Should the Total World Index include Crypto?

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BogleBuddy12
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Should the Total World Index include Crypto?

Post by BogleBuddy12 »

If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value? Obviously crypto cannot be included in the world index, so I am suggesting holding crypto as a separate holding. But should this be excluded from what we consider a World Market Index?

Thank you.
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Re: Should the Total World Index include Crypto?

Post by AlohaJoe »

Do you also hold market weight of real estate, coal, chicken, almonds, art work, NBA Top Shot NFTs, and Franklin Mint collectibles?

Let's not go crazy with Market Weight All The Things here.
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JoMoney
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Re: Should the Total World Index include Crypto?

Post by JoMoney »

VT is Vanguard's "Total World Stock Index Fund". It holds stocks, so yes as you pointed out it would be completely inappropriate for the stock index fund to hold something that's not a stock or security of any type. You would have to hold it separately. If crypto is something you want to own, then whatever floats your boat... but buying into pyramid schemes using a "passive" strategy doesn't seem like a good idea. It pretty much guarantees you'll be a late mover, one of the ones left holding a bag of virtual coins you can't sell for anything when the music stops.
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Re: Should the Total World Index include Crypto?

Post by JoMoney »

Maybe next we can start extolling the great "investment" that is selling Herbalife and Amway products, recruit more people to sell the product and you to can get rich with it as they to enlist sellers under you... Apparently that's the investing model for the 21st century, just need to call the products xxxx-coin and you're on your way.
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Re: Should the Total World Index include Crypto?

Post by greg24 »

Should it hold a cap weighting of all currencies?
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Re: Should the Total World Index include Crypto?

Post by Astones »

I believe that the theory behind the choice of investing in the whole market is solid only if we reduce our definition of market to the assets that can create added value. So no, I don't believe crypto should be included, nor commodities or other currencies for what matters.

Many people disagree with me on this.
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Re: Should the Total World Index include Crypto?

Post by dru808 »

Good to see the slow acceptance of crypto here, don’t even see any gold or RE threads much.

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Re: Should the Total World Index include Crypto?

Post by Ocean77 »

I never understood the fuzz is about market cap weighting assets to begin with. The market cap is simply the price tag the market puts on a certain specific company. There is no other guidance hidden in that market cap that we may try to read into it. The market offers no advice that one's personal portfolio should hold 1000x of one company compared to another one that has 1/1000s of the market cap. I.e. look at an arbitrarily weighted index like the Dow Jones, how poorly it is constructed, and what silly decisions the committee has been making on replacing stocks, and still it pretty much matched the S&P over time.
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Re: Should the Total World Index include Crypto?

Post by Schlabba »

BogleBuddy12 wrote: Thu May 13, 2021 10:50 pm If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value? Obviously crypto cannot be included in the world index, so I am suggesting holding crypto as a separate holding. But should this be excluded from what we consider a World Market Index?

Thank you.
You’re probably invested in Coinbase, Tesla and others. So you are exposed to crypto as much as the corporate world is using it.

I don’t think the market cap argument extends to across asset classes. Would you hold stocks to bonds at market cap weight?
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Re: Should the Total World Index include Crypto?

Post by djm2001 »

Yes, IMO, a global market portfolio (e.g., extending the Word Bond Stock portfolio suggested by William Sharpe) should include gold and crypto.

Here is a long thread on Sharpe's portfolio and its extensions/completions. I have a post on that thread on extending to gold and also crypto (see the post-script of that post).

