Thomas
@aviationdoctor.eth
1090 Following
63550 Followers
Crypto markets are nonlinear systems and TA is astrology for grown adults.
“Why do investors insist on the existence of cycles in gold and silver prices? Because periodicity is the most complicated orderly behavior they can imagine. When they see a complicated pattern of prices, they look for some periodicity wrapped in a little random noise” (James Gleick in Chaos, 1987).
Markets are nonlinear because small news (e.g., a Musk tweet) create large swings, when large news (e.g., a regulatory approval) may cause small swings. Nonlinear systems are not only sensitive to small influences (the butterfly effect), they can also be resilient to large influences (the raging bull effect).
They’re also nonlinear because shallow market depth, liquidity fragmentation, and feedback loops cause nonlinear amplification, as is the case when shorts get liquidated in cascades.
Crypto markets are also aperiodic, even after accounting for BTC’s four-year halving cycles. Their volatility is also highly autocorrelated. Any chart repetition is coincidental and transient at best.
There’s even evidence for strange attractors and fractal geometry in price trajectories.
That’s not to say that crypto markets are random — they are deterministic yet largely unpredictable, as all chaotic systems are.
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This latest Veritasium video is about a widget that shrinks when you pull on it. The script makes whimsical detours into springs physics, road congestion, and Braess' paradox, however the key insight about this little counterintuitive oddity felt unremarkable at first.
But then I realized that it is a rare example of antifragility in action (yes, the Taleb kind), although the video makes no mention of that. As a refresher on antifragility: a few systems benefit from randomness over time, while most don't.
An object threatened by randomness over time is said to be fragile. Such is the case of a vase because so many random events (a baseball, a cat, moving houses) can irreversibly destroy it.
An object is considered to be robust (neither fragile nor antifragile) if it is mostly impervious to randomness over time. Mountains are a good example — only erosion over geological time scales can affect them (and love, if we get lyrical about moving them).
But an object is said to be antifragile if it strengthens as a result of stressors and volatility. If you skip to the 20-minute mark, you'll see that with just the right amount of stress applied to it in the form of vibrations, the widget can oscillate between vulnerable (resonant) and stable states.
That's a fascinating property — imagine that applied to a building in an earthquake-prone zone, to a computer network, or to an immune system.
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