From the day we are born, our lives are influenced by a endless barrage of waves and currents. What’s the difference you may ask? Although waves build in size and ferocity for extended periods of time as they traverse from sea to shore, even the casual onlooker knows they are impermanent, doomed to inevitably come crashing down, and often anticlimactically so. The only certainty about a wave is that it will one day cease to be a wave. On the other hand, currents persist. They may even be invisible to the naked eye, stealthily lurking under the auspices of normality. And when we do see them from afar, we often underestimate their power and vivacity. In many ways, currents are the anti-wave, persistently trudging along without stating their intentions — sometimes for upwards of 1,000 years like the Global Conveyor Belt (this is actually a real thing). On balance, currents are all the more powerful force than waves, causing significant disruption to those who are unprepared for the pull of their wake. As it relates to innovation, I’ve been thinking a lot recently about how to discern whether a new trend or technology is a wave or a current.
The current I can’t stop thinking about is crypto. For a while though, I thought it was nothing more than a wave. I remember in my days as a commodity derivatives trader coming across articles on ZeroHedge about this weird digital asset called “BitCoin” (sic) that was mocked by the vaunted so-called “experts” who controlled the global financial system at central banks, asset managers, and hedge funds. At the time around 2012, Bitcoin’s price volatility was also literally insane, with regular price movements of more than 30% in seconds. As a professional derivatives trader, it was my job to strap on my armor, say my prayers, and wade into some of the most esoteric and illiquid commodity markets in the world, often as the principal market maker, and so I thought I knew a thing or two about how to assess volatility and asset value. No asset with inherent value, so I thought, would ever exhibit such preponderant volatility. Besides, the dominant narrative at the time was that bitcoin was nothing more than a vehicle for wealthy Chinese escaping capital controls and a vehicle for illicit drug trading via the dark web. As such, I shied away from hodling. I strongly believed bitcoin was a wave, not a current. I was so damn sure of it! In recent months, I’ve reflected quite often about what caused me to initially poo-poo one of the most transformative innovations in history. Which forces could possibly have driven me to this conclusion?
The above diagram attempts to categorize why I mistook currents for waves. Obviously forcing a framework here is a bit comical, but :shrug: :smileyface:. It is an attempt to illustrate how fundamental biases, even problematic when isolated, when combined can kickstart a recursive, reflexive loop that compounds ad infinitum. The Dunning Kruger Effect states that people with low ability to do a task overestimate their ability. Makes sense that this would be hardwired into our DNA — whenever our ancestors were on the savanna millions of years ago running from a lion who wanted dinner, they did not have time to question whether they had practiced 10,000 hours of escape routes to gain confidence in their ability to survive. Similarly, in retrospect, I think being a official commodities trader at a Wall Street firm inflated my confidence in my ability to read the bitcoin tea leaves. In reality, I was an immature 24-year old who could barely understand a Black-Scholes model and who had not been tested at that point by the many travails that life indubitably throws our way.
Loss aversion probably also kept me from wading even into the shallow end of crypto. As a relatively recent college graduate who grew up without a regular allowance, I had yet to become jaded by the regular influx of cash into my ‘pockets’ every two weeks. Watching the direct deposit hit my bank account every other Friday brought a wide smile to my face. The thought of parting with the money for something as “risky” as bitcoin was a non-starter, especially since my chief goal was to build up a rainy day fund of sorts.
The level of confidence I had that bitcoin was a ponzi scheme was also perpetuated by where I went to for my information. As I mentioned before, Zero Hedge was my bread and butter. I always looked at ZH as the antithesis of mainstream financial media — I particularly enjoyed ZH’s proclivity to pen comical “eye-roll” articles plastered with Muppet memes every time Goldman or Gartman released a research report. And so, because ZH didn’t give bitcoin the time of day, I decided it was likely not legit. None of the “experts” thought it was legit. As such, I didn’t bother to read the bitcoin whitepaper until a few years later.
In retrospect, I think it’s impossible to spot a current if one’s default mindset is that everything is a wave. I learned that lesson the hard way, missing out on crypto until a good friend knocked some sense in me a few years ago. I’ve since shifted my default programming to assume that new innovation themes are currents. This uber-optimism serves as the top of my funnel for new currents, which then must be further filtered by a deep critical analysis based on a comprehensive risk-assessment mental model. Yes, widening the top of the funnel for currents might lead to inefficiencies whereby too many cycles are spent diving down unfruitful rabbit holes. However, I do think raising the bar for proving the counterfactual of a new current is a net positive principle to abide by. Here is a framework for spotting currents that has worked for me, at least while evaluating certain segments of DeFi over the past year (which I admit is perhaps a rather limited data set of experiences).
To spot currents in things like crypto, I really do believe it pays to be a tad ignorant. Ignoring the rules of traditional financial primitives which historically have governed monetary transfer has been essential to understanding the paradigm shift that is upon us, especially in regard to DeFi. A bit of ignorance also extricates oneself from the vaunted skybox where pundits lounge in the comfort of their conservatism and scoff at how certain primitives will never work because of blah-blah X, yada-yada Y, and whachamacallit Z. In crypto, you even have certain factions of “experts” like some unipolar coin enthusiasts who scoff at the idea of DeFi becoming a robust ecosystem that scales to billions of users. Or the “experts” who claim that privacy is nothing more than a protocol feature. Ignoring traditional mental models for valuing fiat assets or industry TAMs has also proven necessary to nail new headwinds in crypto.
I also think spotting currents has been easier by following a ‘curiosity mirror test’. Namely, can you look yourself in the mirror and say ‘if I don’t do or invest in X, I’m going to regret it severely in 20 years?’. If the answer is yes, the next steps are clear, but it is also important to be ready to switch on a dime if new information emerges that contradicts your mental model for the particular current.
Last but perhaps most important is recognizing that nobody really knows anything at all. We’re all trying to figure it out one day at a time. Putting blind faith in others just because of their title, tenor, or previous success can be a fatal flaw especially for currents in radically new areas like crypto. Each of us alone must do the hard work to aggregate the facts and critically analyze them to inform a nuanced opinion. A fatal flat I think much of the crypto community has fallen into historically is upholding the opinion of the loudest voices in the room as evidence that a certain technology has product-market-fit and therefore is worthy of investment. This reflexive kumbaya is further tainted by the fact that there are starkly different incentives at play between the different market participants.
With this mindset, I hope we can spot bonafide currents more effectively when at first glance they seem nothing more than an innocuous rough patch of sea.