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The Randomness of Bitcoin Prices and Black Swans

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The Randomness of Bitcoin Prices and Black Swans

Early November 2013 – It was during this month that the price of a single bitcoin catapulted for the first time past the $500.00 mark. By month’s end, the price had doubled, eventually hitting the historic milestone of $1,147 in early December.  But in a Sisyphean manner, the price began a topsy-turvy plunge, falling below $200.00 at the beginning of 2015.  Now as a new year begins, the price is back up to a robust $433.72.

Prognostications abound among crypto enthusiasts in terms of bitcoin’s recent rise. Some say that bitcoin prices move in tandem with the US dollar while others propose just the opposite. Some surmise that capital controls and periods of currency instability, like those seen in China and Greece are the primary reason; and more recently, that Satoshi Nakamoto, the mysterious creator of bitcoin, had finally been identified in Australia caused another upswing in price.

A Rubik’s Cube of Wild Guesses?

In the western world, there’s a propensity toward rational explanations for why things occur. Professional analysts are fond of utilizing macro and micro economic variables and linear regression in their attempts to identify answers. It’s this very behavior that fuels an obsession, particularly in America,  with short-term, immediate returns. Like puppets on a string, we find ourselves subject to the whims of what we hear in the media — buzz that is largely informed by studies produced by supposed market experts and gurus.

We also allow emotions to impact our bitcoin price perspectives. This is reflected in what is known as ‘Animal Spirits,” a term attributed to John Maynard Keynes in his 1936 publication, The General Theory of Employment, Interest and Money. It describes the role that emotions play in driving consumer confidence and trust. According to Keynes, when these spirits are strong and consumer confidence is high, prices rise; when spirits and confidence are low, then prices lag.

So are logic and emotions the key determinants in accessing bitcoin’s future price? Or is there another hidden factor at play?

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The Hidden Influence of Black Swans

Coined by Nassim Nicholas Taleb, an iconoclastic financial analyst and academic who has been on a lifelong quest to examine the role of uncertainty, probability and knowledge in the world, the term Black Swan is defined as a rare occurrence whose impact is extreme and unexpected. Taleb’s thesis is that the effects of random events, such as bitcoin’s recent rise on the heels of the unsubstantiated “discovery” of Satoshi Nakamoto, drive our incessant desire to make logical sense out of  randomness. This desire, says Taleb, fuels us to create a rationalization that provides a sense of comfort in our decisions (i.e. at what point in the price trajectory should one invest in bitcoin?). He believes that those who reap a massive return  have a tendency to become wedded to their success, leading them to believe that they actually predicted the price jump – of course, after the fact.

So in essence, Taleb, who is also the author of the blockbuster bestselling book Black Swan,  concludes that there’s very little rationale for prognosticating the ebbs and flows of bitcoin prices. He believes that this sort of behavior creates a dangerous trap that distracts us from the “impact of the highly improbable,” the subtitle of this book. He says that most of us have a tendency to mistake luck for skill – a factor which makes us disinclined to wrestle with the anxiety-ridden realm of the unknown.

As articulated in the book Black Swan: The Impact of the Highly Improbable, past performance is a poor predictor of future growth. Most successful bitcoin investors are likely to offer compelling and convincing factors that seem to explain their past successes. Unfortunately these sorts of linear attempts at predictability often fall woefully short or overlook factors like randomness, chance and blind luck.

Erik Voorhees, CEO of ShapeShift.io and one of world’s most prominent Bitcoin advocates, believes that many in the crypto community are investing an inordinate amount of energy in trying to figure out where bitcoin prices are headed.  

“People usually look for ‘causes’ when it comes to asset prices. Why did the price go up or down? It’s uncomfortable to just let it rise or fall without assigning purpose, but often that’s the wisest option. Prices, like all complex systems, should be observed with respect and humility. We don’t know how they will develop, or why, and that’s OK.”  

As we usher in 2016, predictions abound about what’s next for the price of bitcoin. If Taleb’s views are indeed on point, then our endless pontifications about where this number is going to land are for naught. We are then left with a bitcoin landscape that is destined to foster intrigue and uncertainty throughout the New Year. In the end, that’s the price we may have to pay for a digital currency that is itself inherently paradoxical.

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