The Hamster Syndrome

It seems that the crypto community has taken a big step towards one critical realization: Trading on a cryptocurrency exchange in hopes of getting rich only benefits the exchange itself.

In the news feeds I’ve read recently, it appears that everyone, without exception, has had a take on a story of the hamster that traded crypto more successfully than most amateur traders. However, before we continue, let’s briefly recap the events.

Someone came up with a brilliant idea: since amateur crypto traders are called “hamsters”, why not let an actual hamster trade on the stock market? The furry trader was named “Mr. Goxx” (a nod to the notorious crypto exchange) and placed in a special cage equipped with sensors. The wheel and the tunnels in it were connected to a computer, which performed transactions following the animal’s actions. By running in the wheel, the hamster “chose” the cryptocurrency for trading. Passing through the left tunnel, he would sell the chosen coin and buy by going through the right one (in both cases – for 20 euros). The sell tunnel would eliminate his entire position. A kind of living embodiment of a random number generator. With its own Twitch stream.

Mr. Goxx started trading cryptocurrencies on June 12, 2021, with 11 cryptocurrencies worth $ 390 in his portfolio. Over the next three months, his asset portfolio grew to $ 580. As a result, the daily activity of the hamster-trader proved more profitable than the S&P 500 (+ 6%), having bypassed the famous investor Warren Buffett (- 2%), NASDAQ (+ 12%), and Bitcoin (+ 23%) in the same time period.

Some of the hamster’s most successful deals included:

– purchase of the Chiliz token (CHZ) at $ 23.6 and sale at $ 36.44 (+ 54%);

– purchase of the Pantos token (PAN) at $ 23.57 and sale at $ 35.33 (+ 50%);

– buying Dogecoin (DOGE) for $ 23.79 and selling for $ 34.8 (+ 50%).

Mr. Goxx would have actually made even more, but then the Chinese government intervened with another crackdown on cryptocurrencies and dropped the market.

The author of these lines majored in biology, where experiment is of particular importance. Often a successful experiment negates the results of years of theoretical analysis. A random number generator could have been used instead of a hamster, but that wouldn’t have been quite so spectacular.

The most important point the experiment demonstrated was how little all the talk of trading strategies and trader’s behavior, all the endless arguments over figures and charts, discussions about bottom breakouts and corrections are actually worth. You can follow signals, copy other trading strategies or create your own, calculate the probabilities and risks – but the hamster will still earn much more from crypto trading than you. And lose much fewer nerve cells in the process.

It’s worth mentioning that the hamster experiment with far from the first of its kind. It’s just that earlier such tests were performed on stock exchanges, not on the cryptocurrency markets.

The monkey-investor experiment, in which literal monkeys beat the Wall Street gurus in the stock market, has long since become legendary. A study by the University of Cambridge found that a perfect balance in a long-term investor’s portfolio is achieved when 80% is invested in stocks and 20% in cash (or some equivalent, i.e., treasury bonds). As it turned out, when you put 20% of your money on a bank deposit and distribute the other 80% over the shares chosen by the monkeys, you can earn quite a lot.

At the end of 2014, according to Hedge Fund Research Inc. data, the average hedge fund lost 0.6%, while the “monkey portfolio” gained 2.3%. A year earlier, hedge funds showed a return of 6.7%, while the combination of monkeys and the bank account demonstrated 21% growth. That is, they were three times more effective!

In 2012, monkeys outperformed the hedge funds to the magnitude of four, earning 13% compared to 3.5% for funds.

Obviously, the monkeys didn’t bear the same costs as hedge funds, which have to account for salaries, bonuses, taxes, and so on. All these expenses are paid by investors out of pocket. But the question still stands: Why bother with hedge funds at all if a random selection of stocks provides better results?

In early 2009, the Russian “Finance” magazine conducted its own experiment. A circus monkey named Lukeria was offered 30 cubes with the names of different publicly traded companies. She chose eight cubes, which were formed into an investment portfolio.

The results were staggering: Over the course of the year, Lukeria’s investment portfolio has risen in price much more than the shares of many prominent funds. Only 18 out of 312 investment funds were able to bypass Lukeria, so the circus monkey that year proved more effective than 94% of all Russian expert investors.

By simply holding on to randomly chosen stocks and never trading them, Lukeria outplayed the absolute majority of Russian professional managers. Over the next two years, 86% of equity funds earned less than an actual circus monkey.

The experiment ran for ten years and ended with the animal beating mutual and index funds, with its portfolio growing more than the Moscow Exchange index.

A couple of journalists from the Wall Street Journal (WSJ) decided to test the principle of monkey investors in practice and see if they can beat the “cream of the investor community”. On April 23, 2018, they hung newspaper pages with stock quotes on the wall and started throwing darts at them. The return on the portfolio formed this way (eight stocks were selected for purchase and two for sale) was compared to the average return on stocks that fund managers recommended for investment at the annual Sohn Investment Conference in New York over the period up to April 22, 2019.

The average return on the portfolio of professional investors was minus 9.7%, plus 17.3% for the journalists’ portfolio. Thus, randomly selected stocks outperformed carefully selected ones by 27 percentage points.

“In this financial experiment, not a single animal was harmed, but the egos of some human beings were severely wounded,” summarized the WSJ journalists.

And now we see the hamster confirm all the aforementioned patterns for the cryptoasset market.

Psychologist Philip Tetlock further dismantled the already questionable reputation of the supposed experts. He interviewed 284 people who made their living by giving “commentary or advice on political and economic trends.” Tetlock asked them to assess the likelihood of certain events occurring in the near future in areas and regions they were most familiar with.

The results were dreadful. The experts performed worse than if they simply assigned an equal possibility to each of the three suggested outcomes. It turned out that people who make a living by studying a certain topic make worse predictions than monkeys who randomly choose among given options.

Experts were shown less accurate than random distribution in assessing the probability of a particular event. In addition, Tetlock found that the more famous the forecaster, the more erroneous their predictions are.

The conclusions are clear, though, obviously, not everyone is ready to accept them. Be it in the stock market or the cryptocurrency market, in trading or investing, a random number generator is much more effective than any science-based strategy.

I do not mean to say that stock or cryptocurrency exchanges are unnecessary. On the contrary, they perform a vital function of shaping and regulating markets. However, the stories traders tell each other about getting fabulously rich by trading their assets, in 90% of cases, are the product of the exchanges’ PR departments.

When it comes to crypto or stock exchanges, you may win or lose, but the exchange will profit off you in either case.