The Wolf Den #697 - Randomness In Investing
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In This Issue:
Randomness In Investing
We Had An Epic Spaces Conversation
Bitcoin Thoughts And Analysis
Altcoin Charts
Legacy Markets
Basic Primer On Self-Custody
Coinbase Finds Success In Singapore
The SEC Subpoenas SushiSwap
Dollar-Cost Averagers Are Winning
The White House Goes To War With Crypto
Why Regulation Is Bullish For Crypto | Oliver Linch, Bittrex Global
Randomness In Investing
Despite our differences, Nassim Nicholas Taleb remains one of my all-time favorite authors. Over the years, Taleb and I have exchanged our fair share of blows on the internet, and part of me thinks he is a moron for hating Bitcoin after literally writing the foreword for "The Bitcoin Standard." He even called me an idiot and blocked me, seemingly making him more fragile than antifragile. However, the man is still a genius in his own right, a fact that cannot be taken away.
One of Taleb's most famous books (and one of my favorites) is "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets." Having read it a long time ago, it still influences my thinking to this day and is a goldmine of wisdom. Below, I have paraphrased and rewritten one of Taleb's best ideas in the book. This is a prime (and hypothetical) example of what it means to be fooled by randomness.
Let's imagine Bob, an intelligent man who has successfully retired from his career in dentistry and is now interested in the world of investing. Bob is an excellent investor; he is expected to achieve an average return of 15% in excess of Treasury Bills, with a 10% error rate per annum. On a bell curve sampling 100 possible paths, we can expect 68% of Bob's decisions to return within +/-10% of his 15% average, meaning 95% of all sample paths will fall between -5% and 35% returns.
For my visual learners, here is a bell curve of Bob's success. As you can see, 95% of Bob's trades will fall into the blue shade.
Bob's investment returns are far from average; he is a success story. Like any other normal person, Bob decides to create a spreadsheet to track his winning and losing trades. This spreadsheet is designed to be a live tracker of all his trades, updating instantly and flashing red and green each second. Up until this point, Bob has been excelling with his investment decisions, but this spreadsheet eventually becomes his downfall.
Here's why.
Over any given year, there is a 93% chance that Bob will be profitable. However, on a timeframe of any given second, there is only a 50.02% chance Bob is profitable. On very small timeframes, it doesn't appear as if Bob is a profitable trader; his screen is red half of the time, and his stress levels skyrocket. Like anyone else, Bob feels an emotional pang with every loss and pleasure with every win, but not in equivalent amounts. The overall trading experience feels vastly negative when he sees the results.
Let's look at a chart outlining his probability of success at different time scales.
At the end of each day, our dentist can't bear any more investing. If Bob trades for 8 hours a day, on average, he will have 241 pleasurable minutes vs. 239 unpleasurable ones. Over the timeframe of a year, this means 60,688 pleasurable minutes vs. 60,271 unpleasurable minutes. It's important to remember here that the unpleasurable minutes are worse in reverse pain than the pleasurable minutes in pleasure terms. Observing his results at a high frequency comes at a major cost.
What if our dentist only viewed his success monthly? Well, 67% of his months will be green, so on average, he only experiences four pangs of pain a year – not bad. If he looked at his performance only once a year, it would take an average of 19 pleasurable years to witness one year of pain – incredible.
"Some psychologists estimate the negative effect of an average loss to be up to 2.5 times the magnitude of a positive one, leading to an emotional deficit."
Let's conclude with a few key takeaways. First, observing performance over short time frames reveals nothing more than variance, not returns. This means that we are better off observing our success over longer time frames, holding out as long as we can before we measure our results. You, me, and Bob shouldn't focus on controlling our emotions; instead, we should concentrate on what we can control. Lastly, as long as there are investors who continue to monitor their results second by second, there is room for you and me to succeed. Humans cannot resist making the same mistakes they are blind to, and emotions are the downfall of any investor or trader.
Randomness is everywhere, particularly abundant in the investment world and still largely ignored. Bob's obsession with seeing his account grow all the time and tracking his trades is the beginning of his demise. We all have a little bit of Bob in us, but we should strive not to be like him. Since the crypto market operates 24/7, resisting temptation is even more challenging, but it's essential for long-term success. Personally, I believe it's a mistake that Taleb dislikes crypto, but at the end of the day, traders and investors must do what works best for them. As long as we are intelligently working around randomness, there's room for many strategies to succeed. Just don't be fooled by randomness.
If you wish to read Taleb’s book, you can do so here.
