For most, recognizing the existence of the uncertain is not an easy task. In many cases, it is much more comfortable to believe false certainties than to accept uncertainties. However, uncertainty is a fact of life. Our knowledge is not perfect. The information available is not complete. And our understanding of the world is not absolute. Therefore, our ability to forecast the future is quite limited. That is true of Elon Musk. It is true for Warren Buffett. And it is true for the rest of mortals. I mean, it’s true for everyone.
What do we know about the price of Bitcoin? Get on? Go down to? Actually, we don’t know. We know that this is a price that fluctuates. However, it is not easy to predict the exact direction of its swings at any given time. This lack of predictability is the source of uncertainty. And this uncertainty is the origin of the risk.
Now, Bitcoin is an asset (in essence) speculative. This implies that the investor buys with the intention of taking advantage of its growth over time. In other words, the investor buys “cheap” today to sell more “expensive” tomorrow. The gain lies in the rise in price over a period of time. Achieving this requires that, in the future, people are willing to pay more for the same code. And people will only pay more when they, in turn, believe that the price will rise even higher in the more distant future. Ultimately, it is a game of expectations.
It could be said that, in this business, the optimist finances the pessimist. The optimist buys. And the pessimist sells. Or, put another way, the buyer buys on a bullish forecast and sells on a bearish forecast. But the optimistic buyer needs a pessimistic seller. And a pessimistic seller needs an optimistic buyer. This dynamic serves as an incentive to create a bullish bias. Because this industry, in order to grow, needs the constant entry of new capital. That implies that there is no other option but to promote the bullish discourse at all times. Can an exchange afford to be bearish? Can a startup afford not to be bullish? I don’t believe it. We all need to keep the enthusiasm alive.
Bullish propaganda helps spread bullish bias in the community. And this bias fosters the “trusting ignorance” of the fan. It is about the “eternal optimist” who does not recognize risk and does not take profit, supported by a false sense of certainty. What is the bullish bias? The idea that ups are forever and downs are temporary. Always buy. never sells The fan never doubts. His faith does not waver. Because he does not recognize uncertainty. Obviously, it is a delusion. Because the future is not written. Fan confidence comes from fantasy, not reality.
All rational forecasts are based on probabilities.. The big question: What are the chances that tomorrow’s demand will be greater than today’s demand? In a scenario of high uncertainty, the probability that the price will rise could be represented as follows: 50/50. In this case, one could say that anything can happen. It’s like flipping a coin.
Now suppose we are slightly bearish (40/60). To do? Despite our bearish forecast, we are still investing in a scenario of high uncertainty. The fanatic (bullish) thinks in absolute terms. And, due to his bullish bias, the answer is always to buy and never to sell. On the other hand, the critic, due to his bearish bias, the answer is never buy. He does not take a risk. But he always misses the opportunity. Never lose. But he never wins. Both extremes are irrational.
To do? In times of high uncertainty, the most sensible thing to do is to act prudently. That is, trust the odds and manage risk. We can buy. But it’s not sensible to walk away. It is not very sensible, for example, to run out of cash and leave everything in one position. One way of defining the appropriate amount of a position is our ability to cover that amount from our other income. In this way, our possible losses may be covered (if necessary) by the income generated by the other instruments in our portfolio.
Then, we have to define the “maximum risk” and the “minimum gain”. And we must remember something extremely important: Here we are talking about numbers. Our goal is purely financial. What you want is to grow financially.
Now, a hypothetical case. We consider a 50/50 scenario. Practically, we are making a bet with a blindfold on. The odds here are even. The price may go up. But the price can also go down. And it is very difficult to know the trend. Because the price is giving off a lot of laterality signals. However, we don’t want to miss out on the action. In other words, we don’t want to lose if the price goes down. but youNor do we want to stop earning in case the price goes up.
We do a study of our most secure income. And we determined that “$100” is a manageable amount. What happens if we lose that $100? Nothing. Well, we stopped growing a bit. But nothing from the other world. Now, when buying, “$100” could serve as a benchmark for our maximum risk in placing the stop loss. Then, we place the take profit (take profit) to a level that at least doubles the risk. In other words, in a 1:2 ratio. In this example, it would be $200. Recommendation. Delve deeper into the following concepts: Risk, stop loss, take profit, Win Rate, Risk/Reward rateand Coverage (hedge).
All these measures are taken in the event that our forecasts do not come true. In other words, The purpose of managing risk is to reduce uncertainty. The price goes up. The price goes down. But, due to our management and planning, the result is more or less predictable. Fanaticism and faith reduce uncertainty on a psychological level. However, in reality, it is about reducing anxiety, resorting to fantasy. That path usually leads to disappointment. A much more effective technique is to accept the existence of uncertainty and implement much more practical protection measures.
The fan usually places all his faith in a prediction. “The price of Bitcoin is going to go up.” If the price goes up, fanaticism increases due to validation. If, on the other hand, the price falls, fanaticism can also be increased by considering the fall as a test of faith. Let’s remember that the bullish bias tells us that the rises are eternal and the falls are temporary.
Rational predictions don’t work the same way. Forecasts are probabilities. And there are no absolute forecasts. In times of high uncertainty, the exceptional is as common as the probable. Therefore, a sensible strategy requires being prepared for different scenarios. What happens to us if the price rises? What happens to us if the price goes down? If the answer to both questions is “good”, surely we are managing the risk well.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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