieved a record 17% savings rate in the mid-1970s before a long decline set in. In 2013, the rate briefly spiked again above 10%, but Americans have become less thrifty since then. The most recent data point shows Americans saving just 3.6% of their income.

How does this compare to the rest of the world? A chart on the Trading Economics website shows that most countries fall in the 4.5% to 10% range, but with considerable fluctuation. For instance, Spain experienced a negative savings rate just last quarter, but this quarter reports a rate of more than 14%. Japan and Mexico seem to be consistently the thriftiest of the reporting nations, each with savings rates above 20%. (India's rate on the chart appears to be in error.)

Does any of this matter? Economists will tell you that when the savings rate is high, it cuts into consumption, which lowers economic activity. But at the same time, countries with high savings rates have more capital to invest in their future, and their citizens tend to be less vulnerable to economic downturns. On the whole, we should probably prefer more savings to less.