We Had An Epic Spaces Conversation
Michael Saylor joined me on Twitter Spaces yesterday, and we had our biggest turnout yet! Thank you to everyone who tuned in. Unfortunately, we encountered a glitch in the Space and were unable to bring up additional speakers due to a bug, so it essentially turned into the Michael Saylor show, which is still pretty awesome. Saifedean Ammous did join and say a few words, which was epic. Then the entire Spaces randomly shut down.
Must listen!
If you missed the conversation, you can listen HERE.
Bitcoin Thoughts And Analysis
Little has changed over the past few days. This is likely a good thing. The key resistance remains $28,600, the lows of the 2021 retracement that was the launch pad for a new all time high.
This entire area (red box) can be viewed as a strong area of resistance, which is why it has been my target of this entire move, before waiting to see what comes next. That box goes all of the way up to $32,000.
The 50, 100 and 200 MAs are all curled up now, so the trend has clearly changed to bullish.
Price has stubbornly been hanging around under resistance, also a bullish signal. It has not been strongly rejected.
I have a feeling that FOMC will give us some direction today, although the more likely scenario is that we see a “Darth Maul” candle, with wicks up and down to destroy anyone using leverage… then we chop around here for a while again.
Altcoin Charts
I am aware that I have not been sharing altcoin charts. There’s a reason, and that is because at times like these, the focus is on Bitcoin and all liquidity is being sucked from altcoins to help Bitcoin ascend. The time to focus on alts will come, but for now they are getting destroyed by the honey badger in relative terms.
Legacy Markets
US equity futures and European stocks were steady ahead of the Federal Reserve's interest-rate decision. The pound rose to a six-week high after UK inflation unexpectedly accelerated, putting pressure on the Bank of England to act. Virgin Orbit Holdings was set for a record surge after resuming some operations. Traders placed greater odds that the Fed would raise interest rates by 25 basis points after market pricing was split between a hike and a pause earlier in the week. The European Central Bank said it will take a robust approach that allows it to respond to inflation risks as needed but also aid financial markets if threats emerge.
Key events this week:
US Treasury Secretary Janet Yellen to appear at Senate subcommittee hearing, Wednesday
FOMC rate decision, news conference from Chair Jerome Powell, Wednesday
EIA crude oil inventory report, Wednesday
Eurozone consumer confidence, Thursday
BOE interest rate decision, Thursday
Swiss National Bank rate decision and press conference, Thursday
US new home sales, initial jobless claims, Thursday
US Treasury Secretary Janet Yellen testifies to a House Appropriations subcommittee, Thursday
Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
US durable goods, Friday
Some of the main moves in markets:
Stocks
S&P 500 futures fell 0.1% as of 6:14 a.m. New York time
Nasdaq 100 futures fell 0.2%
Futures on the Dow Jones Industrial Average were little changed
The Stoxx Europe 600 rose 0.1%
The MSCI World index rose 0.3%
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.2% to $1.0786
The British pound rose 0.6% to $1.2288
The Japanese yen was little changed at 132.64 per dollar
Cryptocurrencies
Bitcoin was little changed at $28,165.5
Ether fell 0.4% to $1,793.42
Bonds
The yield on 10-year Treasuries declined two basis points to 3.59%
Germany’s 10-year yield advanced three basis points to 2.32%
Britain’s 10-year yield advanced eight basis points to 3.45%
Commodities
West Texas Intermediate crude fell 0.7% to $69.17 a barrel
Gold futures rose 0.3% to $1,964.70 an ounce
Basic Primer On Self-Custody
Self-custody in crypto refers to the practice of securely managing and controlling your own cryptocurrencies, rather than entrusting them to third-party services like exchanges or custodial wallets. It is crucial for several reasons:
Security: When you have self-custody of your assets, you are in control of your private keys, which are the cryptographic keys needed to access and manage your crypto. This reduces the risk of hacking, theft, or loss that can happen when trusting third parties with your assets.
Ownership: Self-custody ensures that you have full control and ownership of your cryptocurrencies. In contrast, when you store your assets on an exchange, you are essentially giving them custody of your crypto, which can lead to loss of control and potential issues with withdrawals or liquidation.
Privacy: With self-custody, you can maintain greater privacy over your transactions and holdings. Many third-party services require you to provide personal information, while self-custody solutions can offer greater anonymity.
Independence: Self-custody promotes financial independence and sovereignty, as you are not reliant on any single entity for the safety and management of your assets.
Regulatory risk: By holding your crypto in self-custody, you can mitigate risks associated with regulations, such as potential freezes or seizures of assets held by third parties.
Options to secure your assets in self-custody:
Hardware wallets: These are physical devices that securely store your private keys offline. Examples include Ledger and Trezor. They provide strong security by isolating your keys from the internet, reducing the risk of hacking.
