Interview with the author of Money Psychology 10 Advice for Cryptocurrency Investors

Exclusive Interview with the 'Money Psychology' Author Top 10 Tips for Cryptocurrency Investors

Even if you have experienced several bear markets, the next bear market could be completely different.

Compiled by: Deep Tide TechFlow

Morgan Housel is a partner at Collaborative Fund and a former columnist for The Wall Street Journal. He has twice won the Best Business Award from the American Business Editors and Writers Association, and has been a finalist for the Robert F. Kennedy Journalism Award for Outstanding Business and Economic Reporting. He is also the author of the bestselling book “The Psychology of Money”.

In this interview, Morgan provides ten key tips for cryptocurrency investors. These tips cover specific investment strategies, and Morgan’s insights are applicable not only to the cryptocurrency market but also to a wider range of investment fields. They are a valuable resource for investors of all levels.

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Hosts: David & Ryan, Bankless Podcast

Speaker: Morgan Housel, writer

History repeats itself, inevitably

Morgan Housel firmly believes that whether it’s 100 years from now or 200 years from now, market bubbles will still exist, just like the technology bubble and real estate bubble of 1999. He points out that historical bubble events, whether 100 years ago or 200 years ago, have astonishing similarities.

Morgan explains that history repeats itself because human reactions to greed, fear, risk, and uncertainty remain consistent. Whether in finance, medicine, military, or physics, people’s reactions to these themes are remarkably similar.

Morgan mentions economist Hyman Minsky’s “Financial Instability Hypothesis,” which argues that if the market never experiences a downturn, people become excessively optimistic, leading to excessive debt accumulation and eventually a recession. He emphasizes that stability itself can lead to instability, and excessive stability can drive the system towards instability.

Morgan points out that after every market crash or recession, people always look for someone to blame, but in reality, these are all part of the normal operation of a capitalist society. He believes that attempting to eliminate market cycles will only make the situation worse.

Although Morgan believes that breaking this cycle is nearly impossible for society or an industry as a whole, he also mentions that there is hope at the individual level. Individuals can recognize these repetitive patterns and avoid falling into the same traps in their own investments and decision-making, thus partially breaking free from this cycle.

Morgan emphasizes that if an investment can increase in value fivefold in one year, it is also possible for it to lose 80% of its value in one year. This is particularly evident in the cryptocurrency field, where investments can sometimes increase tenfold in a year, but may also drop 80% to 90% within a year due to sporadic news, and even some “shitcoins” may become worthless.

Morgan mentioned that many people entered the cryptocurrency market for the first time during the middle of a bull market and wrongly believed that the bull market would continue for a long time. However, they soon found themselves on the other side of the market cycle, entering a bear market and experiencing the entire bear market process. During this process, more than half of the people would leave.

Morgan mentioned that in financial affairs, if you can complete the sentence “I am a XX investor,” then you have almost linked your identity to your investment style. In a bull market, people may think of themselves as smart or wealthy, but in a bear market, this identification may change to “I am a failure” or “I am poor,” and this identity tightly linked to market fluctuations can cause harm to individuals.

Morgan quoted Harry Truman’s words, pointing out that the next generation learns little from the previous generation unless they experience it firsthand. In financial affairs, if you have never experienced a 50% decline, you may not truly understand this experience. Every bear market is unique, and even if you have experienced multiple bear markets, the next one may be completely different.

The psychological impact of exaggerated returns

Morgan mentioned that the market has collective memory, and the market consists of the collective consciousness of its participants. Different market participants, based on their age and experience, will have different reactions to the same events, and each generation will understand risk in their unique way. For example, young adults who have experienced the Great Depression may remain cautious about financial markets for life, while those who were children during the Great Depression may have only heard these stories from their parents.

Morgan emphasized that what people experience between the ages of 15 and 30 has a profound impact on their lives. During this stage, the brain is still plastic, and individuals begin to take on social responsibilities, so the experiences during this period will deeply influence their worldviews. There are also differences in financial viewpoints between generations.

Morgan pointed out that in a bull market, people often become dissatisfied with their own returns because they envy others. He believes that this envy is one of the main causes of a bull market getting out of control. Additionally, on some social media platforms, people tend to exaggerate or even fabricate their own successes, which can lead to unrealistic expectations and envy in others.

Morgan believes that due to the influence of social media, market cycles are becoming faster. This phenomenon is particularly evident in the cryptocurrency field, where market ups and downs can occur in a very short period of time.

Money, happiness, and personal values

Morgan mentioned that in a bull market, especially in the cryptocurrency market, people often showcase their wealth, which is particularly evident on social media. He pointed out that this behavior easily leads people to envy others rather than focus on their own progress and achievements.

Morgan believes that while money can bring a certain level of happiness, it can only solve money-related problems. True happiness also includes healthy relationships, a good mental state, and a fulfilling lifestyle.

Morgan also mentions that successful individuals often have a lot of unstructured free time in their schedule. This seemingly inefficient arrangement actually provides space for creative thinking and problem-solving. On the other hand, those who fill every minute of their schedule often don’t have time for creative thinking.

Morgan quotes music producer Rick Rubin, pointing out that people only realize they haven’t felt any different after achieving their dreams, which can lead to despair. He emphasizes that money doesn’t completely change a person’s life experience. Many people actually crave a simple, independent life, but they mistakenly pursue high status. Status is a game that can never be won because there will always be someone richer, prettier, or happier than you.

