Is Bitcoin Talebian?
Nassim Taleb sat for an interview with Erik Schatzker from Bloomberg and if you care what Taleb has to say then you'd find the interview interesting. One of the first things I heard him talk about many years ago was the idea of concentrating a lot of risk with asymmetric payoff into a very small slice of your portfolio. The first iteration I heard was 90% in T-bills and then go for broke with the other 10%. Although the specifics as he has discussed them have changed a little over the years he still believes in the concept and talked about it with Schatzker.
In the interview he said the following;
I recommend that individuals stay out of the market unless you know how to hedge and few people do. You're not obligated to have exposure to financial assets. It's not prudent.
This is a more conservative expression of the idea than I've heard him talk about before. Schatzker pointed out the impracticality of this for most people but he is focused on preservation as being more important than "generating income." Another major focus of his was hedging tail risk--protecting against (reasonably) unpredictable, outlier events.
Taleb is insightful but like with anyone, if his message resonates then you'd take bits of his process to contribute to creating your own process. I would say his thoughts have influenced my process but I don't do anything like his 90/10 allocation and I don't perpetually hedge against tail risk.
An important concept I have talked about over the years is that over the long term, average stock market return combined with an adequate savings rate and the avoidance of stupid behaviors is enough to get the job done for most peoples' retirement plans. That potential outcome greatly reduces the need to "beat" the market as opposed to capturing most of the effect. If you are an average investor there will be years you outperform and years where you lag but the pursuit of alpha, at the expense of letting your guard down risk and volatility-wise, aka chasing heat, becomes unnecessary.
I have always been a huge believer in trying to protect against large declines which I think overlaps what Taleb has said but I don't necessarily think a portfolio needs to be antifragile in the face of large declines for the simple reason that over the long term the equity market tends to move from the lower left to the upper right large declines nothwithstanding. Even after the worst financial crisis in 80 years the market went on to make a new high in kind of a short time period. If you still believe in that tendency, I do, then the need for anifragility (antifragile means benefiting from a tail event) is arguably less as opposed to improved resiliency by simply avoiding the full brunt of a large decline. Draw your own conclusions of course and build your own portfolio process but I think this is a good example of being influenced without mimicking.
Included in Taleb's personal high risk bucket currently is some sort of derivative strategy that would benefit from a blowup in the bond market. I don't think he used the word asymmetric, but holdings with asymmetric risk would seem to be a good fit in a high risk bucket which leads us to Bitcoin. I've been using the word asymmetric in conjunction with Bitcoin for months and while I make no claim of originality I am seeing more and more Bitcoin touts (maybe they're charlatans) also using that word. The run up to $8000 (it is a little below there as I write this on Tuesday afternoon) has whipped up more excitement and based on its history we might be in some sort of inertia event (claim of originality on that one LOL) that will lift it higher.
I read a lot about Bitcoin and I still can't find anything that convinces me that going to zero is off the table. Here's a one year old link by someone in the space who claims that noted crypto-skeptic Nouriel Roubini embarrassed himself at some conference because he had no facts, only opinion. I wasn't there, I don't know but I am not sure there was anything but opinion in the link crapping on Roubini. For example, Roubini says Bitcoin is not a store of value because of its volatility. Article author Barhydt says that Bitcoin is not intended to be stable against the USD, it is intended to be stable versus Bitcoin. Giving the author every benefit of the doubt, can you even conceive of how Bitcoin being stable against itself has any practical use for you?
It may become what the touts say it will but I have no idea and I am not sure they know either. This creates the asymmetric opportunity that Taleb believes in at a higher level and that I think might be available from Bitcoin. As I have said many times, zero is just as likely as some astronomical payoff. Last week I quoted another article that said a good amount to speculate with is an amount you can laugh off if it goes to zero.
If you have to speculate in this arena, go very small and allow yourself to benefit from the asymmetry if it goes up a lot (disclosure for anyone new, I took a small position in December). And as I always say, if you are lucky enough that your speculation grows into a life changing piece of money, sell it and let it change your life.