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Key Lessons:
- Recognize the role of randomness in trading outcomes.
- Avoid survivorship bias by understanding the untold stories of failure.
- Be skeptical of compelling narratives and focus on fundamentals.
- Embrace uncertainty and think in terms of probabilities, not certainties.
Introduction
When I first read Nassim Nicholas Taleb's Fooled by Randomness, I was just starting my journey into trading cryptocurrencies. The hype lured me in, convinced that I could predict the next big move in Bitcoin, Ethereum, or whichever altcoin was trending with enough analysis. Taleb's book shattered many preconceived notions about markets and uncertainty and profoundly shaped how I approach crypto trading today.
The key to success in trading is to manage risks, not to manage profits. Black swan events moved the market drastically and unexpectedly, wiping out the traders who took too much risk. Managing risks helps ensure survival during these unpredictable events while focusing solely on profits can lead to catastrophic losses when unexpected events occur.
I highly recommend Taleb's book. It provides deep insights into the role of randomness and uncertainty in markets. Now, I want to share what I learned from the book.
The Illusion of Skill in Crypto Trading
One of the core ideas of Fooled by Randomness is that many successful traders are simply lucky, not necessarily skilled. Taleb discusses how randomness and luck play a much more significant role in success than most people are willing to admit. This hit home for me after my first big win in crypto.
After hearing about it in a Telegram group, I remember buying into a small altcoin. Within a week, its value tripled. I thought I was a genius, convinced my “analysis” had been spot on. The truth was, I knew almost nothing about that coin—except that someone said it was going to “moon.” My success was purely due to luck and had nothing to do with skill. Taleb’s words helped me realize that it was easy to attribute positive outcomes to my supposed ability while ignoring the random factors at play.
This realization was a humbling experience. I began questioning every profitable trade I made. Was it my analysis, or was I riding the wave of market sentiment? In crypto, where volatility is extreme, it’s easy to mistake randomness for genius.
Survivorship Bias and the Crypto Market
Taleb also explains the concept of survivorship bias—how we tend to focus on the winners and ignore the countless losers. In the crypto space, this bias is incredibly pervasive. We hear stories about people who bought Bitcoin when it was under $100 and became millionaires. We read articles about traders who timed the market perfectly and made a fortune during the 2021 bull run. But we rarely hear about the countless people who bought high, sold low, and lost everything.
I fell into this trap myself. I remember reading about a trader who had turned $10,000 into $1 million within a year. Inspired, I tried to mimic his trading style, focusing on high-risk, high-reward trades. I ignored the dozens of other traders in the same group who had lost everything trying to do the same thing. They were the silent casualties of the market, buried beneath the success stories.
Survivorship bias taught me to take every success story in crypto with a grain of salt. It also helped me appreciate the importance of risk management. Instead of trying to be the next big success, I focused on protecting my capital, making consistent, smaller gains, and surviving the inevitable downturns.
Survivorship bias can also manifest when selecting coins to trade. Traders rely on backtest results and often pick the most profitable coins. Because they are testing with the coins available today, they fail to account for the ones that have failed, such as LUNA. This can lead to overconfidence in the selected coins, as the results are based solely on the survivors of the market. Many coins that once showed high potential ended up collapsing or disappearing entirely. To avoid falling into this trap, it's essential to consider the broader context, including coins that failed, as these can offer valuable lessons about risks and vulnerabilities that might not be apparent from a successful coin's history alone.
The Narrative Fallacy and Crypto Hype
Another concept that resonated with me is the narrative fallacy—our tendency to create stories to explain random events. Humans love stories, and we’re especially good at connecting dots to create narratives that make sense of complex situations. The crypto market is full of narratives: Bitcoin as digital gold, Ethereum as the foundation for Web 3.0, or a new altcoin as the next “Ethereum killer.”
I remember being swept up in the hype surrounding a new token that promised to revolutionize decentralized finance (DeFi). Influencers were all over social media, discussing how it would change everything. The story was compelling, and I bought in, convinced I was part of the next big movement. A few weeks later, the project fell apart, and the token’s value plummeted. Now, I thoroughly research projects, looking at their fundamentals and development teams to avoid falling for similar hype.
Taleb’s work helped me recognize my susceptibility to these narratives. The reality is that many of these stories are just marketing tactics designed to appeal to our emotions and get us to buy in. Now, I’m far more skeptical of hype-driven narratives. I try to focus on the fundamentals and the actual utility of a project rather than the story being sold to me.
Embracing Uncertainty
Perhaps the most important lesson I took from Fooled by Randomness is to embrace uncertainty. In crypto, nothing is guaranteed. Prices can move wildly in either direction for reasons that are often unclear. Trying to predict every movement is a fool’s errand, and Taleb’s book made me comfortable with the idea that I can’t control everything.
I remember when I spent hours analyzing charts, convinced that I had identified a pattern that would lead to a price breakout. I placed a big trade, only for the market to move in the opposite direction because of an unexpected news event. It was frustrating, but it made me realize that no matter how much analysis I do, there will always be elements of randomness and uncertainty that I can’t account for. Recent events like regulatory crackdowns or sudden macroeconomic changes have often moved the market unpredictably, underscoring the importance of expecting the unexpected.
Now, I approach crypto trading with a probabilistic mindset. Instead of being overly confident in any single trade, I think in terms of odds and manage my risk accordingly. I diversify my portfolio, use stop losses, and never bet more than I can afford to lose. I’ve learned to be okay with being wrong, knowing that randomness is always at play.
Final Thoughts
Fooled by Randomness taught me that trading is not about certainty but navigating uncertainty. The crypto market is unpredictable, and success often comes down to luck as much as skill. By recognizing the role of randomness, avoiding the pitfalls of survivorship bias, questioning narratives, and embracing uncertainty, I've become a more cautious, thoughtful trader.
In a volatile crypto market, your approach is the only thing you can truly control. For me, that means accepting that I will never have all the answers—and that’s okay. What matters most is how I manage my risk, learn from my mistakes, and stay in the game long enough to take advantage of the opportunities that come my way.
