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The Most Dangerous Idea in Investing
If I were to ask you what you think the most dangerous idea is in investing that investors must be wary of, what would you say that is? Bear markets? High volatility? Technical analysis? No, no, and again no. The most dangerous idea in investing is the following four words: âThis time is differentâ.
âThis time is differentâ is a result of the hubris of an overly eager investor, the rallying cry of investors that believe they can ignore previous attitudes, beliefs, concepts, or ideas about investing because, âThis time itâs differentâ. When you hear say somebody say that phrase, or something like it, you should run as far away as possible and donât look back. That phrase has caused more money to be lost than at the point of a gun. I donât care how different the latest investing craze seems, or how widely innovative some piece of technology is that youâre investing in, there is always at least some similarity between todayâs investing experience and experiences of the past. In fact, these similarities may be more remarkably closer than you might think.
This still holds true even in the âwild-westâ field of investing in cryptocurrency. As much as weâd like this to not be true, fundamentals will still apply for cryptocurrencies in the long-term. Which cryptocurrencies/tokens will provide actual value in 10â15 years? Which tokens are designed in such a way that it actually makes sense to hold the token for a long time? Is the team behind a cryptocurrency/token experienced, reputable, and trustworthy? Is a cryptocurrency/token addressing a real-world problem, or is a token attempting to create a solution for a problem that doesnât actually exist (i.e. putting the cart before the horse)? You must be able to answer these questions fully if you want to invest in cryptocurrencies/tokens that will provide you with strong returns in the next few years.
Itâs understandable, of course, why one might get into the âThis time is differentâ mentality when it comes to cryptocurrency. After all, usually this mentality is correlated with dreams of unimaginable riches, a belief that this time truly is different, and that previous times in which something similar occurred were fundamentally different (e.g. the dot-com bubble)
During the dot-com bubble, investors had the mentality of âThis time is differentâ as well, because of the innovativeness of the technology and its long-lasting implications. During this bubble, many investors were eager to invest in any company at any valuation, that had a â.comâ suffix at the end of its title.
Weâre seeing the same thing happening todayâââA British company called âOn-line plcâ that invests in internet and information businesses announced that it was planning on changing its name to âOn-line Blockchain Plcâ. Its shares jumped 394% in one day. This isnât some wild or extreme case either. A biotech company called âBioptixâchanged its name to âRiot Blockchainâ and its stock rose more than 50% ahead of the announcement, and 17% after they formally unveiled the name-change.
This is concerning. The fact that a company is able to simply add a term to its name, and have its stockâs value skyrocket, should show you the irrationality that the market has for anything and everything blockchain/cryptocurrency related. Itâs no different than the greater fools willing to pay massive valuations for dot-com companies.
Mark Twain once said, âHistory doesnât repeat itself, but it often rhymesâ. In no field is this more true than investing. According to the book This Time Is Different, âThe U.S. conceit that its financial and regulatory system could withstand massive capital inflows on a sustained basis⊠arguably laid the foundations for the global financial crisis of the 2000s.â Iâll let you, the reader, decide whether or not this holds true of the cryptocurrency market as well.
Known Unknowns, Unknown Knowns, and Systemic Risk
âThere are known knowns, things we know that we know; and there are known unknowns, things that we know we donât know. But there are also unknown unknowns, things we do not know we donât know.ââââDonald Rumsfeld
If when you hear or see the words âsystemic riskâ, your eyes glaze over in confusion, then thereâs a problem. So Iâm going to take the following paragraph to explain exactly what systemic risk is.
Systemic risk is the possibility that an event within a specific company or group could cause massive instability and uncertainty across an entire market. In this case, weâre concerned with systemic risk within the market of cryptocurrencies and tokens. Companies or groups that are systemic risks are sometimes colloquially referred to as âtoo big to failâ, i.e. if it fails weâre FUBAR, so it canât fail.
There are many different types of systemic risk, and it all really depends on the industry or field that weâre concerned with. A systemic risk in a particular market could be contained simply in that market, and could have no impact on the wider economy as a whole. Sometimes, systemic risk could cause instability in the entire economy. These are the ones we should be the most concerned about.
