I love to talk about blockchain. I talk about it for a living. But when people come up to me asking, “Are you that blockchain guy?”, I have to groan and excuse myself.
The blockchain is cypherpunk infrastructure. It’s not fully developed yet, but it’s getting there. It will enable sovereign digital structures where people can communicate, do business, and transact without any authority being able to interfere.
No one ever wants to talk about that. They always have the same question: what coin should I invest in?
That question has nothing to do with blockchain technology. It has nothing to do with infrastructure. Whether the price of ETH is $23 or $888, the Ethereum blockchain ticks away in happy oblivion. I hate investment questions. But whenever I get the same question over and over again, I write an article to shut people up, so here it is.
What coins will go up in future? My answer is this: no one knows the future. We know the past, but not the future. You should have grasped this important fact by the age of two, according to Piaget, but the blockchain community has seen a sudden influx of people with less mental capacity than that.
The blockchain has nothing to do with the market, but let’s look at what a market is, and how it works.
A market is a distributed auction. There is some asset for sale – a stock, a precious metal, a cryptocurrency, or whatever – and people pay what they believe it is worth. If it has a high perceived value, sellers are unwilling to part with it cheaply, and buyers need to bump up their bids to acquire it. If a company’s CEO is eaten by coyotes, people no longer believe the company is as good. Then they’re not willing to pay as much for the stock, and so the line on the chart goes down.
The market-price of a cryptocurrency is the result of thousands of brains, attached to thousands of eyeballs, all around the world, assessing the value of a coin. Some of these brains are in the skulls of highly-informed professionals, and they move the price more, because they control a lot of capital. Some of these eyeballs are pointed at secret insider knowledge.
Compare to this the average crypto-ferret, trading online, at his laptop, in his tighty-whiteys. He subscribes to Youtube investment channels, reads whitepapers, and does technical analysis. He yaks about price movements on Twitter and Bitcoin Talks. Now here’s the key point: in order for him to correctly predict future price movements, he would have to assess how much confidence a cryptocurrency really deserves more accurately than the market. That’s impossible. The market has already made its assessment; that’s the price you see. And it has factored in much more information than any trader can process.
Markets can aggregate a lot of information from a lot of sources. That’s the first reason they’re efficient. The second reason is incentive; if someone, somewhere, does have better information, they have an incentive to buy or sell on the basis of that information. Buy-action will drive the price up, and sell-action will drive it down. In this way, the market offers players a cash reward for adding their wisdom to the pool. That wisdom is absorbed into the price listed on the exchanges, and the market-quote becomes even more accurate. All this happens within one minute.
Note that future value is already accounted for. The solar industry is a good example of this. Solar is going to grow a lot over the coming 20 years. There’s no argument about that. So can we just buy solar shares now and watch them go up as the industry grows? No. That future growth is already absorbed into the market-price. As soon as the swarm understood that that growth was coming, it bought up a bunch of solar stocks, willing to pay a bit more to acquire them, and so the price went up to its current level, until it hit a ceiling beyond which confidence is not justified.
When you look up the price of an asset on coinmarketcap.com, that is what you are up against. You are looking at the best-guess of thousands of brains working together, being paid to contribute their best information. You cannot outthink this system. Stop trying to. And stop asking me to, especially on weekends.
It’s a bit analogous to the economic policies of the two hemispheres in the 20th century. The Western world trusted in the efficiency of markets (decentralised planning) to run their economy. Should there be another hair salon in Kimmage? Let people on the ground figure that out. If they guess wrong, the hair salon will quickly die, and Kimmage will have the exact number of hair salons it needs. The Reds favoured centralised planning; some bureaucrat in a government building, far from the fields, would crunch numbers on old-timey spreadsheets and decide how many tractors should be manufactured that year. I won’t ruin the ending of the Cold War for those of you who haven’t read that far yet, but it gives weight to the idea that markets are more efficient than the individual cogitating in his armchair.
That is the theoretical reason you can’t outsmart the market. Now let’s look at the empirical argument:
Burton Malkiel wrote in ‘A Random Walk Down Wall Street’, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” (This experiment has actually been carried out. The monkey’s name was Lusha. Lusha outperformed 94% of managed funds.)
And yet people seem to never tire of their pointless conversations about picking assets. Here’s a typical selection of titles from Bitcoin Talk forum:
- Which coin to buy right now?
- Buying USDT during crypto dips.your thoughts.
- how to preditct coin price?
