Warren Buffett & Charlie Munger used mental models as an edge to become the greatest investors in history.
There are hundreds of mental models.
I found 14 that will help you become a better Crypto Investor:
(including common investing traps)
There are hundreds of mental models.
I found 14 that will help you become a better Crypto Investor:
(including common investing traps)
What is a Mental Model?
Mental models are concepts to help us better understand the world.
Your thinking is limited by your own experiences & biases - Mental models are a way to gain wisdom from entire fields.
Understanding them will help you think clearer.
Mental models are concepts to help us better understand the world.
Your thinking is limited by your own experiences & biases - Mental models are a way to gain wisdom from entire fields.
Understanding them will help you think clearer.
/1 Cockroach Theory
When there's bad news, there might be many more negative events that are coming.
Seeing one cockroach means that there's more hiding.
If a company shares bad news, remember that they're often hiding more bad things to buy time.
(Like Celsius did)
When there's bad news, there might be many more negative events that are coming.
Seeing one cockroach means that there's more hiding.
If a company shares bad news, remember that they're often hiding more bad things to buy time.
(Like Celsius did)
We knew it was bad when Terra Luna and $UST collapsed.
Many people underestimated how far the contagion would spread.
Other roaches like Celsius and Three Arrows Capital emerged.
Whenever there's bad news, brace yourself for more.
Many people underestimated how far the contagion would spread.
Other roaches like Celsius and Three Arrows Capital emerged.
Whenever there's bad news, brace yourself for more.
/2 Three Men Make a Tiger
A Chinese proverb about the tendency to accept absurd information as long as it is repeated enough times by enough people.
Imagine if there are rumors of a Tiger:
1 person: He's a liar
2 people: Is this true?
3 people: There's a Tiger!
A Chinese proverb about the tendency to accept absurd information as long as it is repeated enough times by enough people.
Imagine if there are rumors of a Tiger:
1 person: He's a liar
2 people: Is this true?
3 people: There's a Tiger!
Now instead of 3 people, imagine if it's thousands of people sharing across social media.
Now you add in bot traffic and financial incentives, it's easier than ever to spread misinformation.
Be cautious of rumors without any facts or evidence.
Now you add in bot traffic and financial incentives, it's easier than ever to spread misinformation.
Be cautious of rumors without any facts or evidence.
/3 Behavioral Inevitability
Human behavior and its biases will always remain.
"History never repeats itself; man always does." - Voltaire
It's interesting to see how some books that were written thousands of years ago can feel so relevant today.
(Meditations by Aurelius)
Human behavior and its biases will always remain.
"History never repeats itself; man always does." - Voltaire
It's interesting to see how some books that were written thousands of years ago can feel so relevant today.
(Meditations by Aurelius)
I'm applying this thinking to the next cycle.
Humans are greedy.
• Will there be more real-world adoption? Yes.
• Will there be better technology next cycle? Yes.
But will there also be ponzinomics and cult leaders again? Yes.
Humans are greedy.
• Will there be more real-world adoption? Yes.
• Will there be better technology next cycle? Yes.
But will there also be ponzinomics and cult leaders again? Yes.
/4 Acton’s Law
"Power tends to corrupt, and absolute power corrupts absolutely."
We saw so many main characters in this cycle get destroyed.
Daniele, Andre, Do Kwon, Su Zhu, etc.
Be wary of powerful figures- most people can't handle the power & will abuse it.
"Power tends to corrupt, and absolute power corrupts absolutely."
We saw so many main characters in this cycle get destroyed.
Daniele, Andre, Do Kwon, Su Zhu, etc.
Be wary of powerful figures- most people can't handle the power & will abuse it.
/5 Brandolini’s Law
The bullshit asymmetry principle.
The amount of energy needed to refute bullshit is an order of magnitude larger than to produce it.
The bullshit asymmetry principle.
The amount of energy needed to refute bullshit is an order of magnitude larger than to produce it.
Compare
• Write a thread on Luna / Anchor = thousands of likes.
• Write a thread critical of Luna / Anchor = enemies and harassment.
