Why we keep losing money and don’t want to leave the currency circle

Hello everyone, I am Nakamoto Curry.

Hello everyone, I am Nakamoto Curry.

There are always two contradictory scenarios in the currency circle:

On the one hand, many people think that "the risk is too high". It is normal for a stock to fall by 99.9%, and it is not uncommon for a stock to rise or fall by 20-30%.

On the one hand, many people want to increase by 5 times, 10 times, 20 times, or 100 times, preferably 10,000 times is not too much. (nonsense)

"High risk" and "high return", really? Don't rush to draw conclusions, let's first take a look at how the two "beautiful B" bigwigs we know make money.

1. The Big Short BBB

This movie can be regarded as a must-see movie for all investors. John Paulson made a huge profit of 25 billion in the 2008 subprime mortgage crisis. In fact, John Paulson took advantage of the asymmetric risk and return factors to earn to such a huge amount of assets.

At that time, the subprime bonds in the United States were sold in many grades. The better ones were rated AAA, and the worse ones were rated BBB. The bond rated BBB is only 1% higher than the yield of US Treasury bonds! In other words, if you want to get 1% more income, you need to give up the relatively safe US Treasury bonds. (It is conceivable that national debt is likely to be safe)

Why is the yield of BBB only 1% higher than that of national bonds, because bonds rated below BBB are all rubbish. This has caused the price of BBB and AAA to be very high. John Paulson's team carefully studied the assets behind BBB at this time and found that these combinations were very unsafe.

If you think about it, the yield of BBB is 1% higher than that of treasury bonds; then, conversely, if BBB falls by 1%, is it better to buy treasury bonds?

In other words: as long as the BBB falls by 6%, it is worthless! A 6% fall in the BBB only requires a 12% default to obtain a 100% return.

Generally speaking, in the case of a loss, it will lose 1% a year. For a fund, 1% is a drizzle, but if it is profitable, it can earn 100%!

After John Paulson saw this opportunity, he shorted the asset size of BBB to 25 billion US dollars. In the eyes of ordinary people, 25 billion assets are huge, and the risks are huge. But if you calculate it proportionally, you will lose 250 million a year, and if you make a profit, you can earn 25 billion.

The risk-benefit ratio is 1:100, which is extremely asymmetrical!

Later, John Paulson waited until the BBB was worth nothing and made $25 billion. In fact, John Paulson's original management scale was 6 billion. The reason why he expanded the scale to 25 billion US dollars was inspired by Soros.

Next, we will talk about the risk-return asymmetry of Soros' famous "short pound"!

2. Soros shorted the pound

In 1992, there was an exchange rate mechanism in Europe at that time, and the exchange rates of currencies in various countries generally fluctuated around 2%. But later, after the British pound and the mark were added to this exchange rate mechanism, 1 pound = 2.95 marks, that is, the pound was overvalued a lot.

Due to some factors, the German government raised the mark's interest rate, and the increase in the interest rate represented the appreciation of the mark. In this way, according to the exchange rate of 1 pound = 2.95 marks, the pound is even more overvalued.

However, the British economy was in a downturn at the time, and it was too late to release water. No one dared to raise the interest rate of the pound. Therefore, the pound could only hold on.

After Soros discovered this rule, he believed that the pound would fall. Of course, the possibility of losing money was also considered. According to the exchange rate mechanism at that time, if the pound did not raise the interest rate (increase the interest rate), it would lose at most 2%. And as long as the pound is devalued, it's not just 2%, it could be 20%.

The risk-benefit ratio is 2:20, which is extremely asymmetrical!

Such opportunities are very rare, so Soros vigorously shorted the British pound and made a lot of money.

We now know that John Paulson was inspired by Soros:

If you encounter an investment with asymmetrical risks, do it to your death!

Looking back at Bitcoin, Bitcoin is now around 7,500, and many people will see $100,000 in the next bull market. Bitcoin has fallen by as much as 90% from its all-time high. But the rate of increase is often about 10 times.

For example,

If you buy $7,500 of Bitcoin now, you will lose $6,750 if it falls by 90%!

If you make a profit, assuming that the target price is 5 times, 37,500 US dollars, the net profit = 30,000 US dollars.

The risk-benefit ratio is 9:50.

(If your goal is $100,000, the risk-reward is even more asymmetric)

Is it risky? It's not big, the loss is only 90%, but the profit is 500%! Going to look at the physical business now, few businesses can achieve such a risk-benefit ratio.

In the currency circle, we are calculating the risk-benefit ratio all the time, such as the often said "buying the bottom", which means to reduce the risk to a lower level and increase the return to a higher level.

In addition, the comparison between ETH and EOS a few days ago, in fact, from the price point of view, the risk-return is more reasonable than EOS, which is one of the factors that make EOS more popular than ETH.

The reason why so many people are addicted to the currency circle is that the biggest reason is the asymmetry of risk and return.

Assets that can go up, as long as they don't return to zero, the income is only a matter of time. For example, Bitcoin, so I am more sure that the opportunity cost is the cost that the currency circle needs to consider most.

The real risk is that when you ALL-IN, your position is already full and there is no cash flow;

The real risk is that you don't have a reasonable goal;

The real risk is that you are greedy for lower bottoms;

If you want to invest in Bitcoin but have not found an effective profit method, or you have stocked up on spot but don’t know how to use contracts to hedge risks, or you like Nakamoto Curry’s humor, welcome to communicate, don’t worry about ignorance in the future, invest There are bosom friends on the road. I am Nakamoto Curry (BTC6668888), and I am willing to stand with you through thick and thin!