I’ve studied 100s of mental models to become a better Crypto Investor. Here are 7 of the most important mental models 🧵

Mental models are frameworks of thinking & explanations that can help us expand our thinking. We think a certain way due to how & where we were raised, experiences, etc. Our minds are full of biases that narrow our thinking. Expanding our thinking can give us a Huge Edge 👇

1. First principles thinking Boil things down to the fundamental truths and work your way up. Ask why at every step. Question every assumption. We often base our decisions on what experts, others & society says. This can lead to poor decisions, especially in crypto.

First principles → original thinking. Here is my thread on first principles https://twitter.com/Cov_duk/status/1535430989622611968

2. The Map Is Not the Territory A map of the world is not the world itself. It’s made up of assumptions, imperfections & reductions. By map we mean anything that seeks to make sense of reality - descriptions, theories, models, etc Maps have limitations.

Maps are reductions of reality. It is very easy to equate the map to the real world itself. Our brain naturally takes shortcuts & maps of reality help make sense of things. Think about valuation models. We’ve an obsession with using models & indicators to tell us when to buy.

Stock to Flow (S2F) is a way to calculate BTC’s price based on scarcity. S2F says BTC should be at 110k atm. In reality, it’s at 20k. • We’ve have an overreliance on valuation models. • Learn to interpret them correctly. • Models always have their limitations & assumptions.

Crypto is new. Old playbooks don’t work the same way. The market volatile, uncertain & is getting slaughtered. Don’t put all your faith in these maps. Or you’ll get burnt “All models are wrong, some are useful.” https://twitter.com/VitalikButerin/status/1539167095312850944

3. Second order thinking. Deliberately think about the implications of an action by considering future consequences Let's say market goes up rn. Consider the consequences • You FOMO & want to buy. • If you do, you’re illiquid & can’t capitalize on anything else.

Other retail investors are prob thinking the same → you become exit liquidity. The farther you consider, the higher the likelihood of success. • Ask “what then” • Consider different time windows - 1 day, 1 year, 5 years. It’s deliberate & hard, but it’ll set you apart.

4. Probabilistic thinking Estimating the likelihood of something happening & acting based on the odds. Crypto is a game of probability & speculation. No one knows what’s going to happen next, but successful traders & investors make bets based on probability.

Consider the different possibilities for a token & come up with probabilities • Up (20%) • Sideways (30%) • Down (50%) How do you come up with probabilities? • Macro & other news • Past performance can give you some clues

It takes time to get good at this. @cobie has a great post on this. https://cobie.substack.com/p/probabilistic-thinking It’s easy to skew the probabilities in your favor & overestimate, so be careful. There’s a lot more to cover on probabilistic thinking, I’ll make it a separate thread soon.

5. Occam’s Razor Among competing hypotheses, the one with the fewest assumptions should be selected. In order words, the simplest explanation or solution is often the correct one. When there 2 conflicting explanations, the simpler one is usually preferred.

We like to overcomplicate things & come up with elaborate reasons. The market is going to go down cuz [insert elaborate conspiracy]” Occam’s razor suggests it’s usually something simple: macro just sucks.

It’s a powerful tool that helps you come to decisions faster. Make sure you consider the limitations. Even the simplest explanation ought to be rooted in evidence. If evidence contradicts it, then revise. https://twitter.com/bitcoinpanda69/status/1256020776957943816

6. Inversion Think about the opposite of what you want. You want to become a good investor. Think about what you ought to do to be a bad investor.

Traits of bad investors • Poor risk management • All in shitcoins • buy high sell low • Invest without understanding • Blindly follow influencers Now, just avoid those things. Simply through avoid the bad, you can become good.

7. Cognitive Biases Cognitive Biases skew your thinking & cause deviations. • Still holding bags cuz it’s down 50%? Sunk cost bias • Fall in love with your bags? Endowment effect @thedefiedge has a good thread on biases https://twitter.com/thedefiedge/status/1490765231248838661?s=21