The money in the market that makes you uncomfortable is the money you can truly earn.

In financial markets, the cost of acquiring wealth is often not intelligence, but whether you are willing to bear those risks that make others uncomfortable. You don’t need to be the smartest person; you just need to be the one willing to endure discomfort.

Social media is filled with pursuits of unique indicators and wealth secrets. But frankly, most of the widely displayed strategies have little to do with true advantage. They are more basic, yet because they are too basic, most people overlook them. People don’t understand why they work.

Most people mistakenly believe that trading profits require being smarter than the market. The truth is, you only need to be willing to accept risk premiums. Once you understand this concept, you can see why you make money and build long-term strategies with logic.

What is a risk premium? Before discussing trading, an insurance example can illustrate it. You buy fire insurance for a house worth $200,000, paying $300 annually. The insurance company knows the probability of fire is about five in ten thousand, with an expected payout of about $40. They earn a $260 margin.

The key point is: both sides know this probability. You have no informational disadvantage. You pay to transfer risk. You prefer to pay a certain $300 rather than face the uncertainty of a tiny but possible $200,000 loss. To relieve discomfort, you are willing to pay $260 annually. The insurance company takes on your anxiety and earns a reward for it. This $260 is the risk premium. It stems from the discomfort of bearing risk itself, not from information or skill.

Stock prices rising may be the most primitive form of risk premium. Some believe stocks should return 7-10% annually, as if it’s a physical law. But that’s not true.

The long-term upward trend of stocks is actually a form of compensation. If you buy and hold $SPY, your portfolio might be halved during a crisis or go sideways for ten years. Individual stocks can go bankrupt, recessions and wars happen. Sometimes it feels terrible. That’s exactly why the premium exists.

If holding stocks feels very safe, its return will be similar to short-term government bonds. If $META’s volatility were like bonds, everyone would buy it. But that’s not the case. Despite rising countless times since 2013, it also pulled back 40% last year, and 80% in 2021. Who would accept this risk for a return like risk-free government bonds? No one. Stock investors demand extra compensation for uncertainty. Historically, this has been about 4-6% above the risk-free rate annually.

Interestingly, despite widespread awareness, stock risk premiums have not disappeared. Data spanning over a century, across dozens of countries, through world wars and the Great Depression, proves this. The premium persists because the underlying risks continue to exist. Someone must hold stocks, and those who do hope to be compensated for this discomfort. This is fundamentally different from trading advantage: once discovered, trading advantage can be arbitraged away, but risk does not disappear just because you understand it.

This brings us to $BTC, an interesting case. Since its inception, its price trend has been extraordinarily strong, far exceeding stocks. If you buy and hold throughout, though the drawdowns are severe, the returns are also astonishing. The honest question is: is this risk premium, or something entirely different?

I believe there is no definitive conclusion yet. For stocks, we have over 100 years of data across multiple economic systems. That’s enough to be confident that the premium is structural. But for $BTC, we only have about 15 years of data as a single asset. Moreover, since the COVID-19 pandemic, $BTC has undergone huge changes: capital flows now come from ETFs, and options markets are extremely active.

The long-term upward price trend may be a form of risk premium. Holding something that has crashed 80% multiple times is indeed very uncomfortable. If the asset continues to appreciate, part of its return is likely compensation for enduring such volatility. But it could also be early adopter effects, speculative momentum, or an as-yet-unburst bubble. It’s probably a combination.

The speculative component in crypto markets exceeds that of traditional markets. This isn’t necessarily bad, but it means your future return uncertainty should be higher. Anyone claiming to know that $BTC will return X% annually is extrapolating from very limited data. As for altcoins, most perform poorly and are suitable only for short-term speculation.

Arbitrage premiums exist in both traditional and modern markets. Classic arbitrage trades operate in the forex market. Borrow low-interest currency, invest in high-interest currency, and earn the interest spread. Why is it effective? Because you bear risk. When global risk appetite collapses, high-yield currencies often plummet, while safe-haven currencies appreciate. In days of chaos, you might wipe out all accumulated profits. That stable income is compensation for bearing this occasional extreme reversal.

In futures markets, the same concept is realized through basis trading. When futures prices are above spot, you buy spot and short futures to lock in the spread as profit. This is called cash-and-carry arbitrage.

