Upside vs. Downside

A Brief Education About Risk


Typically when most people think of risk they utter this all-too familiar phrase: "High risk, high reward. Low risk, low reward."

That is a very false statement.

Risk is subjective. Boom. Yep I know. Myth = busted. Because risk is subjective, what may be high risk for one person is not high risk for someone else. Therefore, this is a very poor way of analyzing risk and forecasting potential rewards. Per example:

$10,000 is a lot of money to somebody who's entire life savings is only $10,000.

While $10,000 isn't very much money at all to someone who makes $1,000 a day.

So if you were to ask either of these people to invest $10,000 in bitcoin, the first person would say that it would be a high risk/high reward investment. Whereas the other person might see a $10,000 investment in bitcoin as a very low risk investment with high reward potential.


How Should We Look At Risk?

Risk should never be looked at through the subjective lens of high risk/high reward or low risk/low reward. It should always be looked at from an objective point of view and the focus should be on the facts and the hard figures of the equation.

This can be done by looking at risk in terms of downside potential vs. upside potential.

A $10K investment in bitcoin has a finite downside (unless you're an idiot) of $10K. Boom. Simple. That is a hard fact based on the numbers.

The upside potential of bitcoin is (essentially) infinite. It might never go passed $20K again, but it could also go to $300K or even higher than that.

So the downside vs. upside equation in this example is a fixed $10K potential downside with an infinite upside potential.

Now of course reality needs to be taken into consideration when looking at things like this, because the odds are that investing $10K in your uncle's microbrewery most likely won't have an infinite upside potential. But with that being said, the downside potential is fixed in stone. Unless of course you factor in different variables that would just be unnecessary page filler for this article so we ain't gone go there.

Infinite Kitty.



So after everything is said and done, it isn't very wise to think of things in terms of high risk/high reward or low risk/low reward; because risk is subjective and it means different things for different people. But solid numbers mean the same to everybody. Unless you're from that one country where the number 7 is actually in place of the number 8 and in that case you're probably fucked.

The best way to look at risk is through the objective lens of downside vs. upside. Downside meaning how much you might lose if everything went sour, and upside of course referring to how much you might gain if everything goes sweet.






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Professional artist. Part-time cryptocurrency trader. Semi-retired napper.

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