Law Of Large Numbers And Crypto Prices

We are going through a frustrating time. Bitcoin price continues to decline for the ninth week after eight weeks in a row. It's unprecedented in Bitcoin's history. Fortunately, there is the law of large numbers. We know that more likely things will start to improve in a few weeks.

The Law Of Large Numbers

The law of large numbers, which is considered within the scope of probability theory, states that the results will approach the expected value in the long run. We can compare the price of an asset falling for eight weeks to eight consecutive heads or tails in a coin toss game. If there is no gimmick in the coin, we expect the number of heads and tails to approach fifty at the end of the hundred tosses. On the other hand, the fact that eight landed heads or tails does not change the probability of the ninth toss. Claims to the contrary are called gambler fallacy in the logic literature.

According to the law of large numbers, when we roll a fair dice repeatedly, we expect the average to approach 3.5 over time.

By Pred - Own work, Wikipedia Commons

As seen in the graph, it sometimes takes a long time for the average to reach the expected value. However, if the results are independent of each other and there is complete randomness, the expected result will come true sooner or later.

I first encountered the law of large numbers during a simulation course I took at university. We wrote a piece of a program in Fortran on a computer that sounded like a truck. The program allowed a point to be placed at a random place in a circle. I watched the dots form a perfect circle as if watching a magician's show. Here is the benefit of hands-on training: It is not forgotten even after 30 years :)

The law of large numbers tells us that gambling against the casino is meaningless. Because the casinos set up the game in such a way that they will have an edge in the medium term.

The opposite is true for crypto. Historical data shows that the Bitcoin price is more likely to rise than fall. This is why HODL stands out as a popular strategy.

In 2021, the price of Hive increased 15 times. Therefore, those who bought Hive at the beginning of 2021 and sold it at the end made huge profits. In 2022, the price of Hive fell to nearly one-third. Most of us follow the HODL strategy because we do not know when prices will rise or fall. We know that the law of large numbers will help us if we stay in the market long enough.

The law of large numbers shows us that the key is effort rather than luck. Because the losses and gains that occur due to reasons we do not control tend to be balanced over time. Bear markets are for builders is not said in vain.

The Law Of Large Numbers and Game Theory Combination

When we use the law of large numbers in combination with game theory, we can solve more complex problems. We don't just use game theory for zero-sum games where players' interests conflict. It seems more attractive to me to compare the earnings potential multiplied by the probability of the return to the investment amount for each possible investment. The greater the number of such investments, the greater the law of large numbers helps to bring results closer to the expected value.

Crypto projects, for example, have high earning potential when they are in their early stages. On the other hand, the probability of profit realization is low compared to mature projects. Project developers sometimes make tangible promises about earning potential. The probability of earning is a variable that the investor will determine by evaluating the idea and the project owners. When we invest in a large number of projects with reasonable risk-to-return ratios, our potential return increases. In accordance with the principle of "there is no free lunch", those who simulate the investment game in their minds make more successful investments.

I plan to discuss how game theory can be used in crypto investments in more detail in another article. Because this is a topic that deserves at least 1000 words on its own.

Conclusion

Uptrends or downtrends often take longer than expected. Sooner or later the law of large numbers comes into play, ensuring that the results approach the expected values. In the meantime, it's fine to continue building.

Thank you for reading.

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fabian98 (73) 3 years ago

Well I see the law of large numbers but every day with the price of HIVE and it works pretty well, the high was $0.35 and now it's going up, and that's a great sign of things to come.