The awkward mathematics of booms and bubbles

When short and long aren't opposites.

One of the most common responses in the many, many comments to my pieces on Bitcoin over the last couple of weeks has been to ask me why, if I'm so sure it's a bubble, I don't short it.

The simplest answer is that journalism isn't a career which leaves a huge amount of money left over after the bills are paid with which to gamble, and that I'm not entirely sure it's ethical anyway. There's also the fact that the two main Bitcoin meta-exchanges aren't particularly liquid, which leaves me doubtful that I'd get the best value for money on any shorting contract,

Then there's the problem that being pretty certain the bubble is going to pop doesn't leave me any surer about when it's going to pop – something which most methods of shorting require you to know.

Shorting usually involves borrowing the thing you want to short for a fixed amount of time, selling it straight away, and then buying it back just before your loan is up. Ideally, the commodity has dropped in value, and so you make a profit by you pocketing the difference.

In a normal commodity, going short and going long – buying the commodity to sell at a higher price – are roughly symmetrical. If a share in Apple goes up $1, the people who are long make a dollar a share; if it goes down, the people who are short do.

But that symmetry breaks down when you're dealing with a commodity on the sort of parabolic trend that Bitcoin is shooting along now.

If I spend £100 on Bitcoin, then the most I can lose is £100. Conversely, if the trend continues, I could have £1000 in a month. And the maximum possible payoff is basically uncapped. Suppose I'm catastrophically wrong, and Bitcoin becomes the world currency by the end of the year – anyone who'd bought in to it, even at today's inflated prices, would be a millionaire.

But what if I short it, by borrowing £100 of Bitcoin? Well, then the most I can earn is £100, if the price drops to zero. But the amount I could lose is potentially uncapped, for the exact same reasons that make buying in to it so appealing.

That lack of symmetry – which is an innate feature of, well, maths – serves only to goose the bubble higher and higher. And at the other side, when the down swing comes, it will be vicious; with no shorters ready to step in and buy the coins of people trying to cash out, the volatility will have nothing dampening it.

So that's why I'm keeping my money where it is. But don't think I'm not pretty damn confident when I say that if I had any extra, it still wouldn't be in Bitcoin.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Not just a one-quack mind: ducks are capable of abstract thought

Newborn ducklings can differentiate between objects that are the same and objects that are different, causing scientists to rethink the place of abstract thinking.

There’s a particular loftiness to abstract thought. British philosopher and leading Enlightenment thinker John Locke asserted that “brutes abstract not” – by which he meant anything which doesn’t fall under the supreme-all-mighty-greater-than-everything category of Homo sapiens was most probably unequipped to deal with the headiness and complexities of abstract thinking.

Intelligence parameters tail-ended by “bird-brained” or “Einstein” tend to place the ability to think in abstract ways at the Einstein end of the spectrum. However, in light of some recent research coming out of the University of Oxford, it seems that the cognitive abilities of our feathery counterparts have been underestimated.

In a study published in Science, led by Alex Kacelnik – a professor of behavioural psychology – a group of ducklings demonstrated the ability to think abstractly within hours of being hatched, distinguishing the concepts of “same” and “different” with success.

Young ducklings generally become accustomed to their mother’s features via a process called imprinting – a learning mechanism that helps them identify the individual traits of their mothers. Kacelnik said: “Adult female ducks look very similar to each other, so recognising one’s mother is very difficult. Ducklings see their mothers from different angles, distances, light conditions, etc, so their brains use every possible source of information to avoid errors, and abstracting some properties helps in this job.”

It’s this hypothesised abstracting of some properties that led Kacelnik to believe that there must be more going on with the ducklings beyond their imprinting of sensory inputs such as shapes, colours or sounds.

The ability to differentiate the same from the different has previously been used as means to reveal the brain’s capacity to deal with abstract properties, and has been shown in other birds and mammals, such as parrots, pigeons, bees and monkeys. For the most part, these animals were trained, given guidance on how to determine sameness and differences between objects.

What makes Kacelnik’s ducklings special then, as the research showed, was that they were given no training at all in learning the relations between objects which are the same and object which are different.

“Other animals can be trained to respond to abstract relations such as same or different, but not after a single exposure and without reinforcement,” said Kacelnik.

Along with his fellow researcher Antone Martinho III, Kacelnik hatched and domesticated mallard ducklings and then threw them straight into an experiment. The ducklings were presented pairs of objects – either identical or different in shape or colour – to see whether they could find links and relations between the pairs.

The initial pairs they were presented served as the imprinting ones; it would be the characteristics of these pairs which the ducklings would first learn. The initial pairs involved red cones and red cylinders which the ducklings were left to observe and assimilate into their minds for 25 minutes. They were then exposed to a range of different pairs of objects: red pyramid and red pyramid, red cylinder and red cube.

What Kacelnik and his research partner found was that the ducklings weren’t imprinting the individual features of the objects but the relations between them; it’s why of the 76 ducklings that were experimented with, 68 per cent tended to move towards the new pairs which were identical to the very first pairs they were exposed to.

Put simply, if they initially imprinted an identical pair of objects, they were more likely to favour a second pair of identical objects, but if they initially imprinted a pair of objects that were different, they would favour a second pair of differing objects similar to the first.

The results from the experiment seem to highlight a misunderstanding of the advanced nature of this type of conceptual thought process. As science journalist Ed Yong suggests, there could be, “different levels of abstract concepts, from simple ones that young birds can quickly learn after limited experience, to complex ones that adult birds can cope with”.

Though the research doesn’t in any way assume or point towards intelligence in ducklings to rival that of humans, it seems that the growth in scientific literature on the topic continues to refute the notions that human being as somehow superior. Kacelnik told me: “The last few decades of comparative cognition research have destroyed many claims about human uniqueness and this trend is likely to continue.”