5 Mental Models to Navigate the Crypto World
Use these models to maximise returns and avoid pitfalls in crypto
Hello there! 👋🏻
The crypto world is full of obstacles, scams, and disappointments.
Without "mental models" to operate and make rational decisions, you'll end up making emotional decisions like 99% of people.
Luckily, here are 5 actionable mental models for navigating crypto:
1) Circle of Competence 🧠
The Circle of Competence mental model involves focusing on areas where you have the most knowledge and expertise.
This means understanding and investing in companies, narratives, or criptocurrencies that you deeply understand, while avoiding areas outside your expertise.
This approach helps you to make more informed and confident decisions, reducing the risk of mistakes due to unfamiliarity
2) Finite vs. Infinite Games 🎲
👉🏻 Finite Games:
Played with the purpose of winning.
Participants obey clear rules.
Have limits and end with winners and losers.
Example: Sports.
👉🏻 Infinite Games:
Played with the purpose of continuing the game.
Participants can change the rules.
No definition of winning or time limits.
Crypto is an infinite game.
The only "winning" is staying in the space and not going broke.
3) Metcalfe's Law 🕸️
This law states that the value of a network is proportional to the square of the number of users connected to it.
As more users join a network, its value grows exponentially due to the increase in possible interactions between users.
When evaluating cryptocurrencies:
Community
Hype
Interaction
Are often more important than other metrics because of this law.
4) Pareto Principle (80/20) ⚖️
This principle states that, in most cases, 80% of results come from just 20% of efforts.
Therefore, according to this rule:
Focus on the 20% of investments that generate 80% of your returns, rather than over-diversifying.
We are not an investment fund with unlimited time and money.
5) Confirmation Bias ✅
Confirmation bias is the tendency to interpret situations in a way that aligns with our existing beliefs, rejecting anything that contradicts them.
To combat this bias in crypto:
Humility: Acknowledge that you're not Warren Buffet and don't have all the answers.
Avoid Attachment: Don’t fall in love with a single cryptocurrency. Recognise the pros and cons of each.
Data-Driven Decisions: Learn to use objective data to make informed and effective decisions.
I hope these models help you make better decisions and enjoy the crypto journey!
Any questions, I'm here. Have a great week!
Until next time! 👋🏻