“I like cryptocurrencies less than you do. To me, it’s just dementia. It’s like somebody else is trading turds and you decide you can’t be left out.” – Charlie Munger (speaking to Buffet at Berkshire’s AGM in 2018)
I was disappointed to see one of the people who I admire so much, handle something as inherently interesting as bitcoin with such dismissiveness. I’m chalking this one down to age, because if you don’t know Charlie Munger, you should learn about him. He is one of the wisest and most practical people alive today.
In the spirit of carrying on with Charlie’s philosophy of using the big ideas from different disciplines to find lollapalooza effects, I’ve decided to use a talk he gave as the basis of a fun “thought exercise” on the big ideas influencing the rise (and continuous rise?) of bitcoin. I’m using his ideas against him.
The talk he gave is titled “Practical thought about practical thought?” and is really worth reading. In the talk Charlie explains how he makes decisions by taking us step-by-step through a diverse set of “mental models.” Using Coca-Cola as his example, he presents a case study that asks rhetorically how the listener would go about producing a $2trillion business from scratch.
In his example, a man named Glotz says he will invest $2million in a company that will only operate in the soft drink industry. He wants a plan to make the company worth $2 trillion 150 years later.
Charlie, with the benefit of hindsight, takes us through his plan of using the big ideas (mental models) to ensure the company is worth $2 trillion in 150 years. (Again, this talk is really worth a read)
I’m going to try and do the same using bitcoin:
A man named Glotz comes to us and says that he wants to create a new type of money because he’s tired of governments being in control of money supply and effectively printing their citizens poorer. He’s a bit of an anarchist and we immediately like him. He says he has solved the double spending problem of digital money with math we don’t really understand. He wants us to help him with a plan to make his money the world’s first permisionless borderless currency. He says he’s conservative and just wants it to be worth $7.8 trillion by 2134. So that’s a compound growth of 10.81% over 125 years.
Glotz says he wants to call this new money bitcoin and he’s already decided that there will only be 21,000,000 bitcoin ever in existence. He doesn’t want us to go into scarcity, fungibility and all the technical stuff because he’s got that side figured out already.
So with that in mind, here’s my plan:
First off, I assure him that fully understanding the math isn’t necessary. There will be people who do understand it, and it is this community where the currency will first be adopted. People who have thought about this problem for a long time will immediately realize what the breakthrough is, and will start working to help improve it. They will ensure that the technology remains robust. Robustness, we will later see is very important.
Early adoption is going to be easy. It’s mass adoption that is going to be the tricky part, and to make it happen we will need a lollapalooza effect from a wide range of factors working together. We can use ideas from different disciplines like psychology, economics, systems theory, statistics, biology, physics, computer science, etc.
For mass adoption we would need a nice coherent story; something to get the memes going. To do that, we should look no further than the best stories that have been told for generations. I’m talking of religion, of course. Nothing on earth has spread as wide and as quickly as religions have done. So we should do like all religions do and steal some aspects from them like they steal from each other.
With that in my mind, here are a few important things we need to do:
- Mr. Glotz will never mention he created this technology. We want the creator of this technology to be as mysterious as we possibly can. So, we use a pseudonym when we first launch bitcoin (something cool like Satoshi Nakamoto) and after a while we let him just disappear from the scene completely, never to be heard from again. This has that beautiful creator myth about it that people will love talking about.
- We use a scripture to launch the idea that is comprehensive but vague. It needs to set out the technological breakthrough, but it also needs to be ideological. Not only ideological, but open for interpretation. What this will do is entice people to argue about what the “true” bitcoin is, fueling the spread of our currency/religion.
- We also need an enemy. Nothing like a good witch hunt to get the people going. Because we are creating a new monetary system, the incumbents of the old system should work fine. We all secretly despise the rich anyway (until we become rich of course). If we could launch bitcoin in the midst of one of the biggest financial meltdowns, causing massive distrust of the old system, it would be perfect.
