Are You Risking What You Can Afford to Lose?
Updated
Here I'd like to propose to you a hypothetical stress test.
The idea of a "Stress test" isn't to think about what you think will happen, it's to consider the affects of the things you do not think are going to happen happening.
The stress test is as follows;
If BTC was heading into a "Depression" style crash (Characterised by a drawdown of over 80% and five to ten years trading at low prices) - Would this negatively affect your life? How would it affect your finances? Emotional wellbeing? Relationships? If in the year 2030 BTC was trading under $9,000 - what would this mean for you?
It's Not Impossible
I find if you ever post anything that's not eternally positive about BTC people often get very upset and they usually make a lot of assumptions about what sort of person you are. The truth is, I am just a person who thinks it's wise to be aware of the risks you're taking in things that you have no control over.
There are people, with no sound reasoning, who will act as if these sort of things are impossible. And they're not. In fact, given the trading history of BTC it's not even fair to say this is improbable. BTC has crashed over 80% many times and the cycle of how long it takes to recover from it widens each time.
On the flip side of this, the bet has had diminishing returns for years. People speak about the gains to be made from BTC relating them to gains you could have made buying it when it was trading in single to triple digits. Realistically, it's been hard to make extreme amounts of money in BTC for a long time.
If you'd bought BTC while it was at/near a high any time in the last 7 years the very best you'd have done is triple your money. Tripling your money isn't a bad thing, but if you have draw downs of 70 - 90% during this - it's not actually all that risk efficient. There are a lot of ways to triple your money if you're willing to lose 70 - 80% of it.
Indeed, you could have just went 3* leverage on SPX or Nasdaq from any of the lows since 2018 and significantly beat the risk adjusted return of BTC.
As time has went on, people have become more confident in BTC and as they have it's also become a less risk efficient bet. This is fact. More and more faith builds up around it but the risk adjusted return has been worse and worse. It's entirely fair and valid to say we've an observable downtrend in the risk adjusted return of BTC - even although it's high now.
What is this trend continued?
Another thing I think people do not factor in is the domino effect a sustained bear market can have. To explain this, let's look at the theory of "Reflexivity".
"Reflexivity theory states that investors don't base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors' perceptions and thus prices. "
For example, when price is going up and up this brings in things that bulls can use to support a fundie case. The ETF. Capital inflows. I don't have to tell you the narrative. It's rammed into your face every day if you use any form of social media and follow market related content. People assume this is fundie improvements - but it can just be the result of a bull run.
This same thing can flip. When prices are falling, people become less optimistic. Inverse ETFs can be created. The sense of community can break as people suffer devastating losses. The now ever so popular "HODL" started to be seen as "GAMBLE". In extremes, regulators come in and start to gut the market.
In the same way success breeds success in the market, failure breeds failure. A negative cycle of events can feed upon itself and perpetuate. Once this has gone on for a while it becomes intrenched. People forget all about the good times. They live in a world of persistent pessimism related to the asset in question.
Let me very clear on something - you THINK it's easy to hold through downturns. It's not. There's a lot of pressures that come into place.
You're surrounded by people who PRESENT as if they flawlessly navigated the wild BTC swings, but we can literally look at the long volume and we can see most people went long right into the capitulation period and then they close their longs right before the breakout early in the year.
And this wasn't even a mega and sustained crash. It was a one year event.
Be realistic with yourself, what do you think would happen if this developed over multiple years and went down a larger percentage?
The idea of being a holder through whatever is lionised today, but it will be frowned upon if these conditions hit. People won't be considered astute fearless investors - they'll be considered reckless gamblers. People who endlessly promote the joys of BTC now will be either no where to be seen or have no one wanting to listen.
The investing environment in which you live can change. Not only is it not impossible, history tells us it's the most rational thing to accept.
A 1% Chance of Losing Everything is High
When the risk is high enough in terms of what it will mean to you, then the odds of it happening do not have to be high to make it worth being aware and diligent about the risk.
If you play Russian Roulette, you have a 5/6 chance of being absolutely fine. Most of you, I'd assume, would decline to play anyway because the 1/6 odds have dire outcomes.
I'll assume you're one of these people that's not risk their life on these odds. What if I give you $100 to play? No? $1,000? Still no? $100,000? Not tempted yet?
Have fun staying poor.
==========
When discussions around this topic are raised they're usually derailed. "Bears have always been wrong", "I made 1,500% in the last 5 years". "People have been saying this for 10 years".
None of these address the underlying point. There are people who have exposure to BTC that would change their life negatively if this sort of big bear event happened.
Real people, real risks in the real world.
And these people are discouraged from considering these risks usually by faceless people on the internet acting like they have an infallible read on the future.
Their perception of infallibility isn't real. The risk, are real.
Take a second today to think not about what you think will happen. Certainly not about what you want to happen. Think about the worst things that can happen and how that's going to realistically affect your life. The golden premise of investing is you do not bet what you can't lose- and you certainly don't do it on the thing with more 80% drawdowns than anything else.
Hypothetically speaking, if BTC was 80% lower than it is today in 5 years time, what would this mean for you?
The idea of a "Stress test" isn't to think about what you think will happen, it's to consider the affects of the things you do not think are going to happen happening.
The stress test is as follows;
If BTC was heading into a "Depression" style crash (Characterised by a drawdown of over 80% and five to ten years trading at low prices) - Would this negatively affect your life? How would it affect your finances? Emotional wellbeing? Relationships? If in the year 2030 BTC was trading under $9,000 - what would this mean for you?
It's Not Impossible
I find if you ever post anything that's not eternally positive about BTC people often get very upset and they usually make a lot of assumptions about what sort of person you are. The truth is, I am just a person who thinks it's wise to be aware of the risks you're taking in things that you have no control over.
