Thanks, I think this might actually be the argument I was looking for.
Whether the Bitcoin markets are efficient enough to worry about this is an open question
Right, so now the question is one of, does this idea of adverse selection actually apply?
I suppose one reformulation of the point made in the article is: if I believe X will happen with probability 5%, then I do not necessarily want to bet on X at 4.99% and bet against X at 5.01%, because it could be that my confidence is low enough that the very fact that someone wants to bet for or against me will shift my estimation of X in either direction outside that range.
So a safety factor is necessary. Question is, how large? The current markets are willing to bet on the proposition at 0.7% (as a first approximation; in reality the rectangle of $34000 * 5% is only part of the probability distribution so it’s probably more like 0.2%). I’m not sure that many people are willing to bet against it at 0.7%; my hunch is that the people shorting it now would disappear once some threshold is passed (eg. the old $1242 all-time high) and are merely going on short and medium-term technicals.
In general, I’m hypothesizing that the Bitcoin markets have an inefficiency in that many people who are in them are already in them deeply, and so marginal additional investment even at positive expected value is a bad idea for them because in those worlds where BTC goes up a lot they would already be very rich and so they would rather optimize the remainder of their portfolio for the worlds where that doesn’t happen; essentially limitations due to risk.
A claim that would significantly work against my hypothesis is the BTC price not going up by much or at all over the next year, as Bitcoin ETFs for mainstream investors are now available.
For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.
True, I hadn’t thought of those. Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
I think the way to go here is to assemble a larger set of potentially comparable cases. If you keep finding yourself citing different idiosyncratic distinctions (e.g. Bitcoin was the only member to be not-overblown AND have a hard cap on its supply AND get over 3B market cap AND …), this suggests that you need to be more inclusive about your reference class in order to get a good estimate.
Thanks, I think this might actually be the argument I was looking for.
Right, so now the question is one of, does this idea of adverse selection actually apply?
I suppose one reformulation of the point made in the article is: if I believe X will happen with probability 5%, then I do not necessarily want to bet on X at 4.99% and bet against X at 5.01%, because it could be that my confidence is low enough that the very fact that someone wants to bet for or against me will shift my estimation of X in either direction outside that range.
So a safety factor is necessary. Question is, how large? The current markets are willing to bet on the proposition at 0.7% (as a first approximation; in reality the rectangle of $34000 * 5% is only part of the probability distribution so it’s probably more like 0.2%). I’m not sure that many people are willing to bet against it at 0.7%; my hunch is that the people shorting it now would disappear once some threshold is passed (eg. the old $1242 all-time high) and are merely going on short and medium-term technicals.
In general, I’m hypothesizing that the Bitcoin markets have an inefficiency in that many people who are in them are already in them deeply, and so marginal additional investment even at positive expected value is a bad idea for them because in those worlds where BTC goes up a lot they would already be very rich and so they would rather optimize the remainder of their portfolio for the worlds where that doesn’t happen; essentially limitations due to risk.
A claim that would significantly work against my hypothesis is the BTC price not going up by much or at all over the next year, as Bitcoin ETFs for mainstream investors are now available.
True, I hadn’t thought of those. Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
I think the way to go here is to assemble a larger set of potentially comparable cases. If you keep finding yourself citing different idiosyncratic distinctions (e.g. Bitcoin was the only member to be not-overblown AND have a hard cap on its supply AND get over 3B market cap AND …), this suggests that you need to be more inclusive about your reference class in order to get a good estimate.