- So with our saviour (Mr. Nakamoto) here to protect us against evil (banks and government) we can all start believing in something again (bitcoin).
With these religious undertones in place we get a result we desperately need: evangelists. We don’t have money to launch money, so we don’t have a marketing budget. We need people to start talking about this new money on their own. The more passionate they are, the better. This devotion we have fostered will stand us in good stead when rivals arrive. If a phenomenon like “bitcoin maximalist” can get started, we’re well on our way. These guys are going to do our marketing for us.
Religious devotion only takes us so far, we need other factors to work together to ensure people keep believing and improving our money. And to that point, what is a religion without incentives? I don’t know many Christians who don’t like the idea of ending up in the eternal bliss that is heaven. Luckily, we have something far more powerful than rewards in the afterlife. We have rewards in the present life. Monetary rewards.
Because the system we’re creating captures value really well, the people working on it will be directly incentivized to make it better. The evangelists who bought in initially will be rewarded for doing so. Good feelings all round.
To quote Charlie Munger himself, “Never, ever, think about something else when you should be thinking about incentives.” There is probably not a man alive who understands better than Charlie that incentives are some of the most powerful forces in the world. Almost nothing works as well to get people to act in a certain way as rightly aligned incentives.
So even with all the ideological mumbo jumbo, we have monetary rewards as incentive to improve and grow the value and strength of our money. Show me anything more attractive to work on than something you believe will change the world for the better, plus you get paid really well to do it? Few will be able to resist.
These factors will be important for the early enthusiasts and will keep them inspired to keep on improving the technology going forward. They will be extremely important for mass adoption to come later. We need them to stay and work on the technology. Without these “early adopters” the system will fail. Coining a term like “early adopter” will help to make them feel more special than the other people that join later, but I’m sure such a classification should arise naturally.
Early adopters tend to get bored when pretenders come into the technology they created, which ends in them leaving. That’s why incentives like monetary reward are so powerful. It will keep them there as the masses move in. They will also realize that they need the masses in order to get more rewards.
Because our technology isn’t perfect, it will run into problems from time to time as it gets adopted. But because of incentives, people will work hard to keep on improving it. And we won’t need to wait too long for solutions, we’ve got Moore’s law on our side. Things will improve faster than we think possible.
Because bitcoin is a community of participants, network effects will also help us along the road to mass adoption. Bitcoin becomes more valuable the more people use it, just like Facebook. But because bitcoin rewards users directly through increased value of their holdings, bitcoin will be like Facebook on steroids. Unlike Facebook, you’re actually going to tell your mom to buy some bitcoin.
Because network effects are going to be an important factor for our technology, it’s critical that we be the first mover. We need to get the network effects working for us first, because in a game ruled by network effects the winner takes all. If you’re first you attract the best and they tend to stay because of sunk costs.
Network effects also have very auto catalytic elements to it. The faster you grow, the more valuable you become. The more valuable you become, the more people you attract. The more people you attract, the faster you grow. A nice virtuous cycle that ensures only one winner in the borderless-permisionless-digital-currency game. A game we want to win.
As we move to wider and wider adoption, the technology itself needs to be robust. Because if the technology is robust, the complex system built around that technology can be antifragile. Bitcoin, like open software, is antifragile. The community built around it is a complex system and that system will be antifragile as well. A system that is antifragile gains from disorder, and there will be a lot of disorder early on.
Boom and bust cycles, theft, hacks, and other bad behaviour will be part of our growth. But don’t worry, this is great news. If we survive the first few attacks on our community, we will probably survive most things as the ecosystem becomes more and more decentralized. And if we survive, all those shocks would have only served to make the system stronger.
Some examples to clarify what I mean:
- Shocks to a system, which is antifragile, will show areas of weakness, and areas of weakness can be improved. (Exchanges will get better over time for instance.)
- Shocks to a system creates noise, and noise is great for further adoption. There’s no such thing as bad publicity.
- Booms and busts will shake out weaker players to be replaced by new stronger ones.
