The Online Investing AI Blog

Bitcoin has had an interesting history. Launched in 2009, it was revolutionary in combining cryptography with money. Perhaps the motivation for this idea was to create a system that distributes financial resources to those who have computing power.

Image courtesy of BitcoinCharts.com

We may never know the motivations behing Bitcoin. The mysterious creator, Satoshi Nakamoto, cut off communication in 2011. The name appears to be a pseudonym and he has never been identified. It has been theorized that he is not even a single person, but a group of people who have opted for anonymity. If this is the the case, they have succeeded.

Has Bitcoin revolutionized the way that humans use money?

Consider the following 4 phases of money:

1. Barter
2. Money
3. Fiat Currency
4. Cryptocurrency

The first phase of human exchange predates the first villages. It was simply the exchange of x amount of one good for y amount of another good. For example, “I’ll give you 3 apples for 2 pears”. Although this worked, it was cumbersome because there was no simple way to value a given good.

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Don’t blame the media. Don’t blame the government. Blame Darwin and the occasional saber-toothed tiger.

We are surrounded by bad news because of evolution. Our brains developed to deal with an overwhelming amount of stimuli, mostly in the forms of threats to our safety and acquiring food and shelter. We watched for bears and worried about our next meal. Good news, quite frankly, wasn’t important.

This affects us today. When you’re on the freeway, do you stop and gawk at the motorist who successfully exits the highway? Or, do we slow down and gawk at the car accident at the side of the road? The media promotes the unusual and trends that threaten us before it shows us the common and trends that benefit us, even though, as we’ll see, there are far more opportunities than threats out there.

I believe this gives us a distorted picture of the world — and, in fact, may keep us mired down psychologically. We focus on the bad and ignore the good. (Although, to play my own devil’s advocate, it may also keep us from being complacent.)

Anyway. This week, I’m passing on links to prove my point.

Good things are happening, even if you believe your life, your world, and your reality sucks.

From Reuters, data indicate growing economic momentum.

There’s good news about job growth on Yahoo News.

Global poverty is shrinking — Pro Bono News.

From working in a sweatshop to being a billionaire, on the Good News Network.

Leukemia cure in one study — may just be the beginning, according to story at ABC News.

Quantum computing researchers are making impressive discoveries, according to one of the companies on the forefront of this new industry.

Exoskeletons can increase worker productivity. That’s from Next Big Future.

3D Printing? Yeah, that’s coming to, says the Wall Street Journal.

And lots more…

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It has been quite interesting to watch Bitcoin as it has gone through one bubble, and consistently risen since. Many people thought that Bitcoin was finished after its stratospheric rise in 2011, and it’s subsequent collapse to $3. Can Bitcoin survive such a massive devaluation?

Image courtesy Bitcoin Charts

Recently Bitcoin has achieved quite a bit of attention, because of WordPress.com announcing that they will accept payment in Bitcoin. More recently, Reddit has decided to accept Bitcoin. The more interesting (and perhaps) exciting development is that you can now buy pizza with bitcoins.

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There’s been a conversation about how people become wealthy on a few blogs the last couple of days..

A guest post on Financial Samurai offers an untraditional roadmap to financial success. This is a response to a previous post on making a six-figure salary.

There is no one true path to building wealth. There are a lot. You can earn it. You can invest it. You can win it. Someone can give it to you.

There seems to be no consensus on who gets rich, either. The rich get richer, they say. But do the poor become richer? Do the smart become richer? Do the religious become richer? Do the well-educated become rich? Do the pretty become rich?

What I would like to do is pull in the scientists and see what they have to say about the rich — how they became rich and, maybe, how you can become wealthy, too.

You don’t have to be smart to be rich. According to a study in the journal of Intelligence, there’s no correlation between IQ and how much money you have.

But, you should have a high SAT score, according to this study.

But, you should still have been popular in high school. Popular kids tend to earn more later. *My two cents: Now, they just need to have a study on how to be popular AND be a nerdy, high-SAT student.

Owners of electric vehicles are richer (and smarter), according to this US News story. *My two cents: It may mean that the rich can withstand the economic impact of what are currently inefficient vehicles.

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You should all be ashamed of yourselves — you and your “level playing field” exhortations.

The rich and their children are hopelessly outmatched in so many ways by working- and middle-class folks that it’s not even fair.

OK, so maybe the rich do have certain advantages. They can send their kids to great schools. When they compound their money, a little is a ginormous sums. They can network and hobknob with contacts that can open up new opportunities.

But…

For the non-rich investor or entrepreneur, making money may actually be easier than the rich.

The Rich Are Lazy
Rich people become comfortable and their interests move toward other activities. They, essentially, become lazy and pampered. That’s a very noncompetitive stance.

