Bitcoin’s Positive Skew

By Stephen Perrenod on The Capital

This is not investment advice. Bitcoin is highly volatile. Past performance of back-tested models is no assurance of future performance. Only invest what you can afford to lose. You must decide how much of your investment capital you are willing to risk with Bitcoin. No warranties are expressed or implied.

Look for Positive Skew: Taleb

In his “Bleed or Blowup” article for the Journal of Behavioral Finance, Nicholas Nassim Taleb notes that many investors seem to prefer repeated small positive payouts but thereby assume the risk of large negative drawdowns or blowups. One should seek positive convexity, positive skew instead, to maximize long-term returns. Fortunately, we have Bitcoin, which exhibits strong positive skew.

For a summary of 20 reasons why Bitcoin is AntiFragile or positively skewed as a system and as a digital currency see: https://medium.com/the-capital/bitcoin-is-anti-fragile-20-reasons-b299e2d734b0

Jensen’s Inequality Shows Convexity

Positive convexity essentially means there is more upside than downside in an investment, and that its response to volatility is favorable. One might expect that Bitcoin itself has positive convexity, since if you buy it straight, not on margin, then the downside is limited to the cost, but the upside might be much more than the initial price, given it is a new technology with a strong long-term…