It’s Sunday morning here, rainy season in Phuket.
The Russian tourists have mostly fucked off, and good riddance to bad rubbish.
I got up early, fed the mangy pack of soi dogs that protect our house, and went for a walk on the beach to watch the wild surf.
Got to thinking about price action, charts… and the existential questions about what you can predict (if anything) with price charts.
This is going to be a big topic, so I’ll cover it over a few days with some current examples.
On Friday after the SEC lost it’s case against Ripple the Bitcoin market spiked and looked like it wanted to start making a new leg up.
What happened here is that EVERYONE bought at once and exhausted available buying pressure.
Those new buyers are by definition weak hands, liable to jump out of their newly created positions at the first sign of danger.
Which is what happened.
Easy (and dishonest) to build a narrative in retrospect, but I’m sure you’d like to know if this kind of fuckery is not just explainable but predictable.
The answer, unsurprisingly, is kinda-sorta, sometimes, weakly, but probably not how you think.
Let’s dive in!
There are two and only two ways we can make money from the markets
1. Identifying when the market has got the price wrong
2. Taking on risk other people don’t want to take
Let’s look at Ripple (XRP) which spiked 100% overnight after winning it’s long running deathmatch with the SEC.
First question - did the market get it wrong?
Nope. We have absolutely no basis for thinking that the tens of thousands of people betting on this thing
Let me show you a cool example of how brilliantly the market can actually predict stuff that looks impossible to predict.
Manifold Markets runs betting on things like “will Lex Fridman interview Putin before the end of 2023”
We can track how closely the true odds of past bets lined up with what the degen punters thought would happen, and the degens get it pretty close!
^^^^^ The takeaway here is that if you think the market has it wrong and you have it right you are probably fooling yourself and there is some other effect going on you haven’t considered.
But I know what you’re thinking.
These are all a bunch of magic beans anyway with no intrinsic value, aren’t you firmly in crackhead-land when you try and put a value on them?
Not really.
The beauty of free markets is that price discovery happens, with millions of traders all over the world.
If you think that XRP is a scam (many do), not truly decentralized (true), or just a ponzi foisted on the market for insiders to benefit (true!) then you can express that view.
You can bet. “Money talks, while bullshit runs a marathon” Nino Brown, market wizard
Bottom line: That court case could have gone either way.
There was SIGNIFICANT uncertainty about who was going to win.
Of course we could do some actual odds calculation based on the prices of the options chain but that’s not really necessary
It roughly looks like this.
Let me explain.
Price before court case - .47
Ripple wins - XRP is worth a lot more
Ripple loses - XRP is worth not very much
There’s a problem here.
Whatever the odds are (and it's not really necessary to work them out) anyone who holds XRP is taking a very real risk of losing most of their money in the blink of an eye.
That’s a crap deal by any measure. Roulette wheel stuff.
Hit the red, you get ahead…. Hit the black you get set back.
You want to take a deal like that?
Are you nucking futs?
Well SOMEONE took that deal. Actually a lot of someones.
It stands to reason that the only reason anyone would take on this crappy deal is if they were getting a good deal on the bet.
So whatever the odds were, you can take it to the bank that the odds were in favor of the guy taking the risk.
This is a foundational principle.
Your insurance company wouldn’t sell you insurance unless they thought they would make a profit, right?
So what we have here is a special situation where you can reasonably expect to get the odds in your favor, but the bet overall is still sucky.
We got paid for taking a shitty risk, which is the second of the two ways we can get paid in the markets.
There’s lots of other shitty risks we can take, which tend on average to make a profit (if we take enough swings at bat).
THAT is the game. THAT is the path to success in the markets.
Take bets only where the odds are in your favor
Take enough bets that the random luck evens out
When the odds are in your favor usually there is something unappealing about the risk
Anyone who is telling you differently probably hasn’t thought things through well enough.
This still leaves a few tantalizing questions.
Open Questions
XRP is worth .72 today after the dust settles and it spiked temporarily to .95. Why?
XRP would have gone down if they lost, but probably not to zero. Why not?
That price change didn’t happen instantly, but over the course of a few hours. Was there an opportunity to ape in and profit?
Check your email tomorrow and we will start to dig into the nerdy goodness.
Scott
P.s. If you think this sounds complicated and hard af, you would be correct. There’s a better, and easier way which I’ll also be showing you.
Love your style my dude.