Encrypted currency investment and Bo silly theory: Who is the last fool?

The Boss Theory (GFT) does not know where it originates, nor does it have a clear definition. This may be because the concept of investment frenzy has existed since the beginning of trade and commerce. In the article of investopedia, the theory of Bo silly is defined as: people are willing to pay a high price regardless of the real price of the item, and it is expected that one person will buy it at a higher price. The point is that items can be sold to larger fools to make money, regardless of whether the value of the item is overvalued; it is recommended to do a detailed investigation as a strategy to avoid becoming a fool.

In recent years, bitcoin prices have often been used as a classic example of a silly theory. It is believed that cryptocurrencies have no intrinsic value and consume a lot of energy, only code. If the value of cryptocurrencies lies in the advantages of remittances, then banks and financial services companies are using the basic technology of cryptocurrencies (blockchain) to safely simplify remittance transactions, and the value of cryptocurrencies is limited.

However, the price of bitcoin has skyrocketed over the years. At the end of 2017, bitcoin prices began to fall after hitting $20,000. As prices have risen, people have been tempted by profits, and a large number of investors have begun to buy cryptocurrencies because they want to sell them to others at a higher price. Bo silly theory also contributed to it.

The author believes that the key to Bo silly theory lies in two "foolish" investment theories: 1) The purpose of investing in an asset is simply to sell it to a "more stupid person" at a higher price. 2) Especially when the current price is higher than its intrinsic value.

Examples of references to Bo silly theory in the media usually include the Tulip Foam, the Mississippi Bubble, and the South Sea Bubble described in Charles Mackey's book, Unusual Popular Fantasy and National Madness. Similarly, critics of cryptocurrencies often view investment cryptocurrencies and historical speculative events as stupid. Because the above speculators became the pick-up man because of the end of the hype cycle of flower bulbs (tulip foam) or mysterious national exploration company (South China Sea bubble).

The author believes that the two premises of GFT can be refuted and weaken the applicability of the theory. First, all non-revenue investments require that the net capital of these investments grow over the long term. Because if an asset is not expected to perform well, then capital will flow to other options. Thus, this argument makes GFT's first premise too broad, so this premise has no meaning. Second, when the price exceeds the intrinsic value, the rationality of such investment should be questioned. When we use "intrinsic value" as an integral part of an asset, the concept of citing it is problematic. We will examine that this common term is actually a reference to authority (a kind of logical fallacy). "Intrinsic value" does not exist independently from people's subjective consciousness, and human subjectivity is always controversial and controversial. Not absolute.

Refutation 1: All investments include risks and expected returns

The first rebuttal argument is easy to understand: investors are hoping to sell at a higher price when investing in any financial product, especially in speculative operations, because speculators have already implied positive trading when speculating. To the expected value. Buyers of these financial assets are usually able to sell these assets at a higher price in the future. When all other things are equal, which asset to invest in an investable product depends on our trade-offs between the advantages and disadvantages of this asset and other options. Even if you open a position for hedging, investors can get value by improving the risk factors of the portfolio compared to the current situation.

This example introduces the concept of human behavior (human beings are fundamentally based on their purpose), which is the basic methodology of the Austrian school of economics. At the same time, it is impossible for an investment to have no speculative attributes. Similarly, there is no real “risk-free” asset. When new geopolitical events have an impact on market expectations of underlying asset risk, stocks may miss market consensus, companies may miss interest, and even so-called zero-risk government bonds may suffer capital losses.

In this way, we expose the first mistake of GFT: specifically, the Bo silly theory (excessively) contains all the investment fields, which completely dilutes its role. Even the original purchaser of a sovereign state bond or a negative-yielding asset would consider a further decline in interest rates, in which case the investment would achieve capital appreciation. In fact, from a business case perspective, this situation may be a particularly good underwriting scenario for an investor who now has purchased and owns these assets. Once cash is exchanged for any asset (rather than consumer goods), the result is the establishment of asset longs and the desire to sell them at a higher price. More specifically, the reality is different from these expectations. Although it is not the intention of investors, investors who have poor expectations of all variables will suffer losses.

In the final analysis, it is those personal behaviors that analyze and mine financial assets in the short-term mispricing, leading to the phenomenon that the financial market shows an effective market in the long run. In other words, the famous quote from Benjamin Graham (according to Warren Buffet): The market is a voting machine in the short term, but in the long run, it is a weight machine.

Refutation 2: Intrinsic value does not exist independently of human subjective consciousness

Because GFT relies heavily on this assumption: Assets are overpriced relative to the set benchmark (intrinsic value), so let's examine the actual existence of intrinsic value. Interestingly, the concept of intrinsic value can be simultaneously defined as an ontology (the study of existence, not the Chinese token project) and an epistemology (related to research and knowledge theory). Suppose that when people refer to "intrinsic value," it is actually an agreed method that simply estimates the short-term value of an asset, not a transaction price.

Some thought experiments have shown that the difference between some popular definitions of “intrinsic value” is very large. Due to the inaccuracy of the results, the use of intrinsic value has become a straw man argument in the content of GFT: it is established to be Pushed down. This, in turn, has greatly weakened GFT as a force for fair criticism, including when it was used against investment in encrypted digital currencies.

