Seb van Dort
Sep 4, 2018 · 3 min read

The Black Swan Theory — how it helped me to safely invest in cryptocurrencies.

Before Europeans had travelled to Australia, the ‘fact’ was that all swans were white. This was confirmed by clear and imperial evidence; all sightings of swans were white. That was until Europeans got to Australia and saw a black swan; one single data points invalidated all previous evidence of millions of black swans.

Welcome to the Black swan; a brilliant theory developed by Nassim Taleb. The theory simply refers to highly unexpected events that have a very large magnitude and consequence.

The added complication with Black Swan events is that these events cannot be predicted, especially using existing data points?

Examples of Black Swan events are 9/11 the 2008 global financial crisis and the Fukushima disaster etc. But on top of this, Black Swan events are rationalised by hindsight after the first recorded instance of the event. The belief that this event could have been expected and predicted using traditional risk models. You often see this played out in the media when a disaster happens and the media try to apportion blame.

We all suffer from this hindsight bias when it comes to black swan events. I often hear people say that that the 2008 crash was obvious, that Fukushima should not have been built on a fault line, as if these events were in anyway predictable. The reality is that these events could not have been predicted and are now only so apparent because they happened.

If you don’t believe me really try to imagine yourself in; say 1914 in Europe, could you really have predicted the outbreak of world war 1? What about the collapse of the Soviet Union, or the Arab Spring, or the power and spread of Bitcoin in 2011?

So the question then is should we, as crypto investors be worried about black swan events?

I argue no, not really and in fact we should look on this theory to actively benefit from black swan events.

The black swan theory, if we break down is a massive A-symmetrical event with a high impact.

Most cases of black swan events we hear or read about are negative black swan events, but we can choose to expose ourselves to positive black swans.

How do we expose ourselves to positive black swans?

Step 1 — Find big asymmetrical opportunities?
Cryptocurrencies are the obvious ones, but if we can look out for other opportunities. I remember Leicester City winning the premier league in 2016; the odds were 5000 to 1.

Step 2 — exposing yourself to these asymmetrical opportunities
Get involved, place that bet on that team with massive odds, invest in cryptocurrencies, set up that entrepreneurial venture, write that book.

J.K. Rolling never would have thought she’ll be one of the richest in the people writing a book for kids, or Jack Ma being one of the richest people by setting up Alibaba.

Step 3 — Limit the downside
Never go all in, only play with what you can lose. Don’t give up your job to write that book, don’t invest your life savings into crypto, but only a small amount that you are okay with losing.

Step 4 — be comfortable with losing, it’s the winners that count.
This is one I have to get to terms with; it’s not your losses that matter (if you’ve protected the downside), it’s the winners that count. If we look at Venture Capital firms; let’s say they invest in 10 startup, they expect 8 to fail miserably and burn through the cash, they might expect one to break even or have a modest return on investment and one investment will be the superstar; one will be Uber, Facebook or Amazon providing 100x return on investment.

So too should, we look at failure, if we only invested time, money we thought we could lose or some hard work we can get ready for the next investment that might be 100x.

In my own life, this is how I started in cryptocurrencies. I decided to look at the riskiest investments to put some money to invest, expecting to lose this. I stumbled on Cryptocurrencies and decided to give it a try. Thankfully I invested in Ripple XRP in early 2017 providing nearly 8,000% ROI. I invested a modest amount and got a decent chunk back. There was no skill involved, this was luck that could not have been predicted; a positive black swan.

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