Bitcoin bulls never discuss risk. It’s wonderful to make money in a good trade, but few pay attention to the risk taken in pursuit of that winning trade.
In regards to risk, bitcoin is nothing more than pure gambling. Worse, bitcoin gamblers face odds that are worse than found at even the worst table games in Las Vegas. It is worth nothing.
Over the very long term, stocks have a positive return expectation. We expect the stock market to rise over time because earnings growth drives stock prices.
Earnings always grow over time because economies, particularly the United States economy, always grow over time (regardless of even lengthy recessions).
If you look at rolling 30 year periods of the Dow Jones, stocks have averaged an 6.7% increase.
In the past ten years, the Dow Jones has delivered a 13.6% average annual return.
But we cannot just look at return. We must look at risk. Risk is expressed by standard deviation, which gives us an expression of probability that a return will fall within a given range.
So the proper way to express the return of the Dow Jones is to say that, in any given year, there is a 95% probability of the Dow Jones returning 13.6% plus or minus 24%.
Gambling in Las Vegas almost always has a negative return expectation over time. That’s because games are tilted in the casino’s favor. If the casino doesn’t make money over time, it goes out of business.
The best long-term return you can expect in Las Vegas is -0.28% plus or minus 1.15%, and that is if you play blackjack exclusively and make all the right decisions.
The worst long-term return is the Big Six bet at craps, delivering a long-term return of – 22%, plus or minus 3%.
Trading bitcoin, however, is worse than gambling in Vegas.
Stocks have a long-term positive expectation, as mentioned, because the underlying companies have assets that generate actual cash flow. Investors determine stock prices based on the discounted value of future cash flow.
Gambling has a negative return expectation because the games have been specifically designed, and has specific rules, that are stacked against the player.
These situations do not exist when trading bitcoin. There is no structure other than a willing buyer, willing seller, and an exchange. Nor is it a hedge for anything.
The rules of most Vegas table games at least allow a player to play intelligently, so as to minimize the house edge. That means knowing when to hit or stand when playing blackjack.
With bitcoin, every transaction is based entirely on an unknown set of psychological variables between those engaging in the transaction.
Ed Butowsky, Managing Partner at Chapwood Capital Investment Management in Dalla tells CCN:
“Transactions are based entirely on unfounded speculation on what the price of bitcoin will be at some indeterminate future time, which is in turn based on countless equally unfounded speculative transactions, which was previously based on the same thing. It’s an endless set of derivatives of derivatives of pure speculation.”
Consequently, we see gigantic standard deviations with bitcoin. The 10-year average annual return for bitcoin may be 60%, but that’s ± 160%.
In other words, there is a 95% probability that you will lose everything, or see a gigantic return.
The problem is, because transactions are entirely based in random behavior, you have no way to reduce risk.
And that’s why they call it gambling.
Disclaimer: The views expressed in this op-ed are solely those of the author and do not represent those of, nor should they be attributed to, CCN Markets.
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