The Kelly Criterion and its use in crypto trading: blessing or curse?

What an invention this Kelly criterion is! As a cryptocurrency trader who has been on this roller coaster for years, I can tell you that this mathematical formula is like that buddy who always wants you to stop drinking: theoretically, he is right, but in practice, sometimes you just want to ignore him.

Created by John L. Kelly Jr. in 1956, this system was born to optimize communications and ended up revolutionizing both casinos and Wall Street. What is its proposal? To calculate exactly what percentage of your money you should bet to maximize your profits without going broke in the process.

The formula is quite simple: f* = (bp - q) / b, where f is how much to invest, p the probability of winning, q the probability of losing, and b the potential gains. But let's be honest, in crypto it's almost impossible to accurately calculate these values when any tweet from Elon Musk can send your investment to the moon or to hell in a matter of minutes.

In theory, the Kelly criterion would help you decide whether to put 20% or 40% of your capital into that shitcoin your buddy recommended. But the volatility of this market makes trying to apply precise mathematics like trying to measure a hurricane with a ruler.

Let's imagine an operation: you think there is a 60% chance that a certain coin will rise, with a potential profit of 2:1. The criterion tells you: invest 40% of your capital. Forty percent! Anyone who has been through a crypto winter knows that this is madness.

The truth is that while the traditional market operates with some logic, the cryptocurrency market responds to factors that no formula can predict: sudden regulatory changes, platform hacks, or simply the collective panic of investors.

I do not deny that the Kelly criterion has advantages: it forces you to be disciplined, to think in probabilistic terms, and to avoid those emotional decisions that are so costly for us. But it can also push you into positions that are too aggressive if you overestimate your chances of success (something we all do).

Unlike the Black-Scholes model that is used to value options, Kelly focuses on the optimal size of your bets. It's as if Black-Scholes tells you how much the boat is worth and Kelly tells you how much you should pay for it.

My advice, after losing and winning amounts that make me sweat just by remembering them: use Kelly as a guide, but apply your own "prudence factor". The crypto market is so unpredictable that even the best mathematicians end up scratching their heads.

In the end, the best strategy combines mathematics with instinct, analysis with humility, and above all, never invest what you cannot afford to lose. The Kelly criterion is a useful tool, but in this digital wild west, no formula replaces common sense.