Another huge mistake many people make when it comes to investing in cryptocurrencies is not sticking in their circle of competence. This is ironic given the fact that this concept was popularized by Warren Buffett and he recently stated that cryptocurrencies will end poorly. Many people use this same concept to argue against Buffett, but we'll revisit that later.
Your circle of competence encompasses what you know and know well, rather than what you think you know. In cryptocurrencies, four primary factors contribute to the size of your circle of competence:
- Technology
- Investing
- Finance
- Economics
The more you know about each of these fields, the wider your circle of competence. Most importantly, when you invest inside of your circle of competence, you enable yourself to:
- Better measure risk
- Better measure the probability of success, defined as high ROI relative to risk taken on
The video goes into far more detail related to four fields listed above. If your circle of competence is small, it is likely best to stick with some of the major cryptocurrencies, namely:
- Bitcoin
- Ethereum
- Ripple
- Litecoin
Note that even these cryptocurrencies have flaws that I would encourage you to learn about. Bitcoin is slow and expensive, Ethereum has major competitors in development which promise better scale, Ripple is more centralized and competing with HUGE pockets, and Litecoin is often considered nothing more than a playground for Bitcoin.
Bubbles occur because people invest outside of their circle of competence - They have no choice but to trust others on when to get in, and no choice but to trust others on when to get out because they don't know any better themselves. For example, recently Charles Hoskinson of Cardano and Dan Larimer of EOS had a "debate" over some technical aspects of Cardano. Most people don't have the skillset required to weed out the BS and hence agree with whoever better aligns with their views: Shocker, right?
Expand your circle of competence and don't be the idiot who blindly trusts others. That's the jist of the video. Returning to Warren Buffett, many say he's talking outside of his circle of competence: I disagree. He knows better than anybody the psychology of markets, but it doesn't exactly take a genius to see how stupid this market is. It will end poorly at some point. The one part I disagree with is that this will be a permanent bad ending - In the long-run, there will be cryptocurrencies that make us rethink existing business problems & solutions as we know them.
What are your thoughts?