In traditional markets, these opportunities have been squeezed to nearly zero for retail traders. Hedge funds use 30-50x leverage for treasury basis trades, earning tiny margins only worthwhile at large scale. Major players have cleaned out these markets.

Crypto markets are different—at least for now. Perpetual contract funding rates are basically crypto’s version of arbitrage. When funding is positive, longs pay shorts every 8 hours. So you can go long spot $BTC while shorting perpetual contracts, maintaining market neutrality and earning funding.

Why do positive funding rates persist? Because retail traders want leverage long positions. They are willing to pay for it. Market makers and arbitrageurs stand opposite, providing the liquidity retail needs, and earn the funding rate as compensation. The risk is similar to forex arbitrage. During crashes, funding rates can turn sharply negative, which is when your risk exposure is greatest.

The Bank for International Settlements’ research also points this out: crypto arbitrage strategies can suffer severe drawdowns, with frequent liquidations during volatile periods. Most of the time, you earn small, stable gains, but in a single event, you might wipe out months of profits. This has the same negative skew as selling insurance.

Funding premium still exists, though less obvious and less profitable in large-cap coins than years ago. Altcoins often show extremely high funding rates, especially on platforms outside major centralized exchanges. But this adds another risk—counterparty risk.

If there is a risk premium that is well documented and easy to trade, it’s the volatility risk premium. In $SPY options and most ETFs and stocks, implied volatility is about 85% of the time higher than subsequent realized volatility.

This gap exists because investors systematically pay too much for hedging. Institutions hedge portfolios. Retail investors buy puts when scared. All this demand pushes option prices above fair value. The volatility risk premium is the compensation for selling this insurance.

That’s why selling options is often smarter than buying. Selling straddles, wide spreads, or covered calls. These strategies all harvest the same underlying premium. The problem is the payoff profile: you make steady money most of the time, but suffer large losses during crashes. Selling puts during COVID-19 or the 2008 financial crisis was devastating.

That’s also why I’m less fond of income strategies: they sell options on a basket of stocks and tend to be hurt most during crashes. But overall, this risk profile isn’t a flaw in the strategy; it’s the reason the premium exists. Large, stable income is often wiped out by extreme volatility events. If doing this feels comfortable, everyone would do it, and the premium would vanish.

You can see similar dynamics in skew. On $SPY, the 25-Delta skew is always below zero, meaning implied volatility of out-of-the-money puts is always higher than calls. The volatility smile tilts because everyone wants downside protection. Selling put spreads can harvest this skew premium. The payoff profile is the same: steady income, occasional huge losses.

$SPY spot and volatility are correlated: when prices fall, implied volatility rises. This is due to the common “staircase up, elevator down” pattern: crashes tend to be more violent than slow upward days.

Most risk premiums have a negative skew: small gains most of the time, occasional large shocks. Momentum, however, is different. Assets that have been rising tend to keep rising; those falling tend to keep falling. This trend-following premium is documented in long-term histories of stocks, bonds, commodities, and currencies.

The explanation is mostly behavioral: initial underreaction to news creates persistent trends; or herd effects. Momentum’s interesting feature is its return profile: in choppy, non-trending markets, you lose small amounts; but when a big trend develops, you earn huge gains. It’s positively skewed, a mirror image of volatility selling strategies.

That’s why momentum strategies tend to perform well during crises. When markets crash, trend followers short and trend downward. When volatility sellers are crushed, trend followers often remain unscathed. The bad news is: momentum has weakened over the past decades. More capital chases these signals now. The premium isn’t gone, but its magnitude is lower than historical backtests suggest.

Recent commodity trends perfectly illustrate the expected return profile of such strategies: months or years of sideways movement and small gains, ultimately offset by a big move.

When market positions become extremely skewed, mean reversion often kicks in. This applies to both crypto and traditional markets. In crypto, you can observe this through funding rates and open interest.

When funding is deeply negative, futures prices are far below spot, and everyone is extremely short, it looks terrible. But contrarian long positions tend to be profitable on average. Why is this a risk premium? Because you stand opposite the crowded trade when market uncertainty is highest. Everyone shorting is for a reason: bad news, and buying feels uncomfortable. You’re doing something useful: providing liquidity when no one else wants to, and earning your reward as profit.

