The Mental Models You Need to Survive in the Crypto Wilds
Every time cryptocurrencies get more attention, we get a lot of requests from friends, family and even random people on how to invest in cryptocurrencies. But for beginners, this space can be intimidating. In many ways, cryptocurrencies are still far west. So, frankly, I made a lot of mistakes and it cost me a lot. If I can save you, it will be a mission accomplished for me.
In this post, I’ll share five heuristics I wish I’d known sooner in my cryptocurrency journey. Heuristics are mental models that allow us to judge situations and make decisions quickly in the face of uncertainty. They are never iron-printed truths. Treat them with a pinch of salt. However, they help ease the decision-making process and protect you from ruin.
What are the 5 principles you should adopt to navigate the crypto market?
1. Crypto is Ponzi
Yes I know, it’s a little rough. But actually William O’NealOne of the greatest investors of all time, he had the same principles when he was trading stocks.
“My philosophy is that all stocks are bad. No stock is good unless it goes up. If instead it goes down, you need to cut your losses quickly.”—William O’Neill
It is by no means a universal truth. There are so many incredible projects out there and I am one of her biggest fans in the blockchain community. But let’s be honest, the majority of so-called altcoins are still pretty fraudulent.
Since 2016, only 3 of the top 10 coins are still in the top 10, and only BTC and ETH have seen meaningful adoption and use for non-speculative purposes.
It is important to treat this asset class with caution if you want to be successful. If you can’t maintain a critical view, you can even pay out of your pocket.
This is why I believe that employing this heuristic will help us remain emotionally neutral, distinguish between noise and signal, and reap benefits when the time comes.
The next principle explores this idea a little further.
2. Never go bankrupt for profit
In a bull market, everyone can make huge profits. But since they’re on paper, no one really notices because no one has sold the assets. But when mean reversion happens and prices go down, most people never sell. They never sell, so their profits stay on paper. This behavior is as old as the market, and Jesse Livermore explains it perfectly in his book.Memories of a securities companyBy Edwin Lefebvre.
“The big bucks in the boom times are always first made on paper by the masses. And it stays on paper.” — Jesse Livermore
You don’t want to end up in a situation like this.
When to buy is always more exciting than when to sell. But it’s the latter that makes the difference. no matter what happens Have an exit plan and stick to itThis does not mean selling all bitcoins and giving up cryptocurrencies forever. No. But that means we understand that the market can be in an overstretched state and a return to the mean can occur. Therefore, we acknowledge that your best bet is to realize your gains and wait for more favorable terms.
Don’t blame yourself for taking profits too early.
3. Never FOMO
If you spend a lot of time on Twitter, you’ll feel like others are benefiting greatly while you’re left behind. This feeling is very dangerous because it can make FOMO (Fear-Of-Missing-Out) some shit. Your greatest strength in trading is your ability to think clearly. If you get too emotional, you lose this advantage. This is a portfolio-destroying highway.
As a general rule, do not use FOMO for trading. If you get too emotional, take as many breaks as you need, because it’s more important to be emotionally calm and calm than to miss a trade with a sketchy token. Don’t worry about missing an opportunity. Many good opportunities await you.
4 Influencers are not there to help you
Follow the FOMO mindset and be careful with influencers. While there are many talented people creating and sharing quality content on the internet, there are also influencers who use their social media presence to enhance their pockets at your expense. As a rule of thumb, you should be wary of advice from influencers (until you feel credible). Especially when it comes to “his next 100x coin I have to buy now”.
“Pump and dump” schemes are very popular in this area. It consists of influencers getting paid to promote shitcoins on social media to create buying mania. It leaves dust and sand on people.
Accept the idea that not all influencers are here to help you. Think critically and exercise due diligence with yourself before making a decision. You will please yourself greatly.
5 Watch out for the FED
Early ciphers worked independently. However, as adoption increased, the correlation with NASDAQ increased. why? As this asset class gained momentum, the main actors driving stock prices entered the field and now comprise the majority of market actors. Crypto has thus become a liquidity-driven asset class.
These tend to perform best in risk-on environments. This happens when central banks are providing liquidity to the system by lowering interest rates or printing large amounts of money.
You should always be aware of what the FED is doing to interest rates and M2 (money supply).
– Be more aggressive (riskier investments for higher returns) in a liquid environment that encourages investors to seek yield and break out of the risk curve.
– Beware when the Fed starts tightening its balance sheet and don’t try to fight against the wind. Develop patience in the moment.