Uncertainty Cuts Both Ways

Dear Readers,

We are often used to seeing uncertainty in a negative light, and so will repeat some mantra, trust in some favorite specialist, or banish from our thoughts anything that might seem detrimental to our Crypto investment, which all too often is the object of our affections. If instead we re-cognize this uncertainty toward investment, we will go on to practice risk management. Common to both of these approaches here, the yin of the hyped bubble psychology and the yan of risk management, is the perception of uncertainty in a negative light; that is, insofar as it relates to our exposure to Crypto, and whether one is willing or unwilling to engage with it.

And yet, in this article, I’d also like to portray a more positive aspect of uncertainty; that is, insofar as it positively incentivizes our investing in Crypto. And so my object here cannot be to once again write about hedging and risk management, with which long-term readers of mine are already familiar, but to highlight instead the way in which uncertainty can actually lead even the relatively conservative investor to take on more risk than they would otherwise be comfortable with. My aim then is to illustrate that far from uncertainty being solely the driver of risk aversion, it is also, to some extent, the driver of speculation…. and accordingly, uncertainty cuts both ways.

First I’ll focus on the negative aspect of uncertainty - the thesis; next I’ll focus on the positive aspect of uncertainty - the anti-thesis; and lastly I’ll look at the synthesis of these two in what has to be the optimal balanced approach of the pragmatic investor in Crypto at this time.

The Thesis - Uncertainty in a Negative Light Toward Crypto Investment

First of, I think it no exaggeration to say that many if not most in the Crypto market subscribe to the narrative of hyper-inflation. The idea being based on monetarist theory that an ever increasing balance sheet of central banks must surely lead to a hyper-inflation of the currency, inflation being, in the words of the monetarists, always and everywhere a monetary - or numerical - phenomenon. The popularization of this theory is that ‘fiat’ is backed by nothing. Fiat being the magical world that is supposed to reveal to all the mysteries of the monetary world.

Of course, it’s not quite so simple. Our currencies are debt based, and the weight of unsustainable debt and its possible contraction in a deflationary scenario serves to counter-balance the antics of central bank expansion of the money supply. There is very much a dialectic at play between the two. Yes, there is likely to be an eventual inflation and erosion of purchasing power, but it would be, and is, something quite different from an imminent Weimar-like hyper-inflation.

The certainty of hyper-inflation has certainly been punctured today. And of course, the puncturing of all forms of certainty has to be a good thing, for we are dealing with an unknowable and opaque future here. Mathematicians and logicians may have the luxury of dealing with transparent certainties, or tautological truths, but not so those that speculate on the future. At best, speculators, or investors, inhabit something of a murky middle ground, between certainty on the one hand, and complete randomness on the other. At most, they deal with probabilities and confidences on a sliding scale of degree.

And so the naïve believer of certainty awakens from their dogmatic slumber at some point to become uncertain. This usually involves the passage of time, where predictions fail to materialize. Of course, there is always the option to entrench oneself in a bubble or echo-chamber, insulated against all forms of cognitive dissonance, against anything that might controvert their narrative of choice. Here the critical edge of reason will never dislodge the dogma, for it is dealing with a form of fanaticism.

But this article is directed to the more pragmatic and rational of investors, investors not gamblers or fundamentalists. And the possible response to a newfound appreciation of uncertainty for them is an over-reaction. Suddenly, with the spell of certainty broken, and a large part of that due to continued downward prices, they might flip, into an all too drastic state of uncertainty, where that sense of proportion, or degree, or tension between opposing absolutes, is lost. This is the classic bull come bear scenario, where the animal spirits are still in control - and hence the animal monikers - where an objective and practical reason has yet to gain the driver’s seat in our speculations.

Add to this the threat of continued US regulation, and the investor has much to ponder when investing in Crypto.

And so much for the negative aspect of uncertainty, time now to focus on the positive aspect of uncertainty; that is, positive insofar as it encourages actual speculation… in contrast to limiting it. An awareness of this helps to avoid that ‘flip’ of the animal spirits into that complete bear state.

The Anti-Thesis - Uncertainty in a Positive Light Toward Crypto Investment

It’s my aim here to illustrate how the positive aspect of uncertainty acts as a restraint of that downward spiral into a bearish mindset. Here we stand back from our immediate engagement with the market to look at the wider macro setting. First of, we observe the continued policy of central banks to extend their balance sheets. If this does not lead to immediate hyper-inflation in the economy, it near certainly leads to instability in currencies.

