12-11-2017, 05:44 PM

Quote:What to do?Read the full article at the source.

Given that there is evidence we’re in a bubble, and that it’s virtually impossible to time a bubble bursting, it seems wise to prepare ourselves. So what can we do? As a former professional poker player I like to think of things in terms of expected value or EV. EV is simply the sum of all possible values for a random variable, each value multiplied by its probability of occurrence (if you don’t know what EV is I recommend you give this a read, it’ll change your life). We can use EV to calculate the most profitable option in any given scenario. Sound complicated? Let’s lay out some numbers to make sense of it.

Let’s say you’ve got $10,000 to invest and you think there’s an 80% chance of that we’re in a bubble and that when it pops you estimate it will wipe out 75% of crypto’s market cap. However, you don’t know when the bubble will pop, it could be 2 months or 2 years, and you estimate that staying out of the market will cost you 2x gains in the meantime. Furthermore, if the bubble does pop you believe the market will recover to reach its previous value over the next 5 years. If the bubble doesn’t pop, the market will keep on growing to 4x over the same time period. For simplicity’s sake let’s say the crypto market consists only of bitcoin which is initially worth $10,000 per coin.

In this case:

- If you stay out of the crypto market altogether you simply keep your $10,000. EV=$10,000

- If you invest all $10,000: If the bubble pops (80% chance), you will have made $20,000 but lose 75% of it when the bubble pops, ending up with only $5,000 which will go back to being worth $20,000 after 5 years. If the bubble doesn’t pop (20% chance), you will have made $40,000 over the same time period. EV = 0.8*$20,000+0.2*$40,000 = $24,000

- If you stay out initially with the aim of investing $10,000 once the bubble pops: If the bubble pops (80% chance), you could then invest $10,000 once the bubble pops and have $40,000 after 5 years. If the bubble doesn’t pop (20% chance), then bitcoin will be worth $40,000 and you lose $40,000 in opportunity cost. EV = 0.8*40,000 + 0.2*-40,000 = $24,000

- If you invest $2,000 and keep $8,000 for when the bubble pops: If the bubble pops (80% chance) you’ll end up with $1000 of your initial investment and then you’ll put in $8,000. After 5 years, the $1,000 will end up being worth $4,000 and the $8,000 will be worth $32,000. If the market doesn’t crash (20% chance) you’ll have made $8,000. EV = 0.8*36,000 + 0.2*8,000 = $30,400.

IF we are indeed in a bitcoin / crypto bubble, it looks like the best and wisest strategy is to invest some, and keep some fiat on hand. Generally, this is ALWAYS a good idea when investing - never put all your eggs in one basket.

hodling till Im odling

ethereum, nano

ethereum, nano