Two incredibly important concepts when making any investment, but especially important when investing in cryptocurrencies (you’ll see why below), are the concepts of ‘asymmetrical odds’ and ‘asymmetrical outcomes’.
What does ‘asymmetrical odds’ mean?
Asymmetrical odds means a situation in which the probabilities of two events occurring are not equal (not 50%) for each event, i.e. it means that the chances of each thing happening are uneven. To better explain, let’s take a look at an example.
Let’s say you have an investment in mind that has a 10% chance of increasing in value and a 90% chance of decreasing in value.
This is clearly (you might think) a bad investment. However, if you understand asymmetrical outcomes, which we’ll get into next, you’ll know that determining whether or not this is indeed a bad investment is still very much unknown.
What does ‘asymmetrical outcomes’ mean?
Asymmetrical outcomes means a situation in which the results (or payouts, in the case of investing) of two different things happening are unequal/uneven. Again, let’s use an example to elaborate.
Let’s say that a potential investment you have in mind, if it goes down, may go down all the way to zero: i.e. it could go down in value 100%. But let’s say the potential upside is 10,000%, i.e. the potential for the upside is it going up in value one hundred times (note that although this kind of asymmetry is relatively rare with traditional investments, with cryptocurrency investments it is far from rare — especially for many very early-stage cryptos/meme coins).
So combining our two above example theoretical investment ideas (i.e. combining our above asymmetrical odds and asymmetrical outcomes) would give us a potential investment that has a small chance (just 10%) of going up in value and a large chance of declining in value (90%), but if it does go up in value, it could yield a return of a whopping 100 times our initial investment, whilst the maximum we could lose is the whole of our initial investment.
Would you invest say $1000 into such an investment?
What if the potential downside was only 50% rather than the whole 100%?
Considering asymmetrical odds alone isn’t enough to decide whether or not an investment is worth the risk, it’s just as important (if not more so) to also consider the asymmetry of the potential outcomes as well.
Simple!