Whatâs particularly concerning about systemic risk is how often people are blind to it, most often unwillingly but sometimes willingly. But wait, why would somebody choose to be willingly blind towards risk? Wouldnât investors want to be aware of it so they can take caution and take actions to prevent being affected by systemic risk? The answer, simply put, is no.
Cryptocurrency investors can too willingly ignore obvious systemic risk because theyâre making too much money to be concerned with some stupid concept like âsystemic riskâ, because what in the world is âsystemic riskâ anyhow? Just another term that economics professors (whom they view as charlatans) use to prevent them from making more money with risky investments, in their view. To them, thatâs somebody elseâs problem to deal with, not theirs.
One of the difficulties of systemic risk is itâs nearly impossible to make exact predictions regarding whether or not itâll actually affect anything, and how itâll affect the market, unless one is privy to insider information. The more precise the prediction regarding systemic risk, the less likely it is to occur, and thus people try to avoid calling something a systemic risk to avoid looking like a fool if the supposed âsystemic riskâ that they declare never takes place. This is one reason, I believe, why the most alarming and obvious systemic risks are willingly ignored.
Letâs say I call something out as being an obvious systemic risk and make a big fuss out of it to everybody that I can so that theyâre aware of it. Maybe, just maybe, I could be wrong and nothing bad materializes out of the systemic risk I kept yammering about. Now my reputation is ruined because I made such an uproar about something that, ultimately, was insignificant. Who wants that to happen to them? Thatâs often why people who point out the obvious systemic risks are the ones at the bottom of the totem pole: they have nothing to lose. If theyâre wrong then it doesnât affect them as much because they didnât have a reputation in the first place. But if theyâre right, theyâll have fame (or infamy) and most likely get book deals, be invited to CNBC, and maybe even be a main character in a biopic if they detect and call out systemic risk for something particularly important (e.g. The Big Short)
One aspect about systemic risk is the idea of the âCassandraâ archetype. What is this archetype? Cassandra was a woman in greek mythology who was cursed to speak true prophecies that nobody else believed. Cassandras exist to this day; these are the people calling out systemic risks in financial markets that people turn a blind-eye to. Theyâre viewed as obnoxious at best, and harmful at worst, and theyâre not redeemed until their prophecies (i.e. systemic risks) materialize and cause catastrophe.
A difficulty that investors might have is distinguishing between the Cassandras of the financial market, and the delusional hucksters. So Iâd like to propose some questions you can use when attempting to assess whether somebody is a harbinger of (mis)fortune, or completely deluded. Note that these questions arenât exhaustive, but hopefully it provides a good jumping off point to allow you to generate your own questions/criteria. Note this doesnât just apply to cryptocurrency, but almost anything. In any case, here are the questions you should be asking:
Questions to ask yourself to determine if somebody is a quack, charlatan, or con-artist
- Does this person have experience within this field?
- Has this person published any peer-reviewed papers/books on the subject?
- Has this person been accredited by a reputable organization as an expert in the field?
- Is this person knowledgeable of current literature and information in the field?
2. What is this personâs incentives?
- Are they ideologically motivated?
- Are they financially motivated?
- Do they have skin in the game (e.g. do they get affected if theyâre wrong)?
3. How accurate is the information theyâre using?
- Do they use facts/data to back up their arguments, or do they mostly use conjecture?
- Are the facts theyâre using relevant to the claim theyâre trying to make?
- Are the sources they provide reputable?
4. Who else is saying something similar?
- Are other reputable people saying the same thing?
- If so, how many people are saying it that are considered experts in their field?
5. How bad would it be to their reputation if they were wrong?
6. How adamant are they about their warnings to others?
In Conclusion
Be aware of systemic risks when you are investing in cryptocurrencies. Avoid excessive hubris, and stop telling yourself âthis time itâs differentâ if the fundamentals of a cryptocurrency investment doesnât make sense. When a so-called blockchain/cryptocurrency expert claims or predicts something, ask yourself the questions that Iâve provided above to figure out how much you should consider their opinion.
Best of luck with your cryptocurrency investments. May the investment fundamentals be in your favor.
You can support me by donating ETH (or ERC20 tokens) to this address: 0x0BcB78d67D8d929dc03542a5aEdef257f378e513
You can reach out to me directly at my email in my Medium bio.
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Hubris and Systemic Risk in Cryptocurrencies was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.