Reason Why We Need More Regulation in Cryptocurrency Space

  

In his book the “The Alchemy of Finance” which was first published in 1987, George Soros, outlines his unique philosophy which he attributes to his extremely successful winning streak as an investor. Soros’s philosophy deals with Man’s interaction with his Reality and he coined his new philosophy, “The Theory of Reflexivity”.  

I believe Soros's theory finds utility not just in securities trading but even right here in the cryptocurrency space as well. 

 Although Soros’s book has been on the reading list of important business schools the world over, in my opinion many investors and fund managers to this day, either genuinely do not understand the principles that Soros is trying to get across or have been so brainwashed by the populist prevailing economic theories taught in the universities that they simply refuse to open their minds to consider an alternative paradigm which is in direct conflict with what they have been taught. 

I believe it is exactly because of this misinformation being taught at the Ivy League Madrasahs which are the breeding grounds for the Economic Terrorists that we see plaguing Wall Street.  

What is It? 

Per the Theory of Reflexivity, in a situation involving more than a single thinking participant, there is a Cognitive function; where the participant is trying to understand reality and then there is the Participative function or the Manipulative function wherein the participant’s thinking aims to alter the reality or predict the outcome of the situation.  Such situations Soros calls Reflexive Situations. 

Reality in this sense refers to the situation deemed to consist of facts or independent variables. So called because such information is supposed to be independent of any other external factors or influence. 

What the Theory of Reflexivity goes on to postulate is that in any Reflexive Situation, facts shapeshift from being dependent variables to independent variables simply because of the dichotomy created between reality and the perceived reality by the thinking participant.  

Man understands the world through his senses and his experience. Therefore man’s understanding is limited or imperfect. So, naturally the reality as he perceives it is limited and imperfect; we call this a bounded reality. 

 Therefore, in a Reflexive Situation there are no Independent Variables only Dependent Variables or rather subjective information, which are manipulated by the participants’ thinking.  

In such a situation, it is impossible to predict the outcome due to the uncertainty introduced by the thinking participants; each of which has his/her own varied agenda, preconceptions, values etc which are extremely diverse!  

This leads to an Asynchronous Reality which deviates from the reality or “equilibrium” situation. The interaction between the participants and the reality leads a feedback loop which either amplifies the out of equilibrium situation; a Positive Feedback Loop, or mitigates it; a Negative Feedback Loop. 

 Investing in Cryptocurrency Markets is a Reflexive Situation 

The Stock Market or the Cryptocurreny Market and any sort of Investment Activity is the perfect example of a reflexive situation.  What the Theory of Reflexivity implies is that the markets cannot on their own arrive at an equilibrium situation, it is impossible! 

Brainwashing by Universities 

However, what is being taught in universities and advocated by corporate fascists, and even our government is essentially Market Fundamentalism. Market fundamentalism aka Neoclassical Economic Theory postulates that the volatility of the stock prices is merely a reflection of market participants’ irrationality, but the market as a whole is rational and will correct itself and the prices will eventually reflect the true value of the security.  This is the equivalent of saying that having say one raving lunatic in a room will lead to volatility in stock prices but if I have a room full of raving lunatics, the room will eventually start behaving rational again! WTF??? Market Fundamentalists will advise us not to pay attention to the prices of the stocks but instead to study the securities’ fundamentals to get an understanding of its true value and the health of the business. These include metrics such as the Price to Earnings (P/E) ratio, or the Earnings Per Share, Market Cap etc.  However, as we read in the news daily, of the perpetual list of financial scandals or irregularities, all the above-mentioned so called fundamentals are constantly being manipulated by the stock prices! This is particularly so in today’s so called free market economy, where owners of companies are also part shareholders in the company. These managers to boost stock prices, resort to various manipulative strategies such as share buybacks, and inflating earnings by simply acquiring new companies for the sake of boosting earnings. 

Boom Bust Cycles! 

As mentioned previously there are positive feedback loops and there are negative feedback loops. Negative feedback loops tend to bring our predictions closer to reality whilst positive feedback loops due to self-reaffirming nature can exaggerate the upswing or downswing like the effect of resonance on buildings in an earthquake, causing us to be further from the reality, leading to major corrections or financial crises. However, in the extreme cases the entire building collapses as in the case of the bursting of economic bubbles. The only way this uncertainty may be reduced is by having negative feedback loops via the act of testing.  That is why objective methods of testing our perceived reality are absolutely essential. There has to be a method of collecting metrics that is removed from the process, but even more important is to nurture a culture of Critical Thinking. Because even the metric and method of collecting the metrics involves thinking participants which in their bounded understanding may not be collecting the right metrics which contradict their perception of reality.  In other words, it is not just sufficient to be asking questions but asking the right questions. And the only way to happen on the right questions is via Critical Thinking. 

More Market Regulation not Less 

Even in the Natural Sciences like Physics, no scientific law is declared true, the hypothesis holds as a law if no test result can prove it wrong. Which means just because tests results may apparently support the hypothesis a single false outcome will invalidate it. This is because scientists except that due to our bounded understanding of reality, we attempt to create abstractions, assumptions and simplifications of it to make it possible for our brains to conceive reality. So if we as a society accept that our understanding is imperfect, and that the reality is more complex than we can conceive, it is imperative that the markets are regulated.  And that the market regulators should be completely disjointed from participating in the markets to provide an oversight that is not tainted by bias. In fact to go a step further, it is the job of the market regulators to be the perennial cynic to ensure that the boom and bust cycles do not happen. This is the only way to prevent or at least mitigate catastrophic market downturns which have tremendous negative consequences for society. The widely reported measures of the government and central bankers after the occurrence of financial crises, such as controlling the monetary base and fiscal stimulus measures like deficit spending and corporate bail outs of companies deemed too big to fail, are simply treating the symptoms rather than the cause of the problem.  

Strength in Diversity  

What we are seeing not just in America but globally today is a growing populist society led by a Sheep Herd Mentality, which seeks to crush dissent or drown out its voice at the very mention of it. The advent of Social Media is unfortunately being exploited to amplify this tendency to marginalize and radicalize societies, rather than promoting unity which can be seen recently in the buildup to the Bitcoin Hardfork in August!  

In light of all of the above, I hope you can see that it is absolutely essential that we have a free and open society which encourages dissent and accommodates conflicting views, because it is the diversity of opinion which creates negative feedback loops preventing the wild upswing and downswings as the market searches for the so called equilibrium situation or reality.