More specifically, the idea of ​​using intrinsic value as the immutable property of a given asset is inherently contradictory. We tried to assess the value of the Empire State Building. You might say "very simple" and point out that the range of about $2.5 billion is borrowed from early trading records, or by observing the current transaction price of public real estate investment trust stocks. Then, imagine the Ice Age (about 10,000 BC), when modern humans were exploring the Great Rift Valley of Africa. The same piece of land, what is the intrinsic value at that time? Similarly, if the virus destroys humanity a year later, what is the value of the Empire State Building?

In these two hypothetical scenarios, the answer is clearly zero because of the lack of land demand. The current land has value because land use rights are related to the general economic value of tourism and business activities. (In these three cases, the physical characteristics of the land are exactly the same.) Therefore, we have come to an interesting understanding that “value” is never actually an intrinsic property of an asset, but only a land/property-related right to use. / The right to sell / other rights. Especially for the Empire State Building, these values ​​are quantified in the disclosure of investors, such as the annual report of ESRT (England Real Estate Trust's trading code on the New York Stock Exchange), but for digital assets, the general consensus remains. In the exploration, this made the entire valuation system confusing.

Let us further analyze: What is the intrinsic value of stocks? Is the free cash flow thrown by the company in the discounted cash flow valuation method? EBITDA income (a year in the future)? Earnings per share? For most stocks, the “right” measure depends on which company you care about, which industry you care about, and even who you ask, because even the most liquid, the most widely covered stock There is still room for debate; this is precisely because of the ambiguity of mathematics, because valuation exists in the eyes of bystanders, the traditional market sees a group of avid buyers and sellers, which is why I am not worried about when the asset class is expanded. The tribality and conflict in the world of cryptocurrencies will disappear in the future.

At the same time, investors and analysts concerned with cryptocurrencies are slowly forming consensus to look at certain indicators of Bitcoin and other cryptocurrencies, such as ratios based on transaction volume, realized capital, or other currencies or commodity assets. . This may cause the expected difference (percentage calculation) of the target price of the market speculator (compared to the transaction price) to become smaller as the cryptocurrency market matures, because as everyone continues to accept the consensus approach, the focus of the debate will slowly The larger aspect turned to more subtle differences. However, I believe that although stocks have had decades of consensus-based valuation methods, it still takes years to achieve this in digital assets, which is one of the reasons why the whole theme is distorted and confusing. In the future, retail investors and institutional investors can talk more easily and confidently about the “intrinsic value” of a cryptocurrency, but we should be careful not to think of a missing word consensus today as evidence of future absence.

Big fool theory: What is left?

So far, we have studied some serious problems when the big fool theory is applied to cryptocurrency. Specifically, the idea that investors want to resell an asset at a higher price is stupid is inaccurate. Because, in fact, almost all financial asset purchasers expect to achieve a net asset appreciation. Second, we explored why relying on intrinsic value as a benchmark for market price comparison is a problematic concept because

1) There is a lack of consensus-based valuation methods in the cryptocurrency world compared to traditional assets;

2) Intrinsic value The daily definition of all asset classes lacks philosophical rigor. Even in traditional stocks and real estate, intrinsic value generally refers to a set of heuristic data rather than an inherent asset parameter.

Once the GFT loses the effectiveness of its two components, its ability to judge investment in expected assets will be significantly weakened because the entire argument is based on two weak premises. To be clear, it is comforting that GFT is not the only argument that needs to be overcome, because the actual investment risk of many cryptocurrencies still requires due diligence, including understanding of technology, target markets, regulatory risks, and core members of centralized projects. Risk and so on. In addition, potential investors still need to accurately consider the opportunity cost of capital, compare it with other alternative investments (although traditional asset classes are easy to compare risk and return), and address private key security, keeping a small number of individuals Information is disclosed and other issues. Nonetheless, it is very valuable to eliminate the most common one (in my opinion, laziness) to refute the wording of cryptocurrencies, to discuss them in depth, and to reach a broader consensus and adoption.

Conclusion: Fools are sometimes right, but often one step earlier than others

In Hans Christian Anderson's classic fable "The Emperor's New Clothes", it is the child who does not bear the obligations and fears of the onlookers, so he can overcome the inertia of the status quo and expose the reality that everyone else accepts. . Despite having more fictional and symbolic rather than historical accuracy, a fool is one of the few who are willing to tell the truth to the monarch. This analogy applies here as well. Similarly, like the Greek tragic character, Kassandra of Troy is blessed with the ability to prophecy, but at the same time cursed and not be believed by anyone.

I continue to believe that the adoption of mainstream cryptocurrencies is inevitable, but I have refined the point of view. I think that in the end, the twists and turns will be advanced. Those who are currently on the edge of the existing system will still be people who accept cryptocurrencies quickly. More people only Will participate in this after this. However, what is now considered to be a daily life has been considered stupid in the past, whether it was early writers and engineers about the sea, the seabed, the sky, the stars, or the digital world of creating and enjoying virtual creation. If those weird "fool" ideas are not only likely to be realized, but also vital to today's social business and entertainment, then what else can we miss that might become important in the future?

Original: https://medium.com/messaricrypto/facing-the-greater-fool-980ff4d02014

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