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Kevin comments on Why is it rational to invest in retirement? I don't get it. - Less Wrong
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Is it rational to invest in Bitcoins for retirement?
According to this TechCrunch article, 87% of surveyed economists are bearish on Bitcoin. So we can speculate about cost of adoption, velocity of money, deflation, and volatility all we want, but it seems that the people with PhDs who really know this stuff aren't optimistic.
Still probably a good idea to invest in Bitcoins some, just keep a diverse portfolio.
Edit: these economists don't seem that bearish, and they also seem to think they are pretty clueless.
The generalized question is is it rational to invest in things with small chances of large payoffs. The answer is a qualified yes, given a few conditions.
The pool of people who would devote a significant portion of a windfall to SENS or MIRI should be more risk tolerant in their investments than average.
According to the academic literature, the opposite is true:
"Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?" Antti Ilmanen Financial Analysts Journal, September/October 2012, Vol. 68, No. 5: 26–36.
"The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun rewards. Thus, bearing small risks is often well rewarded, bearing large risks not."
People seem to overestimate events that are salient yet have small probability of occurring. The empirical evidence bears this out.
Investors tend to overestimate the odds of tail events, so selling insurance and lottery tickets is long-run profitable.
Standard financial theory says that in the absence of specialized information about what assets are better than others, you want to invest in every single investable asset proportionally to their total value. The Bitcoin market is worth about $2 billion at current prices, compared to some $25 trillion for stocks, meaning that in principle you should put $1 into Bitcoin for every $12,500 you have in stocks. (In practice, transaction costs make this completely infeasible, as should be obvious, but that's the mathematical argument)
I'm not sure that bitcoins will stay this valuable for several more decades.
Maybe, invest some but not all of your savings in bitcoins.