When building a global market portfolio, here are some important principles:
  • Buy what you measure, and measure what you buy. Using the market cap for one thing (e.g., crypto, physical gold, private real estate) but then buying something else (e.g., Coinbase, gold mining companies, public REITs) is not appropriate because the fundamental characteristics are different.
  • Avoid double-counting an asset. I.e., make sure that the indexes and funds you use do not overlap. So, besides being an imperfect substitute, buying Coinbase (or gold-mining corps or REITs) to substitute for crypto (or gold or real estate, respectively) doubles your exposure to the public company because you already hold market weight of that in your total stock market index fund(s). Note, however, that physical gold ETFs (e.g., GLD, IAU) are not included in the stock markets (because they are structured as grantor trusts, not investment companies), and so can / should be invested in separately.
  • Always use float-adjusted market caps for your allocation ratios, otherwise the market portfolio being efficient (for the "average" investor) is not borne out by theory. Intuitively, in order to benefit from wisdom of the crowds, the crowds must have access to the assets. The non-public-float portion of assets (restricted shares, etc.) can be thought of as obstacles that the competitive public market is working around in order to achieve a (public-float) allocation that is efficient in the face of those obstacles. Float-adjustment is especially tricky for crypto because determining the inaccessible portion of cryptocurrencies is a murky problem. One attempt to measure float-adjusted market caps for crypto is here (see the "Free Float Market Cap" column).
  • Practically speaking, there will be a completeness vs complexity/cost trade-off to reckon with. You have to draw the line somewhere. Fill in the larger gaps in your portfolio first (the largest asset classes by far being TSM, TISM, TBM, and TIBM -- i.e., total US- and international stock- and bond market) before attending to the smaller slivers of real estate, TIPS, crypto, gold, etc. Consider also the costs associated with buying, holding (e.g., expense rations, tax efficient placement), and rebalancing between these.
A note on rebalancing: A market-weighted portfolio will mostly continue to track the market weights over time, but drift still can and will occur across the index funds (e.g., allocation drift between a TSM fund and a TBM fund). This is because underlying assets of non-zero value appear and disappear within these funds / asset classes in small, sudden, discontinuous jumps -- stocks get listed and de-listed, bonds mature and new bonds are issued, gold is newly mined and also consumed to some extent in industrial processes, etc. So while each index fund does the job of maintaining market weight ratios of assets within the fund in the face of these (usually small) discontinuities within the fund's target asset class, it falls on you to manually rebalance the relative discontinuities across the funds.

To aid with the construction of a global market portfolio, I made a spreadsheet that tracks the various market caps in real time. See the FwdProj tab's "Current Mkt Cap" column for the BTC and ETH market caps. (I don't include them in the main MktCaps tab because these market caps are not float-adjusted; I haven't yet figured out how to import the real-time float-adjusted market caps for these.)

P.S., For those wondering why it makes sense to use (float-adjusted) market cap weighting across all asset classes, here is a good paper by John Cochrane called "Portfolio advice for a multi-factor world." that explains the theory. If you want to skip the theory, you can also see the summary in the Conclusions section of that paper, particularly point #6. The point is that this is the market portfolio is the "central" portfolio -- i.e., it is the right portfolio for the "average" investor. So if you are average (or don't know how you are different from average), then it's the right portfolio to hold. If you know how you differ from average (e.g., you have a stable job and many years of work left), then you should adjust for your personal circumstance by tilting your portfolio (e.g., hold fewer bonds than market weight) to bring your overall risk allocation back to the risk allocation of the market portfolio.
Last edited by djm2001 on Fri May 14, 2021 4:46 am, edited 2 times in total.
Astones
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Re: Should the Total World Index include Crypto?

Post by Astones »

Ocean77 wrote: Fri May 14, 2021 1:06 am I never understood the fuzz is about market cap weighting assets to begin with. The market cap is simply the price tag the market puts on a certain specific company. There is no other guidance hidden in that market cap that we may try to read into it. The market offers no advice that one's personal portfolio should hold 1000x of one company compared to another one that has 1/1000s of the market cap. I.e. look at an arbitrarily weighted index like the Dow Jones, how poorly it is constructed, and what silly decisions the committee has been making on replacing stocks, and still it pretty much matched the S&P over time.
According to portfolio theory, market cap weighing should get you closest to the efficient frontier.
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Re: Should the Total World Index include Crypto?