Accordingly, a good case is to be made out for Bitcoin as an alternative currency, or digital gold. Whereas most have relied on the inflationary narrative for Bitcoin investment, now we have also a deflationary narrative for Bitcoin to counter-balance it. Remember, in a possible deflationary scenario, with so many talking about recession these days, capital flies to the strongest forms of liquidity. As a simple measure of risk management, the pragmatic investor in this scenario will not be averse to having a percentage of their liquid wealth in Bitcoin, as they would in gold. In this scenario, diversity in the strongest currencies makes sense.

Again, another reason to maintain some decent exposure to Crypto, and diverse positions in Crypto, is the fact that man is a speculative animal. Given the amount of money sitting on the sidelines, it does not take much in the way of news, events or policy to move the market. The flip to bull in the market can be sudden, and if solid speculative positions are staked at the bottom of the market to be ridden up and averaged out at the top, then serious wealth might be made. ‘Might’ being the operative word here, as such positions are always irreducibly speculative….and rightly so, given our repudiation of certainty.

The savvier speculator becomes a more discriminate buyer. As opposed to a sole focus on the fundamentals, this breed of buyer has more of a bi-focal view on both the rational fundamentals AND the irrational exuberance that comes with speculative markets. With a healthy dose of skepticism on the one side, they will look askance at the more exuberant of narratives whipping the more gullible into a buying frenzy. That said, they’ll also on the other side maintain a healthy dose of confidence and keep an eye on the more sober of narratives outlining the case for a continued and more modest trend upward. What you have here is something of the balancing act of the agile high tight-rope walker with the opposing forces of speculation and fundamentals on contrary sides…. not to mention risk below and fame and fortune beyond.

And so now onto the ‘synthesis’ of the positive and negative aspects of uncertainty, where in the first one has looked to limit their exposure to Crypto, and in the second one has looked to engage in Crypto to some extent.

The Synthesis - Maintaining a Reasonable Level of Exposure to Crypto Investment

Given we recognize our speculations as avowedly uncertain on all fronts, whether that applies to the economy, the currency, or to our investments, we will never get over-exposed, while maintaining some exposure. Here it is a matter of finding that ‘goldilocks’ zone, not too cold, not too hot, which will no doubt vary for each individual according to their time and risk preferences. Anything but the binary of ‘all in’ or ‘all out’. A pragmatic investor’s mindset is typified by diversity and hedging.

The positive and negative aspects of uncertainty, as discussed, applies primarily to narratives, or psychology. Effectively, the positive and negative aspects serve to cancel each other out in my opinion. The field is now cleared, so to speak, of narrative altogether, where we are left to freely and objectively view the technicals. This enables T.A to be viewed as objectively as is possible, without the projection of a bear or bull ‘bias’ onto the chart…. though a theory or hypothesis may yet be involved. And so finally to a few charts of both BTC and ETH.

BTC

On the face of it, technically, we have a solid development in price unfolding. Where price is first front-run on the bull markets, it corrects solidly each time. Of significance is the increasing real correction of each cycle. We have currently seen a real full 50% correction of the previous run-up, with the market now recovering half of that to be back at only 30% off the highs of that spike, even though 60% in nominal/ price terms. Also of significance is the holding of a range for over a year now. Technically, it looks a reasonable level to either establish or maintain a position in BTC.

ETH

Similarly with ETH, we see that solid real correction to near 50% followed on by an extended period of recovery, with price back to 25% off its highs in real terms. Technically, bracketing out all the noise of narrative, it looks a reasonable point to buy a reasonable risk-managed position.

The point of the article has been to engage fully with the idea of uncertainty, even as Crytpo investors might find themselves becoming increasingly uncertain towards their Crypto investments. The risk, in my opinion, is of ‘flipping’ from bull to bear as uncertainty, towards the previous narrative, gains momentum in one’s mindset. When, however, the principle of uncertainty is seen to apply equally to the bear as to the bull outlook, the investor is not going to flip from bull to bear quite so easily, which is always a reactionary move as opposed to a rational one. And then the technicals will come into play, more objectively viewed and uncluttered by the projection of either a bull or bear narrative. A large part of a critical understanding is the recognition that all observations are theory-laden.

The suggestion has been that more reasonable and pragmatic investors, having fully thought through uncertainty in all its ramifications, are much less likely to switch from ‘all in’ to ‘all out’. They’ll at most reduce their exposure to a more reasonable level, for far from, and in between, binary opposites is the middle ground.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.

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