Paper wallets: A paper wallet is a piece of paper containing your public and private keys, usually in the form of QR codes. You can generate and print paper wallets using secure software. They are an inexpensive and secure way to store your keys offline, but can be less user-friendly than hardware wallets.
Cold storage: This refers to storing your private keys offline on an air-gapped device (a device with no internet connection), such as a USB drive or a dedicated computer. This method provides strong security, but can be less convenient for frequent transactions.
Non-custodial wallets: These are software wallets that allow you to control your private keys, as opposed to custodial wallets where the keys are managed by a third party. Examples include MyEtherWallet, MetaMask, and Exodus. Non-custodial wallets can offer a good balance of security and convenience, but they still depend on the security of the device they are installed on.
Multi-signature wallets: These wallets require multiple signatures (private keys) to authorize transactions. By distributing control among several parties or devices, multi-signature wallets can increase security and reduce the risk of loss due to a single compromised key.
It is essential to research and choose the self-custody method that best suits your needs and security requirements. Additionally, it's important to keep backup copies of your private keys and seed phrases in safe locations and practice good digital security habits.
(Written with assistance from AI)
Coinbase Finds Success In Singapore
Coinbase is currently in the midst of an 8-week international expansion, and Singapore is proving to be an early success for the campaign. The news linked above states that effective immediately, "customers in Singapore can transfer funds to and from their Coinbase account using any local bank in Singapore for free." This is made possible by a new partnership with Standard Chartered, a multinational bank known for its strong presence in Asia.
Along with this news, customers in the region will now enjoy an upgraded platform and Singpass, a feature Singaporeans are already accustomed to. Coinbase is wise to service Singapore, as it is a small country that serves as an unsuspecting and dominant crypto hub. In the West, regulators now have to worry about banks instead of crypto, while in the East, crypto adoption continues to look strong, especially with China coming online. The next couple of years should be promising.
The SEC Subpoenas SushiSwap
Regulators have already set their sights on the next targets - DeFi exchanges and their founders. Included in the SEC subpoena is Jared Grey, founder of SushiSwap, who has stated that he plans to cooperate and expects enforcement. However, the head chef isn't just planning on cooperating; the SushiSwap DAO has already created a legal defense fund to cover legal costs and aims to raise $3 million to fight back. I can't imagine it will be difficult for the DAO to raise the funds, considering their popularity. This has just been announced, and I anticipate we will learn more soon.
Dollar-Cost Averagers Are Winning
Bitcoin Magazine shared the incredible graphic above, which speaks for itself. For 99% of investors, there is no better strategy than buying a little each day, putting it away, and not looking at it for as long as possible. It's quite remarkable to think that daily dollar-cost averaging from Bitcoin's all-time high results in a 10% profit. Math is indeed awesome.
The White House Goes To War With Crypto
The Biden administration has expressed skepticism about cryptocurrencies and decentralized finance (DeFi) in its recently published "Economic Report of the President." The report describes cryptocurrencies as "mostly speculative investment vehicles" with limited economic benefits and questions their ability to function as effectively as sovereign money, such as the U.S. dollar. It also highlights the risks posed by stablecoins and their potential to disrupt financial stability.
The report criticizes Web3 as the "so-called new Internet" and suggests that crypto assets do not offer investments with fundamental value, but rather focus on creating artificial scarcity. The administration is cautious about financial innovation and highlights the risks associated with DeFi platforms, urging them to comply with existing regulations and rules. The report indicates that regulating crypto assets is the best approach to addressing the concerns surrounding their volatility, limited acceptance, and regulatory compliance.
The tone has clearly changed from interested or even indifferent to outright contentious.
Then they fight you.
Why Regulation Is Bullish For Crypto | Oliver Linch, Bittrex Global
In this episode of the Wolf Of All Streets podcast, I sit down with Oliver Linch, the CEO of Bittrex Global, a leading international cryptocurrency exchange. With his background as a former financial regulation lawyer, Oliver brings a wealth of knowledge about the intricacies of compliance in different jurisdictions. We discuss the challenges of navigating US regulations in the cryptocurrency industry and why Oliver remains optimistic that the US will eventually develop the best regulatory framework for the space. Tune in for this insightful conversation and much more.
In this episode with Oliver, we discussed:
Bittrex, US & regulation
US regulatory problem
Crypto scams: the process of clearing out
Silvergate bank
If you are right you win
Custody issue
Read the disclosures
Crypto for the unbanked
Stablecoins
Tokenized stocks
Institutional adoption
Why Oliver believes in crypto
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.