Post by burritoLover »

greg24 wrote: Thu May 13, 2021 11:38 pm Should it hold a cap weighting of all currencies?
No, only currencies that have a 5,000,000% gain in 10 years. That way, you can rationalize the dumb decision to have crypto in your portfolio (hey market cap weighted!) while satisfying your FOMO urges.
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Re: Should the Total World Index include Crypto?

Post by whereskyle »

BogleBuddy12 wrote: Thu May 13, 2021 10:50 pm If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value? Obviously crypto cannot be included in the world index, so I am suggesting holding crypto as a separate holding. But should this be excluded from what we consider a World Market Index?

Thank you.
Whatever corporations in the index, such as Tesla, see fit to hold is included in the index.
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Re: Should the Total World Index include Crypto?

Post by acegolfer »

Astones wrote: Fri May 14, 2021 4:39 am
Ocean77 wrote: Fri May 14, 2021 1:06 am I never understood the fuzz is about market cap weighting assets to begin with. The market cap is simply the price tag the market puts on a certain specific company. There is no other guidance hidden in that market cap that we may try to read into it. The market offers no advice that one's personal portfolio should hold 1000x of one company compared to another one that has 1/1000s of the market cap. I.e. look at an arbitrarily weighted index like the Dow Jones, how poorly it is constructed, and what silly decisions the committee has been making on replacing stocks, and still it pretty much matched the S&P over time.
According to portfolio theory, market cap weighing should get you closest to the efficient frontier.
According to "a" portfolio theory.
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Re: Should the Total World Index include Crypto?

Post by z3r0c00l »

If you do, you should also look at how many dollars you have in cash and buy twice as much Chinese Yuan, about an equal amount of Euros, and half as much Yen. Continue this process until you get the top 13 currencies in appropriate amounts, then for the 14th you can buy Bitcoin.
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Re: Should the Total World Index include Crypto?

Post by student »

AlohaJoe wrote: Thu May 13, 2021 10:56 pm Do you also hold market weight of real estate, coal, chicken, almonds, art work, NBA Top Shot NFTs, and Franklin Mint collectibles?
Funny.
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Re: Should the Total World Index include Crypto?

Post by ensign »

BogleBuddy12 wrote: Thu May 13, 2021 10:50 pm If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value?

Thank you.
No. Crypto = tulips.
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Re: Should the Total World Index include Crypto?

Post by watchnerd »

BogleBuddy12 wrote: Thu May 13, 2021 10:50 pm If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value? Obviously crypto cannot be included in the world index, so I am suggesting holding crypto as a separate holding. But should this be excluded from what we consider a World Market Index?

Thank you.
Mine does.

I hold crypto at market weight relative to global stocks and global bonds.

I've held crypto at market weight relative to the global stock and bond portfolio for about a month now.

It's labeled 'Alts' in my sig.

The crypto assets themselves that I hold represent about 67% of the market cap of the crypto space itself.
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Re: Should the Total World Index include Crypto?

Post by Polymorphic »

watchnerd wrote: Fri May 14, 2021 8:47 am
BogleBuddy12 wrote: Thu May 13, 2021 10:50 pm If one is looking to hold a global market weight type portfolio, say using VT (Vanguard Total World,) should a 2% stake of cryptocurrency be held to match its market value? Obviously crypto cannot be included in the world index, so I am suggesting holding crypto as a separate holding. But should this be excluded from what we consider a World Market Index?

Thank you.
Mine does.

I hold crypto at market weight relative to global stocks and global bonds.

I've held crypto at market weight relative to the global stock and bond portfolio for about a month now.

It's labeled 'Alts' in my sig.

The crypto assets themselves that I hold represent about 67% of the market cap of the crypto space itself.
Simple, boring VT investor here. How do you go about determining the market weight of crypto against VT?
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Re: Should the Total World Index include Crypto?