The Rich Are Stupid
Stupid is a mean word. Uninformed? Yeah. That sounds better. But, despite the access to the finest institutions of higher learning, the rich are saddled with “Yes-sir-or-ma’am” thinking. They surround themselves with people who always agree with them — and that cuts them off from learning valuable lessons, both practical and academic. You’ll notice that the rich who make their money in one economic condition, rarely lead the next.

The Rich Have Lazy Money
The rich pass on money to their managers and handlers. Their managers may or may not have their best interest in mind and, so, can make mistakes or poor investments with the money.

The Rich Are Attached
Rich people are terribly loathe to give all the good things they have up (“loathe” — that’s what rich people do instead of  ”hate.”) Since they become attach, they fail to move out of bad opportunities and are slow to seize good opportunities.

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Bitcoin is the first and most popular crypto-currency. It has some very interesting characteristics that make it similar to a commodity and a fiat currency. It even has had a history of a typical bubble.

Image courtesy Bitcoin Charts

As you can see from the chart above, Bitcoin has undergone a typical bubble. Does that mean that Bitcoin is dead? I don’t think so. It has stabilized since November 2011. In addition, there are thousands of companies that accept Bitcoin as payment has been growing steadily. (Apparently the site is having an issue with its SSL certificate, so you may get a warning).

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Each day, machines, not humans, are plowing through statistics and crunching numbers trying to devise trading algorithms to make money in stock markets, futures markets, commodities markets, and any other place that traders can turn a dime.

They’ve been successful.

But not totally successful. And not successful for long stretches.

The stories of trading strategies failing are just as common as stories of amazing machine-learning success in the market.

Why is that?

I’ll take a stab. I believe that most machine learning and artificial intelligence programs are essentially created short-sighted. To build an automated trading system, you “train” the program to understand data. This data can be technical or fundamental, or a range of other data sets. The program learns the relationships between the data and the market. When factor x goes up, the market reacts with a y, let’s say.

But, this data is not an object, per se, but is really a shadow of currents in a broader economy. So, the program ends up not be predictive at all. It is reacting to a reactive set of data.

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Well… The rich just keep getting richer.

According to recent statistics, the wealthier members of society are making more money faster than the rest of us.

And that’s bad. Or is it?

It should come as no surprise that the wealthy get rich faster.

They have access to wealth-building opportunities that we don’t, like venture capital. These are high risk, but really high reward investments. While you and I are earning single-percentage returns — if we’re lucky, rich folks can make double, triple their initial investments. That’s just the beginning.

Rich folks also get a chance to connect with other rich folks. That increases the chances they’ll be able to connect with more money-making opportunities.

For those who are not happy with rich people — the one percenters — this is more than enough reason to shout about the injustice of the system. But, this fails to take in account some some important points.

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Recently I discovered Bountify, a new way to outsource small development tasks. It’s like Stack Overflow meets Guru.com. It’s useful because there are times when you want a complete solution to a small problem, and don’t have the skills or time to do it yourself. The model is similar to Fiverr, but you can pay up to $250 per task.

There are several things that are interesting about Bountify. It was created in Ruby on Rails by a single developer. This shows the leverage that Rails delivers to the programmer. What used to take several people months to do can now be done in 2 weeks by a single person.

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Here’s the thought experiment: You come home on Friday evening after a hard week at the office, do you…

1. Immediately order a pizza and pig out.

2. Have that pizza on Sunday evening after a few days rest.

Most people go right to number 1.

According to a guest post by Professor Dan Ariely on Tim Ferris’ blog, this is called ego depletion. Basically, there’s a connection between exhaustion and consumption. In this case, when you’re exhausted — a state called “ego depletion” — you tend to be more drawn to bad food choices, like junk food.

“I’ve always suspected that we start each day with a limited number of decision-making points that, once depleted, leave us cognitively impaired. This is part of the reason that automating minutiae, adopting rituals, and applying creativity only where it’s most valuable (e.g. not deciding what to eat for breakfast) is so important to me.”

Ego Depletion and Personal Finance

I’m wondering whether this doesn’t work for bad personal financial decisions. One of the reasons that I’m interested in automated trading is because there are human weaknesses — like ego depletion — that can interfere with trading, investing, and spending.

So, let’s explore how ego depletion may affect your personal financial situation.

Check out this scenario.

You’ve been trading all week long. You’ve been trying to maintain your discipline and set strict stop loss rules. But things are turning south by the end of the week. You see a pretty risky trade brewing.

Do you:

1.) Cut your losses and re-charge your batteries.

2.) Take a stab at turning a quick win before the week ends.

I’m suggesting that most would take that trade.

Here’s another scenario we probably all can relate to.

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