Risk of ruin as it applies to the meme coin gambler.
Risk of Ruin is the likelihood that you will lose your entire bankroll while trading meme coins.
What numbers are important for calculating our risk of ruin:
-Your win rate
-Your average win per winning trade
-Your average loss per losing trade
-Bankroll size
-Variance (This is basically the randomness of your results, like a luck factor)
For win rate numbers you can simply pull up your results from a number of websites and search your wallet.
For a low volume trader (say you only have made a few trades) your win rate will be significantly less reliable than a high volume trader (many trades).
With how fast the meme coin market changes I think it’s better to use a more recent win rate like past 30 days or past 3 months.
Many people who were killing it during mania phases, are getting cleaned out now, or just winning less.
Check out the math in the graphic I put together. You don’t need to hand crunch this, but you should know how the sausage is made.
B is your bankroll.
E is your expected value per trade.
V is your variance.
exp is the exponential function
I’ve grinded my bankroll up pretty high and maintained a high win rate so calculating my risk of ruin is not as interesting (virtually zero chance)
But let’s use an example of an up and coming “trencher” named Tommy with a small port, and a so-so win rate to gamble with.
Let’s say Tommy the Trencher has 30 SOL to gamble with.
His win rate is 30%.
Average win is 5 SOL.
Average loss is 2 SOL.
What’s his risk of ruin?
Remember you don’t need to hand crunch out the math. You can just feed your inputs to ChatGPT or similar AI for a calculation.
When calculated out Tommy’s risk of ruin is 55.8%.
55.8% chance that Tommy goes dead broke!
This stuff is important if you are going to try to do this professionally, especially as the game gets harder and the players get tougher.
You need to be realistic.
If you are a casual gambler and you like to splash around discretionary income it does not matter as much.
Many people have hit one crazy meme trade and slowly given it all back.
It’s because of math. Over a large enough sample you can’t run from it.
Respect and acknowledge your own luck.
You might be on borrowed time and you don’t even know it.
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