Post by dknightd »

NO! OK, perhaps. I consider Crypto as an emerging market.
Edit: only you can decide how much you want to put into emerging market. Cryto has no basis in reality. It is made up!
Last edited by dknightd on Fri May 14, 2021 9:24 am, edited 1 time in total.
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Re: Should the Total World Index include Crypto?

Post by watchnerd »

Polymorphic wrote: Fri May 14, 2021 9:06 am

Simple, boring VT investor here. How do you go about determining the market weight of crypto against VT?
Look at the various tabs on the Global Market Portfolio spreadsheet:

https://docs.google.com/spreadsheets/d/ ... g_/pubhtml#

Then pop then into a spreadsheet of your own where you add the crypto market cap.
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Re: Should the Total World Index include Crypto?

Post by watchnerd »

Code: Select all

US Stocks	        CRSP US Total Market	$42,541,751.08	34.65%	Stocks	VTSAX
Ex-US Stocks	FTSE Global All Cap ex-US	$30,708,034.10	25.01%	59.67%	VTIAX
US Bonds	        FTSE USBIG	              $24,492,867.24	19.95%	Bonds	VBTLX
Ex-US Bonds	FTSE WorldBIG - USBIG	$22,361,044.12	18.21%	38.16%	VTABX
Crypto	        CoinMarketCap	                  $2,460,000.00	2.00%	Alts	         GBTC, ETHE
Gold ETFs	        Gold Backed ETFs	          $203,700.00	0.17%	2.17%	GLDM
Last edited by watchnerd on Fri May 14, 2021 10:25 am, edited 1 time in total.
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Re: Should the Total World Index include Crypto?

Post by Astones »

watchnerd wrote: Fri May 14, 2021 9:19 am

Code: Select all

US Stocks	CRSP US Total Market	$42,541,751.08	34.65%	Stocks	VTSAX
Ex-US Stocks	FTSE Global All Cap ex-US	$30,708,034.10	25.01%	59.67%	VTIAX
US Bonds	FTSE USBIG	$24,492,867.24	19.95%	Bonds	VBTLX
Ex-US Bonds	FTSE WorldBIG - USBIG	$22,361,044.12	18.21%	38.16%	VTABX
Crypto	CoinMarketCap	$2,460,000.00	2.00%	Alts	GBTC, ETHE
Gold Backed ETFs	Gold Backed ETFs	$203,700.00	0.17%	2.17%	GLDM
For a brief second I thought that these were your actual money.
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Re: Should the Total World Index include Crypto?

Post by watchnerd »

Astones wrote: Fri May 14, 2021 9:38 am
watchnerd wrote: Fri May 14, 2021 9:19 am

Code: Select all

US Stocks	CRSP US Total Market	$42,541,751.08	34.65%	Stocks	VTSAX
Ex-US Stocks	FTSE Global All Cap ex-US	$30,708,034.10	25.01%	59.67%	VTIAX
US Bonds	FTSE USBIG	$24,492,867.24	19.95%	Bonds	VBTLX
Ex-US Bonds	FTSE WorldBIG - USBIG	$22,361,044.12	18.21%	38.16%	VTABX
Crypto	CoinMarketCap	$2,460,000.00	2.00%	Alts	GBTC, ETHE
Gold Backed ETFs	Gold Backed ETFs	$203,700.00	0.17%	2.17%	GLDM
For a brief second I thought that these were your actual money.
Ha....those units are millions. ;)

i.e. gold-backed ETFs are $203.7B.
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Re: Should the Total World Index include Crypto?

Post by Green Street »

No, but we should see a total digital asset index fund in a few years 🙏
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Re: Should the Total World Index include Crypto?