Same with those Node projects.
Every cycle, there will always be cult projects because it takes too much energy to fight them.
• Write a thread on Luna / Anchor = thousands of likes.
• Write a thread critical of Luna / Anchor = enemies and harassment.
Same with those Node projects.
Every cycle, there will always be cult projects because it takes too much energy to fight them.
/6 Unknown Unknowns (Black Swans)
Known Unknowns - Risks you are aware of, such as smart contract exploits.
Unknown Unknowns - Risks that are so unimaginable that you couldn't have seen them coming
Examples include the 9/11 attack, pandemic, or 3AC Collapse.
Known Unknowns - Risks you are aware of, such as smart contract exploits.
Unknown Unknowns - Risks that are so unimaginable that you couldn't have seen them coming
Examples include the 9/11 attack, pandemic, or 3AC Collapse.
We tend to underestimate the impact of Black Swans.
Diversification helps protect against these events (that means diversifying OUTSIDE of crypto too).
And imagine rare events happening & their impact:
• Satoshi's wallet wakes up
• China invades Taiwan
• Nuclear strike
Diversification helps protect against these events (that means diversifying OUTSIDE of crypto too).
And imagine rare events happening & their impact:
• Satoshi's wallet wakes up
• China invades Taiwan
• Nuclear strike
/7 Pareto Principle
The Pareto Principle states that 80% of consequences come from 20% of the causes.
It was developed by Vilfredo Pareto who showed that approximately 80% of the land in Italy was owned by 20% of the population.
The Pareto Principle states that 80% of consequences come from 20% of the causes.
It was developed by Vilfredo Pareto who showed that approximately 80% of the land in Italy was owned by 20% of the population.
This applies everywhere.
• 80% of the revenue generated comes from 20% of protocols.
• 80% of the profit generated across all traders is from 20% of traders.
• 80% of the revenue generated comes from 20% of protocols.
• 80% of the profit generated across all traders is from 20% of traders.
/8 Network Effects
A product becomes more valuable as more users join it.
Think about how valuable Facebook would be if no one used it.
It'd be even more useless than it is now!
Once a company has network effects, it becomes an economic moat and hard for companies to beat.
A product becomes more valuable as more users join it.
Think about how valuable Facebook would be if no one used it.
It'd be even more useless than it is now!
Once a company has network effects, it becomes an economic moat and hard for companies to beat.
When you're investing, consider which protocols are positioning themselves to gain network effects.
For example, there are quite a few people trying to build a decentralized social network.
Only one can win because of network effects.
For example, there are quite a few people trying to build a decentralized social network.
Only one can win because of network effects.
/9 Lindy Effect
The longer it has lasted, the likelihood it will continue to last.
It's hard to say which coins will be around 20 years from now, but there's a strong probability that BTC and Ethereum will be around.
So they're the safest bet as investments.
The longer it has lasted, the likelihood it will continue to last.
It's hard to say which coins will be around 20 years from now, but there's a strong probability that BTC and Ethereum will be around.
So they're the safest bet as investments.
Lindy Protocols.
I've lost track of how much money has been lost due to DeFi hacks and exploits.
So if you're collateralizing assets, it makes sense to go with more Lindy ones such as Aave and MakerDao.
If they were hackable, it would've happened already.
I've lost track of how much money has been lost due to DeFi hacks and exploits.
So if you're collateralizing assets, it makes sense to go with more Lindy ones such as Aave and MakerDao.
If they were hackable, it would've happened already.
/10 Self-Preservation
Pain and fear are integral parts of all living organisms, and self-preservation is the behavior that ensures their survival.
I don't believe in the concept of 3,3 or "HODL."
People will always put themselves 1st when the going gets tough.
Pain and fear are integral parts of all living organisms, and self-preservation is the behavior that ensures their survival.
I don't believe in the concept of 3,3 or "HODL."
People will always put themselves 1st when the going gets tough.
/11 Control the Center
A phrase from Chess - it means to control a valuable space or resources.
• The Streaming companies are fighting for content.
• The world fights for oil and scarce resources.
