The Quantum Mechanics of Crypto and Equity Trading
Crypto price action and quantum mechanics are more similar than you might think.
- Quantum physics and stock trading might seem unrelated at first glance, but some intriguing similarities can be drawn between the two.
- What lessons can crypto and equity traders learn from quantum mechanics?
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Quantum physics, or quantum mechanics, is a scientific theory that explains how the universe works on a subatomic level. Rather than being deterministic and calculatable, the subatomic world is probabilistic and indeterminate.
Quantum mechanics governs things like electrons and photons (particles of light). These tiny building blocks of our universe behave much differently than the molecules we’re made of. For example, electrons can be in two places at once. The fact is that there is no reality — as we know it — at the quantum level. Only probabilities exist.
Let’s take a look at how the principles of quantum mechanics can be analogous to crypto and stock market price action.
Uncertainty and Probability
Quantum mechanics introduced the concept of uncertainty. For example, if you see a photo of a ball on a pool table, you can see where it is now, but you can’t see where it’s heading. And if you’re watching a video of a pool ball moving across the table, you can’t determine its exact location because, by the time you do, it’s moved on.
Similarly, crypto trading involves a high degree of uncertainty due to the multitude of unpredictable factors influencing prices. For example, if you know the price alone, you can’t tell its direction. And if you know what direction it’s headed, then the price is a moving target. In both cases, statistical models — technical indicators for traders — are used to make informed price projections.
Superposition and Markets
In quantum mechanics, the principle of superposition states that a particle can exist in multiple states simultaneously until observed.
In crypto trading, you have potentially millions of traders actively making buy and sell decisions. The actual price action can’t be determined until all decisions are made — which is, of course, an ongoing, neverending process. Moreover, some of these decisions won’t be triggered until future events unfold — like options and futures, for example.
Entanglement and Interconnectedness
Quantum entanglement describes a phenomenon where two particles become correlated to the extent that the state of one particle instantly influences the state of the other, regardless of distance. (Don’t ask me how it works.)
In all asset trading, from crypto to real estate, the global financial markets are highly interconnected. An event in one market or sector can quickly impact or expose others, showcasing a form of “financial entanglement” where actions in one area have ripple effects elsewhere.
Wave-Particle Duality and Market Behavior
Quantum particles can exhibit both wave-like and particle-like behaviors. Light, for example, is made up of discreet particles called photons. However, when they are on the move, photons look more like waves until they land somewhere.
Markets are made up of spot prices, but they are also made up of price action like moving averages and momentum. This duality “collapses” as each buy and sell decision is made.
Observer Effect and Investor Influence
In quantum mechanics, it’s been proven that observing a quantum system can alter its behavior. For example, photons act like waves until we observe them, then they act like particles.
In trading, actually making a trade affects the price action. While small traders don’t affect the price by much, institutional investments in a single stock can move entire markets. (For example, yesterday, Nvidia [NVDA] posted unexpected profits, and the entire tech market went up.)
Unpredictability and Black Swan Events
Quantum unpredictability challenges the deterministic worldview. For example, an electron can spontaneously jump from one position in space to another. This is called quantum tunneling. The effect is extremely rare, but it can have real-world effects.
Similarly, markets can be influenced by unexpected, rare, and extreme “black swan” events, which can disrupt traditional models and assumptions.
The takeaway from this comparison of quantum mechanics and crypto and equity investing is that no one can predict future price action. We can only come up with probabilities.
Today in the news, I saw just as many articles saying that the bitcoin price will skyrocket as articles saying the price will plummet.
The moment you think you know precisely where a photon is, it’s no longer there. You’re wrong. Similarly, when analysts make price predictions, they are never 100% correct.
The lesson here is this: Successful traders don’t trade based on analysts’ predictions. They trade in a dynamic market by observing technical indicators (moving averages, RSI, MACD, Bollinger bands, etc.) to determine where the price is probably heading and then respond (buy or sell) in real time. Just remember, most predictions are wrong. Be wary.
It’s important to note that these similarities are more metaphorical and conceptual than directly applicable scientific principles. The analogies between the two fields can provide interesting insights and perspectives, but they should be understood as creative comparisons rather than scientifically rigorous connections.