Nassim Taleb just wrote a short but insightful piece on bitcoin.
I suggest you read it (I’ll include a link for you at the end of today’s article).
You might’ve heard of Taleb. He’s a pretty famous trader and author.
He wrote one of my favourite books on trading, Fooled by Randomness. But his most famous piece — and one you probably will have heard of — is The Black Swan.
Along with George Soros, he’s the deepest and most interesting trader I’ve ever come across.
Because like Soros, he has realised an underlying feature of reality that most don’t see.
In a nutshell, his philosophy is that experts know a lot less than they think. And even worse, they don’t know that they don’t know.
Like a left-wing academic who has a job for life, so is able to espouse all kinds of social welfare ideas that will never apply to himself. Or the scientist who is 100% sure genetically modified foods have no consequences.
He questions them all. And is smart enough to prove mathematically why they’re not as right as they think they are.
On his twitter account, he takes aim at any person of self-righteous certainty. From academics to central bank governors. There’s no political bias. He hates left wing and right wing equally. Anyone that doesn’t have the humbleness to admit their own fallibility.
He can be quite acidic at times, and you don’t always have to agree with him. Or even like him. But what separates him from your average radio shock jock or professional sceptic is that his theories actually work in real life.
As he would put it, he put ‘skin in the game’.
And made a fortune.
Betting against the experts
You see, Taleb made a fortune from investing according to this philosophy. He bet that financial markets aren’t perfect. Indeed, they are far from it.
But the investing professionals, the maths whizzes, the PhDs of finance, act like their valuation models are as predictive as Newton’s laws of physics (which incidentally also proved to be wrong eventually, when a certain Albert Einstein came along).
Taleb wagered on his assumption, that they were wrong, versus their conviction they were right.
You can guess who won…
His strategy involved betting on far ‘out-of-the money’ options. An option is simply a way to give yourself the right, but not the obligation, to buy or sell an amount of a particular asset at some point in the future.
And of course, the future is uncertain. That’s the opportunity and the risk.
Taleb bought options that were selling cheap as no one thought the results could happen. The equivalent now would be betting on the DOW Jones share index trading at below 10,000 points (currently at 26,124) by the end of the year.
A peculiar feature of options, is that the price you pay for an option reflects the aggregate expert opinion on the probability of the event happening.
Some of the events Taleb bet on were priced at occurring once every million years. Now to be clear he didn’t necessarily think the events were going to happen. But he knew that the expert’s odds were likely very, very wrong. So, he bet on them being wrong with their guesses rather than on his being more correct with his.
Unlike most traders, he was also willing to be wrong for long periods of time.
This can take its toll emotionally, as you are constantly losing money. Sometimes for years.
But here’s the thing…
When he was right, he more than made up for it. His first big success was the stock market crash of 1987. It vindicated his theory, and literally overnight he was set up for life.
The great bitcoin hedge
Now I’ve explained this is in a bit of detail, as his way of thinking is not the kind of thing you hear much about.
As a child you are taught things are right or wrong. Black or white. But in the social sciences this is usually wrong. Scientific precision in such a complex field of moving parts it’s impossible to achieve.
And it is in this field where you, as an investor, live.
Which brings me to Taleb’s view on bitcoin and cryptocurrencies.
In the piece Taleb finishes off with this:
‘Finally, Bitcoin will go through hick-ups (hiccups). It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.
‘But its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.’
In other words, bitcoin is a hedge for the ordinary person.
A hedge against big government control. A hedge against elite dominance.
It’s an interesting way of looking at it. And it’s certainly one of the many ways bitcoin and cryptos in general will revolutionise the world you live in.
It’s a technological revolution of course. A revolution that will make life a lot easier from a practical point of view.
But it’s also a social revolution.
Some think the government is too big and strong for crypto. But it’s that very possibility that makes it incumbent on you and me to support bitcoin. The 20th century taught us the consequences of strong government in both its right and left-wing extremes.
Bitcoin is the modern equivalent of taking back control and ‘sticking it to the man’ in a world of opaque central bank control.
You can read Taleb’s piece in full here.
Editor, Money Morning
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