Post by DB2 »

JoMoney wrote: Thu May 13, 2021 11:24 pm VT is Vanguard's "Total World Stock Index Fund". It holds stocks, so yes as you pointed out it would be completely inappropriate for the stock index fund to hold something that's not a stock or security of any type. You would have to hold it separately. If crypto is something you want to own, then whatever floats your boat... but buying into pyramid schemes using a "passive" strategy doesn't seem like a good idea. It pretty much guarantees you'll be a late mover, one of the ones left holding a bag of virtual coins you can't sell for anything when the music stops.
100% agreed.

All of these young people who think they are actually "investing" in crypto are going to learn a very hard lesson at some point. And unfortunately, when the scheme collapses, many will probably write off investing entirely even though they were never really doing it. Many simply don't understand what they are even doing.
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Re: Should the Total World Index include Crypto?

Post by Tipro »

Changing the subject slightly - are there single funds that track a market cap basket of all major asset classes? Stocks, bonds, crypto I guess. . . real estate, commodities, maybe even art?
Last edited by Tipro on Fri May 14, 2021 2:07 pm, edited 1 time in total.
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Re: Should the Total World Index include Crypto?

Post by Tipro »

DB2 wrote: Fri May 14, 2021 1:47 pm
JoMoney wrote: Thu May 13, 2021 11:24 pm VT is Vanguard's "Total World Stock Index Fund". It holds stocks, so yes as you pointed out it would be completely inappropriate for the stock index fund to hold something that's not a stock or security of any type. You would have to hold it separately. If crypto is something you want to own, then whatever floats your boat... but buying into pyramid schemes using a "passive" strategy doesn't seem like a good idea. It pretty much guarantees you'll be a late mover, one of the ones left holding a bag of virtual coins you can't sell for anything when the music stops.
100% agreed.

All of these young people who think they are actually "investing" in crypto are going to learn a very hard lesson at some point. And unfortunately, when the scheme collapses, many will probably write off investing entirely even though they were never really doing it. Many simply don't understand what they are even doing.
If you're so inclined, check out the New York Times "The Daily" podcast from this morning. Interviews a young guy (33) who was saving for a down payment on a home but then threw his entire life savings - and even borrowed more on margin - into dogecoin. Turned a $250k "investment" into $2.5M over the last month and he still refuses to sell.
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Re: Should the Total World Index include Crypto?

Post by drk »

Schlabba wrote: Fri May 14, 2021 2:45 am You’re probably invested in Coinbase, Tesla and others. So you are exposed to crypto as much as the corporate world is using it.
Also all the pick-and-shovel sellers: chip-makers, cloud-computing providers, telecoms, energy companies, etc.
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Re: Should the Total World Index include Crypto?

Post by watchnerd »

Tipro wrote: Fri May 14, 2021 2:06 pm
DB2 wrote: Fri May 14, 2021 1:47 pm
JoMoney wrote: Thu May 13, 2021 11:24 pm VT is Vanguard's "Total World Stock Index Fund". It holds stocks, so yes as you pointed out it would be completely inappropriate for the stock index fund to hold something that's not a stock or security of any type. You would have to hold it separately. If crypto is something you want to own, then whatever floats your boat... but buying into pyramid schemes using a "passive" strategy doesn't seem like a good idea. It pretty much guarantees you'll be a late mover, one of the ones left holding a bag of virtual coins you can't sell for anything when the music stops.
100% agreed.

All of these young people who think they are actually "investing" in crypto are going to learn a very hard lesson at some point. And unfortunately, when the scheme collapses, many will probably write off investing entirely even though they were never really doing it. Many simply don't understand what they are even doing.
If you're so inclined, check out the New York Times "The Daily" podcast from this morning. Interviews a young guy (33) who was saving for a down payment on a home but then threw his entire life savings - and even borrowed more on margin - into dogecoin. Turned a $250k "investment" into $2.5M over the last month and he still refuses to sell.
I feel no compunction about staking crypto at 6-8% APR and earning a vig off of these guys.
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Re: Should the Total World Index include Crypto?

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