Wednesday, December 8

Bitcoin is Extremistan of Extremistan, understand

This text is inspired by the book “The logic of the black swan” by Nassim Taleb, which can be interpreted ironically, as Taleb has become one of the biggest critics of bitcoin, however, his works contribute in a fantastic way to the cryptocurrency market .

The most popular concepts such as Antifragil, Black Swan, Mediocrist and Extremistan, come from Taleb’s works, however they are widely applied in the market and traditional investments. Defining the concept of Mediochristian and Extremistan will help us to have a clearer vision of the purpose of this text.

Two types of randomness: Mediochristian and Extremistan

No Mediochristian particular events do not contribute much individually, just collectively, and there is unlikely to be a Black Swan in Mediochristian. There we have situations generally based on physical quantities, for example, weight or height belong to Mediochristian, wealth does not belong.

already in the extremistan the inequalities are so great that a single observation can have a disproportionate impact on the aggregate or on the total, that is, one unit can easily affect the total disproportionately, almost all social issues are from Extremistan. Here we have situations that correspond to numbers, for example, wealth, in the Extremistan there is the vulnerability to the Black Swan.

What can be known through data in Mediocristan increases very fast with the offer of information. But in Extremistan knowledge grows slowly and erratically with the addition of data, some of it extreme, possibly at an unknown rate.

But what does bitcoin have to do with all this?

Well, let’s reinforce the characteristics of extremistan: it suffers from intense randomness, probably found in the modern environment, it is vulnerable to the black swan, wealth is a type of randomness, it takes a long time to know what is happening, it is difficult to predict based on information from the past, and history jumps.

This type of randomness perfectly fits assets like bitcoin, historical changes and technological implementations are Black Swans that can last for decades, it is common to confuse the term Black Swan with everything that is destructive, when you have two types of Black Swans, the positive causing favorable effects and negative that ends up destroying everything. Generally speaking, positive Black Swans take time to show their effects, while negative ones happen very quickly.

Bitcoin is the extremistan of extremistan, something completely new, its exponential and experimental growth has demonstrated its potential and favorable contribution to society so far, on several occasions it has proven Antifragile, but in the investment world we cannot pay attention to the fact that there may be more than one Black Swan, despite its years in the market, solidifying as the years go by we cannot fall into blind faith that nothing bad can ever happen.

We do not know the future of bitcoin, how it will be used in 20 years or more, today it has three characteristics, for each type of user, it can be a digital currency, store of value or protocol, and in some cases all three .

Black Swan

The past is highly insufficient, we are subject to tyranny, the unseen and the unforeseen. A famous example illustrating a Black Swan is the Peruvian Fallacy.

A turkey is fed daily for a thousand days, each meal served will reinforce the bird’s belief that the general rule of life is to be fed daily by friendly members of the human race who “watch over its interest”. The day before Thanksgiving, something “unexpected” will happen to the turkey, it will be subject to revision of its beliefs.

This example is based on an adaptation of a metaphor created by Bertrand Russell. Through metaphor we can verify that not everything we observe is necessarily something definitive or representative of the future, the absence of evidence does not mean evidence of absence.

Being aware that being exposed to assets such as bitcoin means dealing with extremistan extremistan will help us to have a clearer view on how to manage investment risks.

Bitcoin fundamentals give us a positive conviction for the future, and all the ecosystem that is being built around it, but as an investor, neglecting risk can be extremely harmful.

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