- future of crypto 2018 -2020
- Bitcoin will under 5000 within this month do you think so
- Making 1% Daily
These threads all assume one thing: that people cogitating at their laptops can know the movements of the market better than the market itself. Making fun of these is very easy. So let’s make fun of them. The last thread in that list, “Making 1% Daily“, is incredibly removed from reality. One user writes “It’s easy to earn 1% per day”, and another writes, “Maybe a more attainable target is around 5% a month and that would be pretty safe.” This is stupid. A person starting with $100, and earning 1% a day, would be richer than Jeff Bezos in six years. Making 5% a month from age 20, they would be richer than Jeff Bezos by age 56. What they are talking about is not possible. And yet they keep on talking.
This jibber-jabber seems psychologically unhealthy to me. When the price of Bitcoin goes up 10% in a day, these boards are filled with elation and joy, and when it goes down 10%, they are filled with depression. They seem to check the price many times per day. This is a sign that these people have neither read the Lokavipatti Sutta nor set up their portfolio to be tolerant of randomness. You should model the future as being entirely random, and plan for every scenario. If the market changes and you were unprepared, that doesn’t mean the market is bad and wrong; it means you are bad at planning.
While I’m throwing rocks, I have a few stockpiled for so-called ‘technical analysis’, the pseudoscience of telling a commodity’s future price from a chart of its past price. Warren Buffett said,
I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.
Not only does technical analysis not work, it cannot for the reason we looked at before, the market mechanism offers an incentive for anyone who can correct the price. If charts that looked like a witch’s nose consistently preceded price-increases, well those charts are publicly available, so once the witch’s nose appeared, everyone would see it, and the price would reflect that common knowledge, because the price is the common knowledge of the value.
Here are the archives from The Merkle’s series on technical analysis. You can go through the history and see how wrong they are. Defenders of active trading and technical analysis have many times argued with me by pointing to various trades they made that were profitable. Well, of course you guess right some of the time. Lusha guessed right some of the time. It’s not that analysts are never right; it’s that they are not right more often than the monkey. Technical analysis should be considered as useful as astrology or palmistry. No, strike that. It’s less useful; knowing astrology and palmistry at least helps when talking to girls in clubs.
Blockchain’s not a get-rich-quick scheme! It’s not about speculative investing. It is about removing a middleman from the monetary system, replacing the Central Bank and the Federal Reserve and the Illuminati reptilians with an open, bamboozle-free protocol. It is an incomplete, fairer, global infrastructure.
But if you insist on asking me for investment advice (and everyone always does), here’s what I would say:
- Model the future as random. Prepare for every scenario. It’s not about having certainty about the future. It’s about rationally acting in the face of uncertainty.
- Your goal should be to have a diverse portfolio that performs well in good times, and okayish in bad times. Any idiot can have a portfolio that performs well in good times, and disastrously in bad times.
- Over a long enough time scale, averaging out the booms and the busts, this might give you 5-10% gains a year. 5-10% gains a year will make you a rich man because of compound interest. Those muppets on Bitcoin Talks who thought 1% a day was realistic did not realize that 1% a day is equal to 6078798408621773% per decade. Compound interest is the real magic.
- Sometimes crypto will go up. Have some money in crypto to benefit from this. The racetrack rule applies here: don’t gamble more than you can afford to lose. In other words, arrange things so that if all cryptocurrencies fall to zero, you can manage.
- Sometimes crypto will go down. Have some money in asset-classes that are uncorrelated with crypto. A portfolio made of Bitcoin, Litecoin, and Ether is not diverse, because these are correlated; they rise together and fall together.
- So some of your eggs go in a high-risk, high-return basket that includes crypto. Some of your eggs go in a low-risk, low-return basket that includes index funds, precious metals, and government bonds.
- Don’t put too many of your eggs in one basket; you don’t want a drop in that basket to ruin your retirement-omelette. This is called position-sizing.
- Use stop-loss orders or trailing stops to minimise the risk from each particular trade. You could put 20% of your savings into Litecoin at $100, with a stop order to sell Litecoin if it falls to $90. Use stop orders and trailing stops with position-sizing to limit the potential loss on any one trade. (This is called Minimax.)
- Don’t ‘short‘ crypto ever.
- Chill out. Don’t get excited/fearful/emotionally reactive and break these rules. Put your phone away and stop checking the price. You don’t need check the price if you’ve planned.
The disadvantage of this approach is that it leaves you with nothing to talk about.
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