The same logic applies to forced liquidation cascades. When longs are liquidated, they sell involuntarily, not voluntarily. This forced selling can push prices below fair value. Intervening with buy orders in that chaos requires conviction and exposes you to real risk. The expected profit from mean reversion is your reward for providing this service.

Similar dynamics exist in traditional markets. Due to storage and financing costs, futures term structures are usually in contango. But occasionally, during supply shortages or panic, they flip into severe backwardation. Spot premiums tend to revert to futures premiums over time, as the latter is the equilibrium state. If you bet on the normalization of extreme spot premiums by going long futures, you’re betting on reversion. History shows this is often effective. But the real risk is: the time in contango can be longer than your solvency horizon. You are compensated for bearing this risk.

The above discussion is at least partly accessible to retail traders. But some risk premiums mainly exist in institutional markets.

Bond term premiums: when you buy a 10-year government bond instead of rolling over 3-month T-bills for ten years, you bear duration risk. The term premium is the extra yield you earn for this. This premium fluctuates greatly, being negative during QE periods and turning positive as interest rate uncertainty rises post-2022.

Credit risk premium: corporate bond yields above similar maturity government bonds compensate for default risk. This premium spikes during crises, providing huge returns to investors who buy then. But the risk is: defaults happen during recessions and stock market declines—precisely when losses are least wanted.

Liquidity premium: less liquid assets tend to offer higher returns because you give up the convenience of quick exit. The challenge: liquidity often dries up when you need it most. The premium is the compensation for this risk.

The key distinction is between risk premium and alpha. Alpha comes from skill or informational advantage—excess returns. Once discovered, it can be copied and diminishes. Limited capacity, temporary.

Risk premium is compensation for bearing systemic risk. Even if widely known, it persists because the underlying demand for risk transfer doesn’t vanish. High capacity, persistent.

Practical test: if your strategy works because you are smarter than others, that’s alpha. If it works because you’re willing to do uncomfortable things others avoid, that’s risk premium. Insurance companies earn risk premiums. Well known, but they still make money. Counting cards in blackjack earns alpha. Once casinos catch on, they ban you.

Most retail traders should focus on understanding which risk premiums they are exposed to, rather than chasing alpha. Premiums are more reliable and less likely to disappear; alpha is highly competitive and very difficult. Recognizing that you might not be smart enough to compete in that space, though uncomfortable, is beneficial in the long run.

This is often overlooked: nearly every risk premium has a negative skew. Frequent small gains, occasional huge losses. This isn’t a design flaw; it’s the reason premiums exist. If harvesting premiums always felt good, everyone would do it, and premiums would vanish. Those occasional huge losses are the threshold that keeps most people out.

Stock risk premium: most years, it makes steady money, then in crashes, it loses 30-50% at once. Volatility risk premium: monthly premiums collected, then wiped out in a week. Arbitrage premium: steady interest spread, then crushed during safe-haven events. Credit risk premium: steady interest income, then default losses during recessions.

Understanding this pattern is crucial for position management. The expected value of premiums may be positive, but you must survive the drawdowns to realize it. Overleveraging can destroy you before the long-term arrives. Diversifying across different skew characteristics helps smooth returns.

For example, combining short volatility with momentum strategies can improve overall return profiles. Building a diversified portfolio of premiums rather than concentrating on a single one is usually wiser. Correlation is critical: if you short $VIX futures for term premium while long 10 different $SPY components, a 5% market drop tomorrow could be disastrous.

Risk premium is earned by doing what others are unwilling to do: holding uncertainty. The stock market’s long rise is because someone must bear the downside risk. Implied volatility above realized volatility exists because someone must sell insurance. Funding rates stay positive because someone must provide leverage exposure.

Persistent market trends exist because when you try to short, others are systematically buying. Extreme positions will revert because when liquidity dries up, someone must step in. Even if widely known, these returns still exist. They are more reliable than alpha.

The cost is in the return profile: you are rewarded for enduring occasional huge losses. Properly size your positions. Diversify across different risk premiums. And accept a fact: premiums exist because sometimes they feel very bad.

You don’t need to be the smartest in the market. Sometimes, just being willing to take on risks that make others uncomfortable is enough.

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