"Why Do Most Retail Investors Who Trade Contracts Long-Term End Up Dropping to Zero?"

Recently, when the market is sluggish, it is a good time for systematic learning. Yesterday, I picked up Taleb's "Antifragile" theory and found it quite useful for explaining the phenomena in the topics. I will record my thoughts here and hope it can inspire everyone.

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🍒If you are playing contracts and winning and losing but have lost a lot over time, it may not be a technical issue, but rather that you have fallen into the trap of "non-ergodicity."

Taleb mentioned a famous "revolver" thought experiment in "Fooled by Randomness." This story not only explains what risk is but also reveals why retail investors who play contract betting in the long run will inevitably drop to zero.

The experiment is as follows:
Imagine there is a twisted billionaire who gives you a revolver, 6 chambers, and 1 bullet. You pull the trigger against your own head once, and if you don't die, you get 10 million. Based on probabilities, your survival rate is 83%, and your death rate is 17%.

Many people think: It's worth a fight for 10 million.

From a purely probabilistic perspective, the probability of surviving a one-time game is 5/6 (approximately 83.3%), and the probability of dying is 1/6 (approximately 16.7%). Many people might feel that risking a death probability of 16.7% for a chance to win 10 million dollars seems "worth a bet." However, Taleb points out that this kind of thinking is flawed.

The so-called "universality" simply means that "group probability" can be equated to "individual time probability." In this game, you cannot traverse.
If you gather 100 people to play this game, about 83 people will become wealthy, and 17 people will lose everything. On average, the returns are enormous.

For you personally, you only have one life. Once that 1/6 small probability event occurs, the game is forever over for you. You cannot enjoy the "average" results. The joy of those 83 successful people has nothing to do with you; you are just one of the 17 tombstones.

As long as there is even a small probability of being completely knocked out (death or bankruptcy), this risk will almost inevitably occur in the long run.

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🍒In addition, Taleb proposed another upgraded version of the gun experiment, which is more in line with the current situation in the cryptocurrency space:

What if you play this game once a day and give 1 million each time?

As long as you play long enough, the probability of that bullet appearing will approach 100% infinitely. In this game, it doesn't matter how many times you win, because you can only lose once. Once you lose, the game is over, and so are you.

Back to the crypto contract. Many people use high leverage in pursuit of short-term profits. It's like that person spinning a revolver. You might win 9 times in a row (the gun has no bullets), your account has multiplied several times, and you feel like a stock god, thinking your strategy is perfect. But this is just survivor bias; you simply haven't hit that bullet yet.

💣 Why must it inevitably drop to zero? The financial market will always have "black swans" -- that bullet.

Pinning, exchange downtime, extreme market conditions. For spot traders, this is volatility; for high-leverage contract traders, this is "devastating risk." No matter how much you earned before, as long as there is a risk of "liquidation equals exit," with an increase in trading frequency, dropping to zero is not a "possibility," but a mathematical "inevitability."

You might think that the 1011 coin disaster was a sudden and unexpected "black swan" event, and that it was just bad luck or some other objective issue. But in fact, veterans in the crypto space know that the situation during 312 was quite similar to 1011, and it has only been 5 years since it happened; newcomers who entered the scene after 2020 simply did not experience it.

This time, most of my friends who opened contracts with 1011 and didn't encounter any issues have already experienced the baptism of 312 and have psychologically prepared for the worst-case scenario of 312 like seasoned investors.

The value derived from Taleb's wisdom is:

Do not take unlimited (destructive) risks for limited profits. As long as there is a possibility of "liquidation exit," your mathematical expectation in the long run is zero. Want to survive in the market? The first principle is not to make money, but to ensure that you are never hit by that bullet.

This is consistent with my long-standing emphasis on being cautious, not exposing oneself to excessive risk, and not leaving the table.
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🍒So should retail investors use leverage tools?

Of course, I am not mindlessly opposed to using leverage. In my opinion, if there really is an opportunity to "take a 16.7% risk of death to gain $10 million," many people in reality would be willing to try, after all, the principal is too hard to earn.

The biggest allure of the crypto world is still the existence of numerous opportunities to gain a lot with a small investment, and high leverage is one of them. However, most retail investors face two issues:

1. They won't just fire a shot; after firing one shot and not dying, they will feel like they are the chosen one with 10 million, and then they will continue to fire shot after shot until they encounter a bullet.

2. There is no strict trading discipline, especially regarding stop-losses. Using full margin without setting stop-losses and not preparing for the worst-case scenario is basically the prelude to dropping to zero.

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🍒Final Summary:

For any game that has "catastrophic risks," the first thing to consider is whether you can accept the loss in the worst-case scenario (when the bullet is fired), rather than thinking about how high the potential gains might be.

Risk must be within an acceptable range for you, take every contract trade seriously, as if pulling the trigger on Russian roulette.

I personally find Taleb's theories quite helpful, and if you have some time and are interested, you can go read them.