Case Study in Envy and Greed: Bitcoin and Cryptocurrencies

Bitcoin and Cryptocurrency trading is an interesting case study in emotions, especially in Envy and Greed. These are the observations as someone who never bet anything on either Bitcoin or cryptos. I haven’t written much about cryptos before, but they’re an interesting case study in the context of the emotions of Envy and Greed. Just trying to dig deep into my own head so I don’t make mistakes trading “normal” equities and options. (I personally refrained since I had no money to bet at the time, was afraid to lose, and was ramping up on options trading.)

1. Envy

Those who weren’t invested were “extremely” envious of those who made a crapload of money for no reason. It’s important to distinguish Envy vs. Greed.

Envy arises when comparing yourself to someone else, and comes from “relative” wealth. In contrast, greed is what you yourself have and is “absolute” wealth.

I’ve personally been mindful to channel any envious comparison to personal greed. These emotions are powerful and can destroy you if you don’t really understand them since they come from our evolutionary history and there’s no way to turn them off, but rather to go around them and/or channel and leverage them for useful purposes.

As a nuanced point, Jealousy is an emotion that requires both a 2nd Party, and a 3rd Party that threatens to take you already have with the 2nd Party. It’s usually involved in romantic/sexual relationships, and not usually directly related to trading/investing and economic wealth.

Greed is good. Envy is bad.

2. Greed and Fear

The ones who see others make a lot of money feel greed and want to get into crypto as well, but are too fearful to bet their own money. It’s as simple as that.

3. Crash and Self-Righteousness

Cryptocurrency and Bitcoin goes back down. Phew! The Envy has subsided a bit and the “I Told Ya So” and “They were so Dumb” statements come freely and in full force as a backwards-looking justification, vindication, and source of self-satisfaction.

4. Self-Confidence and Self-Esteem

The core here to rise above the riff raff is self-confidence and self-esteem for a healthier mind, so the following thoughts, and similar can exist instead.

– It is 100% OK that I have nothing absolutely and less relatively, since I’m happy with myself and my life.

– Those who made a crapload of money also risked a lot and could’ve lost. I did not risk anything, so therefore I have no right to be envious since I had no Skin-In-The-Game.

– I should be happy for other people’s success and try to learn from their success, rather than be envious, especially if I did not risk myself.

– Greed is good. Envy is Bad.

Low Volatility and High Return

I’ve been doing research into all aspects of volatility to complement my options trading and VIX ETN trading.

There’s a fascinating “anomaly” concerning returns being an inverse function of volatility, flying in the face of intuition and a huge theoretical edifice that returns should actually be a direct function of volatility. The framework for this was mostly built by economists and academics who spend too much time on theory and not enough time on the day-to-day profit/loss trading their own capital.

In other words, a portfolio of low volatility equities actually provide a better return than high volatility equities, since they tend to lose less during stress periods. Interestingly, this is related to how performance may be reported. Mathematically, the geometric average of return is calculated over multiple periods of time, as opposed to arithmetic averages of return calculated period-by-period. As an example, if a position loses 50% then gains 100%, then the arithmetic average return is 25%, whereas its geometric return is 0%. Talk about obscuring performance. (As an aside, this difference between arithmetic return and geometric return is at the heart of risk or money management frameworks like the Kelly Criterion, in particular, maximizing absolute portfolio growth over long periods of time using geometric averages, or about maximizing arithmetic averages over single periods of time for emotional reasons.)

At the end are some screenshots from fund manager Pim Van Vliet’s High returns from low volatility. Two other very important books are:
– Falkenstein – Missing Risk Premium
– Falkenstein – Finding Alpha
In addition, there are numerous published works on low volatility investing on these two authors and others. Best place to find them is SSRN.

Combine the framing of these returns along with fund manager compensation and fund investors benchmarks being tied to specific short periods more aligned with “arithmetic” average as opposed to multiple periods aligned with “geometric” averages, and that’s why this anomaly exists and persists in the investment industry.

This brings up two interesting philosophical issues: one concerning the nature of the relationship between related concepts of volatility, risk, and uncertainty, and the other about the human emotions of envy and greed.

These are distinct issues, but tend to be conflated together both conceptually and mathematically. I admit my definitions are not precise either.
– volatility (quantified movement)
– risk (potential for loss or bad outcomes that can be described by mean, proxied by volatility, and usually with higher moments of the distribution such as skew and kurtosis are not considered)
– uncertainty (in principle unquantifiable, but loosely proxied by statistical measures of risk like variance, skew, and kurtosis).

Concerning envy and greed, since fund manager performance is tied to “relative” returns to a benchmark, usually the market benchmark for their compensation and other managers for emotional and psychological reasons, instead of “absolute” returns, there’s an interesting mapping to envy and greed. Basically, “envy” arises from comparisons in terms of “relative” wealth acquisition or performance vs. greed that is more closer to “absolute” wealth acquisition and performance.