Written by: BroLeon from Australia
Recently, during the market's sluggish period, it's a good time for systematic learning. Yesterday, I picked up Taleb's "Antifragile" theory and found it quite useful for explaining certain phenomena. I’d like to record my thoughts and hope it inspires everyone.
If you play contracts and win and lose but end up losing a lot over time, it may not be a technical issue, but rather you have fallen into the trap of "non-ergodicity."
Taleb mentioned a famous "revolver" thought experiment in "Fooled by Randomness." This story not only explains what risk is but also reveals why ordinary people who play contracts for a long time will inevitably end up at zero.
The experiment is as follows: Suppose there is a perverse billionaire who gives you a revolver with 6 chambers and 1 bullet. You point it at your own head and pull the trigger once; if you survive, you get 10 million. From a probability perspective, your survival rate is 83%, and your death rate is 17%.
Many people think: For 10 million, it's worth a shot.
From a purely probabilistic standpoint, in a one-time gamble, your chance of survival is 5/6 (about 83.3%), and the chance of death is 1/6 (about 16.7%). Many people feel that risking a 16.7% chance of death for 10 million seems "worth a gamble." But Taleb points out that this way of thinking is flawed.
The so-called "ergodicity" simply means that "group probability" can be equated to "individual time probability." In this game, you cannot ergodically sample. If you gather 100 people to play this game, about 83 will become wealthy, and 17 will die. On average, the returns are enormous.
For you personally, you only have one life. Once that 1/6 small probability event occurs, the game is over for you forever. You cannot enjoy the "average" outcome. The joy of those 83 successful individuals has nothing to do with you; you are just one of the 17 gravestones.
As long as there exists even a small probability that could completely eliminate you (death or bankruptcy), in the long run, this risk will almost inevitably occur.
Additionally, Taleb proposed another upgraded version of the gun experiment, which is more relevant to the current state of the cryptocurrency market:
What if you play this game once a day, betting 1 million each time?
As long as you play long enough, the probability of that bullet appearing will approach 100%. In this game, it doesn't matter how many times you win because you can only lose once. Once you lose, the game is over, and so are you.
Returning to the cryptocurrency contract market. Many people use high leverage in pursuit of short-term profits. This is like the person spinning the revolver. You might win 9 times in a row (the gun has no bullet), your account multiplies several times, and you feel like a stock god with a perfect strategy. But this is just survivor bias; you just haven't hit that bullet yet.
Why is it inevitably going to zero? The financial market will always have "black swans" -- that bullet.
Market manipulation, exchange crashes, extreme market conditions. For spot traders, this is volatility; for high-leverage contract traders, this is "catastrophic risk." No matter how much you earned before, as long as there is a risk of "liquidation leading to exit," with an increasing number of trades, going to zero is not a "possibility," but a mathematical "inevitability."
You might think the 1011 coin disaster was an unexpected "black swan," and encountering it was just bad luck or some other objective issue. But in fact, veterans in the crypto space know that the situation during 312 was very similar to 1011, and it was only 5 years apart; newcomers who entered the market after 2020 just haven't experienced it.
This time, most of my friends who traded contracts during 1011 without incident have already been through the baptism of 312 and have psychologically prepared for the worst-case scenario of 312.
The value I gain from Taleb's wisdom is: Do not risk unlimited (catastrophic) risks for limited gains. As long as there is a possibility of "liquidation leading to exit," in the long run, your mathematical expectation is zero. Want to survive in the market? The first principle is not to make money, but to ensure you are never hit by that bullet.
This aligns with my long-standing emphasis on being cautious, not exposing oneself to excessive risk, and not leaving the poker table.
So should retail investors use leverage tools?
Of course, I am not blindly against using leverage. In my view, if there truly exists an opportunity to "risk a 16.7% chance of death for 10 million," many people in reality would be willing to try, as the principal is hard to earn.
The biggest allure of the cryptocurrency market is still the existence of many opportunities to bet small for big returns, and high leverage is one of them. But most retail investors have two main issues:
They won't just pull the trigger once; after surviving the first shot and winning 10 million, they feel like the chosen one and continue to pull the trigger until they hit the bullet.
They lack strict trading discipline, especially regarding stop-losses. Using all their margin without setting stop-losses and not preparing for the worst-case scenario is basically a prelude to going to zero.
Final Summary
In any game with "catastrophic risk," the first thing to consider is whether you can accept the loss in the worst-case scenario (the bullet firing), rather than considering how high the potential gains are.
Risk must be within an acceptable range for you. Treat every contract trade seriously, as if you are pulling the trigger in Russian roulette.
I personally find Taleb's theory quite helpful, and if you have time and interest, you can read it.
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