Ecoinometrics - CEX, hacks and rug pulls
How to think about the risks you can actually mitigate.
If you operate in the world of digital assets in 2022 you are operating in the wild west. There are risks and opportunities everywhere. But not all risks are created equal. Some risks you have to take. Others you can mitigate. Often they are completely ignored.
The Ecoinometrics newsletter helps you navigate the landscape of digital assets and macroeconomics with investment strategies backed by data. Subscribe now to get the latest research directly in your inbox.
Done? Thanks! That’s great! Now let’s dive in.
CEX, hacks and rug pulls
All investments are risky, whatever the label you put on an asset there is always the possibility that something will go wrong. This is the nature of the game.
Some kinds of risks are obvious. Others are more subtle and often overlooked.
Some risks can be mitigated. Others are intrinsic to the investment.
In the world of digital assets the events of the last few months should serve as a clear reminder that you need to think about all the kinds of risks when you are investing.
One way of thinking about the risks inherent to investing is to break those down in two categories, let me call them:
The investment thesis risks.
The investment execution risks.
The risks inherent to your investment thesis is what almost everyone takes into account when they evaluate whether or not to make a bet.
Let’s be specific. I have a long term bullish view on Bitcoin. But that doesn’t mean this investment thesis comes without risk. Here are some those risks:
The software layer of the Bitcoin network could have a technical flaw that would make BTC worthless.
On ramp and off-ramp for Bitcoin could become more tightly regulated which would slow down adoption. That would have a negative impact on the long term growth of Bitcoin.
The global economy could enter a period similar to the Great Depression. In that case Bitcoin could be decades away from realizing its potential.
Bitcoin could lose on its main use case against other digital assets and become worthless or at least stuck in limbo. Which means our investment thesis would not come to pass.
And that’s just for a sample of things that exclude the unknown unknowns about the future. The common thread for this kind of risk is that we have some expectations about what Bitcoin could become but things go wrong and the potential could end up never being realized.
The key point is that this is not really something you can mitigate.
You do your risks assessment and try to estimate if the reward is worth the risk. This kind of risk is intrinsic to the bet you are taking. Without it there is no reward. If this risk is worth taking you will make the bet. Otherwise you won’t. This is a binary choice. Do or do not. There is no try.
Keep reading with a 7-day free trial
Subscribe to Ecoinometrics to keep reading this post and get 7 days of free access to the full post archives.