Thread by @smdiehl

I keep using game theory and quantitative finance terms to describe why #bitcoin is a terrible investment. But let me try a different metaphor that might be more relatable. 🧵

Poker. 🃏

(1/)

In a poker game people show up with cash, a buy-in. They convert this money with the house to get tokens which they then use to play. (2/)

If you sum over all players buy-in you get the total possible winnings any one player could possibly win. This is a fixed value that can't increase unless more players are added. (3/)

After a few hands and bets everyone's holdings are now different. You won a few hands and lost a few hands, but the amount of money in the game has not changed. It's simply changes hands. (4/)

A game like this is called zero-sum, every one person's winning is necessarily another person's losses. It's simply shifting money around.

Now what happens to the total if the house takes a cut on all this action? (5/)

Say the house charges 5% to cash-in, 10% when you cash out tokens at the end of the night and for every hand the house takes a fixed $5 from the pool.

What happens to the total possible winnings? (6/)

The pool of money must decreases on every hand. So the amount that any one player can possibly win keeps going down and down the longer you play. (7/)

You may get lucky on a few hands, but if you are the average player your odds of winning are no different than any other player. Which means as you keep playing your winnings will tend to mean-revert back to the initial money you started with minus the rake the house takes. (8/)

So on average if you play this game on long periods of time with a fixed player pool, your expected returns are negative. Not surprisingly, because this is gambling. (9/)

Investing in crypto coins has exactly the same structure as this game. When you invest in an asset with no cashflows and high market fees and transaction costs you're playing a rigged game. You might get lucky a few times, but most people statistically won't. (10/)

When an investment doesn't involve any productive economic activity it's simply a game of shuffling money around in a rigged game. Mostly to the house.

Crypto coins are gambling not investing. And the optimal solution to this game is not to play. (11/)

Every cognitive fallacy that applies to casino games of chance also applies to putting money into negative-sum investment schemes like Ponzis.

The reason people get addicted to these games is they over estimate their wins and ignore their losses. (12/)

Always analyze investment opportunites from a purely unemotional and statistical perspective. And the expected returns from crypto gambling are terrible.

Every millionaire you hear about is paid out by thousands of suckers getting taken on a FOMO ride. Don't let it be you.

/fin