In part 1 & 2 I already talked about Bitcoin as a store of value and index investing in the crypto space. In both cases big names in the crypto community seem to lie to the community or at best don’t know what they are talking about. I suspect that some people in the crypto space want it to look safer than investing in crypto really it is. A less risky space could attract more people and help crypto overall. Therefore the underlying ethical question is, if it is okay to lie for the greater good.
My final part of the series seems to fit perfect in that narrative as well. Almost any big Crypto Youtouber will tell you to play it safe, don’t invest more than you can afford to lose, don’t leverage and DCA (Dollar-Cost-Average). I actually agree with all these recommendations except DCA.
Market Timing
“Buy the dip” is a wonderful concept, but it is very hard to buy at the bottom, because we don?t know when the bottom is in. And selling at the top is equally hard because it is impossible to predict the future. With technical analysis and interpreting various on chain data, a lot of people try to get a better understanding of what can happen in the future. These methods are not bullet proof, as we have seen prominently with the predictions of Plan B for the end of 2021. But at least we can get a better understanding what probably will happen.
And probabilities are very important to find the right action concerning our future. So let?s talk probabilities in investing. There are 3 possible ways for our investment to play out in the future:
1. It stays the same
2. It gains value
3. It looses value
Possibility 1 is very unlikely for cryptos. Even Bitcoin is still highly volatile and there are huge up- and downswings in matter of hours, sometimes minutes or even seconds (f.e. flash crashes). To keep things simple we rate the probability of our investment staying the same with 0%.
That leaves us with the other 2 options and because we don’t know how the future plays out we have to say that it is as likely to go up or down, leaving us with a coin flip. So the chance is 50/50 for our investment to go up or down.
Dollar-Cost Averaging (DCA)
We don’t know if we are buying at the top and if we put in all our money at once, we could end up loosing most of it. To minimize that risk a lot of people dollar cost average into the market. F.e. they have 10.000$ to invest in BTC and they buy for 1000$ a week for 10 weeks in order to get the average price of the following 10 weeks for their invested Dollars. If the price drops after a week, they can be happy, that they can buy now more shares in week two for the same money. The same goes for week three and so on… You could say they do some sort of time diversification.
This is a perfect example of flawed logic. It is true that if the price is falling I have saved money and can buy more after the price is lower, but if the price is going up I can buy less. So I lower the risk on loosing parts of my investment but therefore my risk of missing out gains is higher in the same proportion. And if the chances are the same (as stated above 50/50) for the price to go up or down, you don’t have less risk.
If you look at it that way you gain nothing by DCA. But it is even worse. We actually don?t think it is a 50/50 chance when it comes to the price action of our investment. The only reason we invest in an asset is because we think the price of the asset will rise in the future (either short- or long term). So we have a more than 50% chance for the price going up, or at least that is our assumption at the time we invest. Therefore the chance of missing gains is higher than the risk of loosing value. In other words it is better to invest all at once. Because time in the market beats timing the market DCA is a form of market timing and a sub optimal investment strategy. DCA being less risky and the optimal way to invest in the crypto market is a Myth.
So much for the logical side of my argument. But there a lot of empirical studies done and the science is pretty clear when it comes to DCA:
Constantinides, George (1979): „A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy“; In: Journal of Financial and Quantitative Analysis; Vol. 14; June 1979; pp. 443–500.
Greenhut, John (2006): „Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work“; In: The Journal of Financial Planning; Vol. 19; No. 10; pp. 76–83.
Shtekhman, Anatoly/Christos Tasopoulos/Brian Wimmer (2012): „Dollar-Cost Averaging Just Means Taking Risk Later“; Vanguard research paper
Statman, Meir (1995): „A Behavioral Framework For Dollar-Cost Averaging“; In: Journal of Portfolio Management; Vol. 22; No. 1; Fall 1995; pp. 70-78.
DCA is based on a logical fallacy and the empirical data proves that it is a sub optimal investment strategy. But there is one upside to DCA that could be an argument for some people.
Psychology
Loosing something feels worse than missing out something. Most people have a tendency to prefer avoiding a loss than acquiring the same amount of gains. This is known as “Loss Aversion” and is a common bias.
For people who can?t get over this bias and have a tendency to panic sell, DCA might provide them with some comfort. But if you are one of those people I guess you should rather buy an asset which is less volatile and invest in stocks or bonds, instead of DCA into crypto.
All things considered there is no reason to DCA into crypto and neither is there a reason to promote it. So why are all these youtubers and financial influencers recommend it? Do they lie on purpose? The only reason except from they don?t know better is again, that they want the crypto space to appear safer than it actually is to get more people into the space.
That begs the moral question if it is ok to lie for the greater good?
The moral question
In my last two articles I answered the question with the utilitarian moral theory and the moral theory of Immanuel Kant. You can read about it here:
In short, the Utilitarians say yes it is ok to lie if it promotes the overall good for all people and Kant says lying is morally wrong no matter what.
Today I want to introduce a less known moral theory named Contractarianism:
Moral norms derive from the idea of a social contract or mutual agreement with the purpose to reach an agreement that is acceptable to all.
This moral theory is based on the works of Thomas Hobbes who didn?t have moral rules in sight. He wanted to justify a state which has all the power as we know it today. He thought it is necessary in order to prevent a state of nature without any rights and duties which would leave us with a war everyone against everyone. In a state a King, or a president takes all the power from the people in exchange for security and rights. We now can?t walk around and kill random people because an authority would punish us. But this idea of justifying a state authority like a government can also be used to derive moral norms. Moral norms also threaten us with sanctions. If you lie to us we want talk to you anymore, if you don?t help us when we need it we won?t be friends anymore…
We agree upon this moral rules and sanctions because it is in our interest to do so. We see that the alternative of living without rules at all is less attractive and costs us even more than following the rules. It could cost us our lives when we live without rules. So we basically trade some freedom for security. I can?t walk around and steal from random people anymore which makes me less free, but I have a lot more security because nobody is allowed to steal from me. For the same reason we would have the rule of not lying to each other.
But would it be ok in a contractarian moral to lie when it is for the greater good?
The answer seems to be yes. Because we could make a reasonable exception to this rule. If the harm done by the lie is less than the positive outcome, we allow it. For example if the Nazis knock on the door searching for Jews to kill them, we could lie and say no we don?t hide any Jews and it would still be the right thing to do so. But not every lie that brings a better outcome to the world would be permissible. It would be an exception of the rule, which we would agree on beforehand. Only in extreme cases we would say yes it is ok. Therefore Contractarianism can provide some sort of middle ground when it comes to the ethic of lying.
I don?t think DCA is one of these extreme cases where lying is so good for the society. So we shouldn?t allow it in this case, neither is it ok for promoting index investing in crypto, or saying that bitcoin is a great store of value. When it comes to such a complex, risky, young and fragile topic like crypto I strongly recommend to stick to the truth as much as possible.
What do you think about that? Let me know in the comments.
