Charlie Munger & A Potential Cryptocurrency Crash
We get lollapalooza effects when two, three or four forces are all operating in the same direction. Lollapalooza effects create mass delusion.
CMQ Investors
I think the Blockchain has a future, but the crypto-mania that is going on right now is concerning me. I would regret not saying something.
FULL TRANSPARENCY: 3% of my net worth is in Bitcoin and Ethereum. I would prefer that my holdings kept going up up up…
But this is getting ridiculous, and this post will show you why.
Do I know what is going to happen? Of course not. No one does.
However, using the multidisciplinary approach to thinking, we can see things more objectively.
🚨THIS IS A LOLLAPALOOZA
Charlie Munger says that lollapalooza effects “can make you rich or they can kill you.”
A lollapalooza effect is when three, four, or five forces combine and move in the same direction.
I will show you what this looks like in this post.
THE INDIVIDUAL FORCES
“We want fancy combinatorial effects. And once we realize that we get extra-powerful effects—what I call lollapalooza effects—from combining a bunch of things to work in the same direction…” —Charlie Munger
“You get lollapalooza effects when two, three or four forces are all operating in the same direction.” —Charlie Munger
1. AUTHORITY BIAS
Here are two examples just from today.
Jim Cramer is now offering advice on how to handle the Bitcoin plunge.
Snickers is participating in #DogeDay.
Fun Fact: Slim Jim is part of the #DogeArmy.
😂 WHAT IS GOING ON?!
OVERCONFIDENCE BIAS
I read a Discover Magazine interview with Robert Bea, a risk-management expert who studied disasters for nearly six decades.
Mr. Bea shared the key lessons from his career.
Here’s a big one: Overconfidence is a killer.
Overconfidence is one of the human traits at the root of many engineering system disasters.
The opposite of overconfident is humble.
What crypto promoter/bull is humble about their beliefs?
They know the dollar is going to crash.
They know that BTC is going to $100k.
They know the Fed can’t print all this money!!!
WARNING: Overconfidence is contagious. Not only does the overconfident person fool themselves, but their confidence influences others to follow their lead.
TRY THIS: Ask them if they can name the last four Fed chairs. If they can’t, they probably don’t know the history of the Fed that well.
Thinking Exercise
No one can predict the future. It’s a false premise.
If someone says they know what will happen tomorrow, they are wrong.
Objectively wrong.
What else are they wrong about?
HUMILITY 101:
SOCIAL PROOF / GROUP ASSOCIATION
The third tweet is included because the twitter name made me laugh.
SIGNALING
By tweeting about their belief in the future of Bitcoin, they are sending a signal to the mating market and their neighbors. What do you say without saying it when you tweet about your crypto portfolio?
You are rich. (You can afford it.)
You are smart. (You understand it.)
INCENTIVE-CAUSED BIAS
Listen to this episode of our podcast. You will learn everything you need to know.
EPISODE #001: “Incentives Are Superpowers”
Of course it feels inevitable. That’s incentive-caused bias.
If you were one of the biggest owners of Bitcoin, wouldn’t you feel it?
FINAL THOUGHTS
If I knew—with 100% certainty—that Bitcoin was going to go up 200%, then I would put all my money in it (minus living expenses).
I would not on CNBC or Twitter and tell people how great it is because I would want to keep it a secret for as long as possible. Keep the price low for me.
After I bought all I could afford, I would go on a promotional tour. I would have a cryptocurrency Substack, a podcast about Bitcoin, and my Twitter feed would be the #DogeArmy headquarters.
Hmmm…
Unrelated, but related: In the comments of two separate, very popular YouTube videos, I noticed two different users that left the exact same comment about Bitcoin. They said it is the investing opportunity of a lifetime and now is such a great time to get in.1
Hmmm…
Be very careful. Something is goofy about this. I don’t want people to get clobbered. I want us all to compound money over the long-term, without interrupting the process. That’s a wealth killer.
I remember when Bitcoin and the other major cryptocurrency crashed in 2017. Everyone was riding high then… crash!
Will it happen again? I have no clue. No one does. All I know is that this is a lollapalooza.
Timeline of the last crash
December 17, 2017: Bitcoin's price reaches its all time high of $19,783.06.
December 22, 2017: Bitcoin fell below $11,000, a fall of 45% from its peak.
January 12, 2018: Amidst rumors that South Korea could be preparing to ban trading in cryptocurrency, the price of Bitcoin depreciated by 12 percent.
November 15, 2018: Bitcoin's market capitalization fell below $100 billion for the first time since October 2017 and the price of bitcoin fell to $5,500.
Making my part : Crypto regrets calculator :)
https://buyandhold.substack.com/p/cryptoregrets
Interesting model for thinking about the madness of crowds.