Identify valuable resources and the players fighting for them.
A phrase from Chess - it means to control a valuable space or resources.
• The Streaming companies are fighting for content.
• The world fights for oil and scarce resources.
Identify valuable resources and the players fighting for them.
We saw this play out in the Curve wars.
Stablecoin liquidity is a valuable resource, and we saw protocols battle it out for CRV / CVX tokens.
What will be a valuable resource in the future that protocols will fight for?
Stablecoin liquidity is a valuable resource, and we saw protocols battle it out for CRV / CVX tokens.
What will be a valuable resource in the future that protocols will fight for?
/12 2nd Order Effects
Every action has a consequence.
Those consequences have consequences.
Most people think about the immediate impact and can't see the additional impacts.
When something happens, think
"and then what?"
Every action has a consequence.
Those consequences have consequences.
Most people think about the immediate impact and can't see the additional impacts.
When something happens, think
"and then what?"
I'm always thinking about this whenever Protocols make changes to token designs.
Here's an example:
A protocol wants lower token emissions to slow inflation.
What are the possible 2nd order effects?
Here's an example:
A protocol wants lower token emissions to slow inflation.
What are the possible 2nd order effects?
• Lower emissions mean lower APR
• Lower APR means less usage and liquidity (because there's less reward incentives)
People will leave unless there's enough utility or other incentives by the protocol.
• Lower APR means less usage and liquidity (because there's less reward incentives)
People will leave unless there's enough utility or other incentives by the protocol.
Think about decisions and frame them in various timelines.
Let's say I eat a Cheeseburger
• Immediate (Yummmy!)
• A week (Gained a little weight)
• A year (The habit has increased my cholesterol)
• Decades (Heart attack)
We suck at thinking long-term.
Let's say I eat a Cheeseburger
• Immediate (Yummmy!)
• A week (Gained a little weight)
• A year (The habit has increased my cholesterol)
• Decades (Heart attack)
We suck at thinking long-term.
/13 Surfing
You're riding a wave with momentum.
In this context, it means to identify and take advantage of a trend early.
• Amazon caught the internet wave early.
• Netflix started as Mail Order DVD. They switched to streaming because they saw the wave coming.
You're riding a wave with momentum.
In this context, it means to identify and take advantage of a trend early.
• Amazon caught the internet wave early.
• Netflix started as Mail Order DVD. They switched to streaming because they saw the wave coming.
You need to identify trends early, ride them as hard as possible, and GET OFF before it stops.
In Crypto:
• Find a Trend early (Spot the wave)
• Invest in it (Ride the wave)
• Take profits along the way. (Get off the wave before it crashes)
In Crypto:
• Find a Trend early (Spot the wave)
• Invest in it (Ride the wave)
• Take profits along the way. (Get off the wave before it crashes)
/14 First & Last Mover Advantage
There could be advantages from a protocol being first to a market.
Either through brand recognition, switching costs, or early purchase of resources.
There's also Last Mover Advantage
They enter later but can improve upon the tech.
There could be advantages from a protocol being first to a market.
Either through brand recognition, switching costs, or early purchase of resources.
There's also Last Mover Advantage
They enter later but can improve upon the tech.
I saw this happening with the Layer 1 Rotation game.
It felt like every few months there was a hot new Layer 1.
And the FIRST DEXs or lending platforms would have significant first mover advantages.
It felt like every few months there was a hot new Layer 1.
And the FIRST DEXs or lending platforms would have significant first mover advantages.
This is a tiny sample of all the various mental models out there.
I encourage you to study more mental models from the past.
And I believe there will be new mental models created from just the Crypto industry.
I encourage you to study more mental models from the past.
And I believe there will be new mental models created from just the Crypto industry.
If you enjoyed this thread and want to go deeper in the rabbit hole, check out a thread I wrote on cognitive biases
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TheDeFiEdge.com
1) I'd love if you could help spread the word by retweeting the original tweet up top
2) Make sure you subscribe to my free weekly newsletters where I share exclusive content.
TheDeFiEdge.com
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