The Black Swans of Crypto

Taleb's black swan

If you haven’t read Taleb’s book “The Black Swan” you are missing out on life and investing education. The most powerful concept of this book is how people underestimate highly improbable events and they don’t take them into account when modeling risk. As we have pointed out in the article about Defi Risk people think only in terms of yield. Well, news to all:

There can be no GAIN without PAIN as there can be no PROFIT without RISK

Potential black swans (improbable catastrophic events)

I want to list here a list of events that most don’t think about. This is a list for Bitcoin and Ethereum that are those that can bring the whole market down. If another smaller altcoin dies it’s not such a big deal since you have a diversified portfolio (right?!)

Bugs

Unforeseen bugs (yes even after so many years). Who remembers that Bitcoin actually had to hard fork to fix a very early bug that was catastrophic and made the supply skyrocket? Or when that recent time when Blockstream’s Luke-jr talked about a bug fix that was known in insiders but not outsiders? In Taleb’s book there is a very good example with a turkey that doesn’t know it is being raised in a slaughterhouse. That’s what insider and outsider difference in understanding does. This has not happened only in Bitcoin. The whole Ethereum network dodged a bullet according to the core developer team. This bug was known in developer circles for a long time until the public found out. So let me repeat this:

While you think the networks are running safely and your “investment” or “currency” or “digital gold” or whatever feels safe, there are many people that know that the whole system is hanging from a rotten cloth.

Cryptographic breakthrough

This is possible either with just a breakthrough discovery in current cryptography (advanced mathematics) or by a Quantum computer breaking all SHA-256 and RSA algorithms. We are not very far from that. A breakthrough is almost like a Black Swan, nobody sees it coming until the day a researcher declares “stuff is broken”. This could be much bigger of course because if the blockchain algorithm breaks it means also that SSL breaks and that is also a major event for the internet as a whole.

Hard forks

Every hard fork brings on bug fixes and new features. The latter increase complexity. Increased complexity is more difficult to model for risk. Nobody knows if the next Ethereum hard fork that will bring us closer to PoS will also bring a catastrophic bug. Systems get hardened only by trial and error and hacks. Imagine like there is a new airplane flying for its maiden flight. Would you go on that plane? If not, then don’t hold all your family money in an instrument like that.

Global Regulation

It’s always a scare card in crypto but to date there has been no regulation, only China banning Bitcoin mining and exchange (but not the actual ownership). It can be a major issue though. As we are going through a turbulent meta-pandemic time with a potential hyper-inflation coming according to some the governments maybe will not be very accommodating. If the US Dollar starts to spin downwards from its status as a global currency don’t be mistaken and think the most powerful government in the world will sit and watch a huge wealth transfer into cryptocurrencies. And if you didn’t know they control the FATF global task force for money regulation and KYC. Another fun trivia is that at some point in the history of USA gold was banned in an era similar to ours.

Conclusion

It’s more risky than you think. Everything is. The point is not to avoid investments and risk-taking but to understand the risk you are taking. If you are taking a risk without knowing it you are being the turkey as per Taleb, ready to get slaughtered. If you know the risks, you are the butcher.

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Disclaimer: The information on this site is for informational purposes and isn’t financial advice. We cannot guarantee that you will have the same results as we have nor can we guarantee that the information shared here is appropriate for you. This is not financial advice and not given by professionals.

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