Assuming you have a capital of $1000, and each investment in Solana can either result in a loss of all capital or a 10x return, should you invest, and if so, what proportion should you invest?
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Table of Contents:
Is it cost-effective to speculate on Solana’s dog?
The “slaughterhouse” where players always lose
Values of the two Kelly formulas:
Interpretation of the formula:
Conclusion
Speculating on dogs seems to be the age-old wealth code in the cryptocurrency circle. It is filled with the most magical stories of getting rich in the cryptocurrency field, and it is also an exclusive track for many who hope to achieve big gains with small investments. From Ethereum to BSC, and now to Solana. On the one hand, the stories of soaring prices have paved the way to financial freedom for a few lucky ones. On the other hand, the majority of investors have lost everything in their desperate attempts to speculate on dogs.
Currently, there is a view that although speculating on dogs in Solana results in more losses than wins, winning once can earn multiple times the investment, making it a high-quality gold mining track. From a scientific investment perspective, is it a reasonable decision to invest in Solana projects? PANews will conduct a comprehensive analysis of this track from the perspectives of practical operation, win rate, and odds using the Kelly formula.
Assuming you have a capital of $1000, and each investment in Solana can either result in a loss of all capital or a 10x return, should you invest, and if so, what proportion should you invest?
Solana has become the most eye-catching public chain currency in this round of market trends. It has experienced a 15-fold increase in the past year, driven by a significant increase in on-chain data. According to data from Defillama, on December 22, 2023, Solana’s highest daily trading volume on the chain reached $2.6 billion, surpassing Ethereum’s highest daily trading volume of $2.5 billion in 2023, making it the most active public chain. The active performance is closely linked to the enthusiasm for speculating on dogs in Solana.
Compared to traditional Ethereum dog speculation, dog trading on Solana has the following characteristics: low gas fees, high trading volume, and fewer token contract vulnerabilities.
Gas fees: The average on-chain transaction fee on Ethereum ranges from a few dollars to tens of dollars. On Solana, the on-chain fees can be so low that they are almost negligible.
Few token contract vulnerabilities: Compared to the various contract vulnerabilities on Ethereum, such as “Piyao Plate,” “High Tax Plate,” and “Siphon Plate,” Solana, due to its mechanism, has almost no other contract vulnerabilities besides token issuance and contract permissions (these two can also be easily found on the on-chain data website).
Lower trial and error costs: The token price of Solana’s mainnet token SOL is much lower than Ethereum, which makes it more accessible for players looking for golden dogs on Solana. Many players invest around $10 by buying 0.1 SOL, an amount that is often not enough to pay for a single transaction fee on Ethereum.
These conditions make dog speculation on Solana appear to be a great opportunity to take a chance and turn a bicycle into a motorcycle. But is it really so?
Players familiar with dog speculation know that it is almost a game of luck, more akin to gambling or lottery than investment. If dog speculation is regarded as a gambling game, the Kelly formula is a mathematical formula that measures whether this game should be participated in and what proportion of funds should be invested each time.
The Kelly Criterion is a mathematical formula used to optimize capital management in investment and gambling. Its core idea is how to allocate funds when facing bets with positive expected values to maximize long-term growth rates. The Kelly Criterion was proposed by John Kelly in 1956 and was initially used to solve information transmission problems on telephone lines. Later, it was proven to be very effective in the gambling and investment fields.
The basic form of the formula is:
F: The proportion of capital to invest
B: Odds (investing $1 can earn $10, so the odds are 9)
P: Win rate (out of 100 investments, winning 3 times, so the win rate is 3%)
Q: Loss rate (q=1-p)
Through this formula, the capital allocation to be used in each investment or bet can be calculated in order to maximize long-term capital growth. An important feature of the Kelly Criterion is that it considers the balance between risk and return, helping to avoid high-risk situations caused by over-investment.
Let’s calculate how much proportion of funds should be invested in dog trading on Ethereum and Solana based on the Kelly Criterion.
We extract data from the past 24 hours for calculation. Within this sample period, there were 1743 new dog projects launched on Solana, while the average on Ethereum is currently around 213.
Here, we set a condition for potential golden dogs. There are more than 100 holders, and the price has increased more than 10 times in the past 24 hours.
Under this condition, the number of potential golden dogs on Ethereum in the past 24 hours is 7, while the number on Solana is 28.
Assuming we have a capital of $1000, and our standard for winning is to buy a dog and obtain a 10x increase. The odds are 10. The win rate for Ethereum is 7/213 = 3.28%. The win rate for Solana is 1.6%.
For Ethereum:
For Solana:
Based on the data, we can see that the Kelly formula value for Ethereum is -0.06, and for Solana, it is -0.08. When the calculated value of the Kelly formula is negative, it means that the expected return on investment or bet is negative based on the given odds and win rate. In other words, it is an investment or bet with expected losses. In this case, the Kelly formula is actually telling us not to make this investment or bet.
As a professional dog speculator, if you can monitor the market continuously for 24 hours, buy into a project as soon as it is launched, and sell when the market price increases by 10 times, how much capital should you invest in dog trading? According to the calculation of the Kelly formula, the answer is not to participate in this game at all, as it will only result in the loss of your capital in the long run.
This is because the game of dog speculation may seem to have high odds (often seeing people sharing returns of 10 times or more), but it overlooks the survivorship bias. Ordinary players face several difficulties in winning this game: firstly, they cannot buy into every project at the opening time; secondly, few players can truly withstand the volatility and fully capture a 10x increase; thirdly, it is difficult to increase the win rate to above 10%. Therefore, from a mathematical perspective, even though there are many advantages of dog speculation on Solana compared to Ethereum, it is still a “slaughterhouse” where players always lose.
Of course, the Kelly formula is only a recommendation for rational investment proportions. If calculated based on a 10x odds and if you can maintain an investment win rate of over 10%, then it is worth considering whether to participate in this game.
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