There are people, with no sound reasoning, who will act as if these sort of things are impossible. And they're not. In fact, given the trading history of BTC it's not even fair to say this is improbable. BTC has crashed over 80% many times and the cycle of how long it takes to recover from it widens each time.
On the flip side of this, the bet has had diminishing returns for years. People speak about the gains to be made from BTC relating them to gains you could have made buying it when it was trading in single to triple digits. Realistically, it's been hard to make extreme amounts of money in BTC for a long time.
If you'd bought BTC while it was at/near a high any time in the last 7 years the very best you'd have done is triple your money. Tripling your money isn't a bad thing, but if you have draw downs of 70 - 90% during this - it's not actually all that risk efficient. There are a lot of ways to triple your money if you're willing to lose 70 - 80% of it.
Indeed, you could have just went 3* leverage on SPX or Nasdaq from any of the lows since 2018 and significantly beat the risk adjusted return of BTC.
As time has went on, people have become more confident in BTC and as they have it's also become a less risk efficient bet. This is fact. More and more faith builds up around it but the risk adjusted return has been worse and worse. It's entirely fair and valid to say we've an observable downtrend in the risk adjusted return of BTC - even although it's high now.
What is this trend continued?
Another thing I think people do not factor in is the domino effect a sustained bear market can have. To explain this, let's look at the theory of "Reflexivity".
"Reflexivity theory states that investors don't base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors' perceptions and thus prices. "
For example, when price is going up and up this brings in things that bulls can use to support a fundie case. The ETF. Capital inflows. I don't have to tell you the narrative. It's rammed into your face every day if you use any form of social media and follow market related content. People assume this is fundie improvements - but it can just be the result of a bull run.
This same thing can flip. When prices are falling, people become less optimistic. Inverse ETFs can be created. The sense of community can break as people suffer devastating losses. The now ever so popular "HODL" started to be seen as "GAMBLE". In extremes, regulators come in and start to gut the market.
In the same way success breeds success in the market, failure breeds failure. A negative cycle of events can feed upon itself and perpetuate. Once this has gone on for a while it becomes intrenched. People forget all about the good times. They live in a world of persistent pessimism related to the asset in question.
Let me very clear on something - you THINK it's easy to hold through downturns. It's not. There's a lot of pressures that come into place.
You're surrounded by people who PRESENT as if they flawlessly navigated the wild BTC swings, but we can literally look at the long volume and we can see most people went long right into the capitulation period and then they close their longs right before the breakout early in the year.
And this wasn't even a mega and sustained crash. It was a one year event.
Be realistic with yourself, what do you think would happen if this developed over multiple years and went down a larger percentage?
The idea of being a holder through whatever is lionised today, but it will be frowned upon if these conditions hit. People won't be considered astute fearless investors - they'll be considered reckless gamblers. People who endlessly promote the joys of BTC now will be either no where to be seen or have no one wanting to listen.
The investing environment in which you live can change. Not only is it not impossible, history tells us it's the most rational thing to accept.
A 1% Chance of Losing Everything is High
When the risk is high enough in terms of what it will mean to you, then the odds of it happening do not have to be high to make it worth being aware and diligent about the risk.
If you play Russian Roulette, you have a 5/6 chance of being absolutely fine. Most of you, I'd assume, would decline to play anyway because the 1/6 odds have dire outcomes.
I'll assume you're one of these people that's not risk their life on these odds. What if I give you $100 to play? No? $1,000? Still no? $100,000? Not tempted yet?
Have fun staying poor.
==========
When discussions around this topic are raised they're usually derailed. "Bears have always been wrong", "I made 1,500% in the last 5 years". "People have been saying this for 10 years".
None of these address the underlying point. There are people who have exposure to BTC that would change their life negatively if this sort of big bear event happened.
Real people, real risks in the real world.
And these people are discouraged from considering these risks usually by faceless people on the internet acting like they have an infallible read on the future.
Their perception of infallibility isn't real. The risk, are real.
Take a second today to think not about what you think will happen. Certainly not about what you want to happen. Think about the worst things that can happen and how that's going to realistically affect your life. The golden premise of investing is you do not bet what you can't lose- and you certainly don't do it on the thing with more 80% drawdowns than anything else.
Hypothetically speaking, if BTC was 80% lower than it is today in 5 years time, what would this mean for you?
Note
Having discussed and debated this with a wide selection of BTC bulls now I've found all of their arguments come down to the same handful of recurring themes and all of these are easily debunked.To date, I've found when you raise these points with BTC bulls they just stop talking about. Usually call you names.
Read the debunks to popular talking points below.
Note
If there is one thing every person with a shred of common sense in their head should agree on it's the simple statement "We can not know the future for sure".And if there's a statement everyone who does not have a gambling problem agrees with it should be "Don't risk more than you can afford to lose in speculative markets".
But this thread is full of people disagreeing with these two entirely undeniable statements.
If this is a top- the over confidence of bulls will be later seen to have be an obvious indicator.
People will read comments like the ones in this thread and think, "Of course it happened. They were all risk junkies".
This isn't me saying I want it to happen. I think it's very sad.
Will be tragic if it happens. People are very exposed.
Lots of people who appear to have never spotted a market turn in their lives feel qualified to tell everyone everything about the bull market.
Note
Replies in this thread and another BTC related post I had prompted me to look into studies on crypto trading and problem gambling. Here's what science has to say.
Note
People are under the impression it's impossible for us to return to the lows quicker than we rallied out of them. They're not accustomed to it.
But it's not impossible.
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