So as long as the underlying protocol of bitcoin is robust enough, shocks to the system are great. Any fragility in the protocol, however, and this game is over.
As these booms and busts, thefts and hacks take place, bitcoin will be talked about a little more each time. More and more eyes will move to this novel idea. What will the people looking see?
Depends on each person. Some people will see the technology and love it; we want as many of these people as we can find. Some will see the idea of borderless transactions and permisionless money; we want as many of these people as we can find. Some people will see early adopters getting rich and will want a piece; we want as many of these people as we can find.
The people who are attracted to the technology or the idea, will naturally flow to bitcoin and they will probably stay there. But these people will be the minority and we need mass adoption. So, let’s look at all the psychological factors that will help us reach mass adoption.
Greed, FOMO, and envy are going to be the fuels to help fire up the booms and busts that will lead to mass adoption. As our system grows the value increases and early adopters become rich. Some of the flashier of these early adopters will start doing stupid things like buying Lamborghini’s or whatever. That will get the masses talking.
We can also flood social media with graphs, pictures, and statistics of exponential growth. Facebook and Twitter will be full of, “If you invested $10,000 in bitcoin in 2011…”
All of this will drive the boom and bust cycles that will flush out the weaker players and keep the strong ones in the game. All the while our technology is advancing at Moore’s law speed.
As adoption advances the association bias of bitcoin will change from negative to positive. Some of our early adopters might be judged to not be the most stand up characters of civilization. But as time goes on, people talking about owning bitcoin will shift from drug sellers to drug users like Snoop Dogg. Bitcoin will move away from a pure-bad-boy-association to a cool-bad-boy-association. Because bitcoin is a naturally novel idea, people will be deemed interesting by the influence-from-mere-association tendency.
Social proof will be a massive contributor to bitcoin adoption as time goes by. We will see bitcoin move from little news articles to big tv appearances, and before you know it the bitcoin price will be mentioned alongside the price of gold during your local radio news update, all the while driving in the notion “if everybody is doing it, it can’t be that bad?”
All this will work well to get the not-so-sophisticated retail investor/speculator to jump in.
The big leap will be when the big institutional investors start moving into the space. When we get the enemy to join us, the party is really going to kick off.
I know you’re thinking that the big institutional guys are way too sophisticated for our psychological forces? Nope! Having lots of money and an education does not exclude you from the forces of envy, greed, or social proof. If anything, these guys are even more incentivized to follow the inevitable herd capitulation. It will be so fun to watch.
You can just imagine it: Some investor or trader who is respected in the community comes out with a fact sheet, and lo-and-behold a 5% bitcoin holding. The rush through the I-don’t-want-to-mis-out-door will be spectacular!
It’s after this point that the real challenge starts for us. It’s also at this point that I make the biggest claim in my plan. In the midst of this free-for-all-frenzy that will create one of the biggest bubbles we are likely to see in a while, the party poopers (governments) will step in.
Here’s my big prediction: By the time governments start stepping in, bitcoin will have reached a critical mass of adoption that will be unstoppable. It is going to be very difficult to tell people that what they are doing is illegal if everyone is doing it. The prohibition didn’t last long (and alcohol consumption certainly didn’t stop).
In the end the different governments will institute different regulations around bitcoin in order to prove they are still the ones in charge, but bitcoin will be well on its way to become the permisionless store of value we need it to be, before it becomes a medium of exchange.
Another thing. If retail and institutional investors couldn’t resist envy, fear of missing out, greed, and social proof, do you think governments will be able to resist?
With all these forces (religious devotion, incentives, evolution, antifragility, Moore’s law, Network effects, envy, greed, curiosity, and social proof) working together our money will reach the critical mass necessary to reach our stated goal. Probably with some time to spare.
So, Mr. Glotz, or should I say Satoshi Nakamoto, that’s my plan for growing your money. All these things will happen quite naturally and I’m sure there are a lot of forces I haven’t even mentioned which will also help along the way.