Morgan mentions that many people may be billionaires in terms of assets, but they carry a “social debt” that exceeds those assets. This debt arises from the need for the impression of others and the desire to showcase one’s identity and worth. Morgan describes this phenomenon as a burden.

Morgan points out that money can be used in two ways: as a tool to enhance personal happiness or as a standard for others to evaluate oneself. Many people mistakenly use money as the latter, as a scoreboard for others to judge their success. If people can reduce this need, they can better utilize money to increase their own happiness.

The host states that when people view money as a tool to enhance freedom, it is the healthiest relationship with money. Pursuing status is an endless and exhausting game, while viewing money as a tool can help people live better.

Morgan mentions that the value of many consumer goods, such as cars and houses, is often misunderstood. For example, a high-end Toyota car may actually be better than an entry-level BMW because it provides more driving comfort, not just for flaunting rights. When faced with significant financial incentives, even inherently good people can make wrong decisions.

Morgan emphasizes that money incentives can lead to not only negative behavior but also positive change. For example, during wars and economic recessions, technological innovation often accelerates due to urgent needs.

Investment Strategy: Medium Balance Long-term vs Short-term

Morgan mentions that his own investment strategy is long-term regular investment. Regardless of whether the market is on the rise or in a downturn, he invests the same amount regularly in the same investments and plans to hold them for 50 years. He emphasizes that this strategy can reduce the influence of emotions on investment behavior.

Morgan believes that long-term investments do not mean ignoring the short-term dynamics of the market. Long-term is actually the accumulation of short-term. Investors need to experience and understand these short-term dynamics, even if their understanding is that some behaviors in the market are absurd.

In the crypto field, new phenomena like NFT and various emerging assets are parts that content creators and investors cannot ignore. The emergence and disappearance of these phenomena are part of the story and evolution in the crypto field. Morgan believes that investors can adopt different strategies. Some people may choose to regularly invest in large-cap stocks or crypto assets, while others may prefer to trade and explore new investment opportunities. He thinks that both of these strategies can be healthy investment approaches.

Morgan points out that many stock market investors allocate most of their funds to long-term stable investments while reserving a small portion for trading and exploring new investment opportunities. This strategy satisfies their intellectual needs for investment while also being enjoyable.

The key to happiness: accepting imperfection

Morgan points out that in the investment field, effort does not always correlate with results. He believes that many investors misunderstand what they can control and overlook the importance of their own behaviors. He mentions that in a bull market, the best course of action may be to do nothing, and the same applies in a bear market.

Morgan believes that in investment, striving for perfection (like predicting market tops and bottoms perfectly) is often unrealistic. The market itself is full of uncertainty and unpredictability. When investors realize that their decisions may be imperfect, they are more likely to adopt conservative strategies, such as diversifying investments, to reduce the potential negative impact of single decisions. Trying to be perfect all the time may result in heavy losses during times of crisis.

Morgan believes that accepting imperfection means taking a long-term perspective. In the long term, the impact of market fluctuations and the imperfection of individual investment decisions on overall investment performance will diminish. Accepting imperfection can also help investors avoid overreacting to short-term market volatility. Accepting imperfection is also part of mental resilience. Throughout the investment process, it is crucial to remain calm and objective, even in the face of losses or mistakes.

Morgan mentions that learning from mistakes is an important part of the investment process. Accepting imperfection and learning from it can help investors make better decisions in the future. Accepting imperfection also means being adaptive. Changes in market conditions and personal circumstances may require investors to adjust their strategies instead of sticking to a perfect plan that may already be outdated or not applicable.

Compete with yourself

Morgan emphasizes that in business, investment, sports, and other fields, the key to long-term success is to let optimism and pessimism coexist. He mentions that for investors who experience the full cycle of the crypto market for the first time, they may tend to invest in cryptocurrencies with complete optimism, hoping to experience the entire cycle from start to finish.

Morgan mentioned that cryptocurrency investors may find themselves in a “dumbbell strategy,” balancing not only between traditional assets such as cash or government bonds and cryptocurrency assets, but also including investments in other hard assets such as real estate. This strategy can provide a certain safety net when the cryptocurrency market declines.

Morgan used Microsoft as an example to illustrate the characteristics of a successful entrepreneur: being extremely optimistic in terms of technology while being extremely conservative in financial management. Bill Gates once said that since the day he founded Microsoft, he always wanted to have enough cash in the bank to sustain one year’s worth of salary expenses with zero income.

Although there may be many challenges and difficulties in the short term, if one can persevere, significant progress can be made in the long run. Morgan mentioned that in his own investment experience, despite frequently facing various problems, the market has achieved significant growth in the long run.

Morgan emphasized the importance of applying these lessons in market cycles. He believes that these lessons are particularly valuable for those who are experiencing the market cycle for the first time. If people’s expectations grow in sync with their income growth, they will never be satisfied with their financial situation. He emphasized that even those lucky enough to have continuously growing net assets and income will never feel happy unless they make an effort to control their expectations.

Morgan advocates for learning to be grateful for everything one currently has and advises against comparing oneself with others’ current situations, but rather comparing oneself with one’s past situations. For example, compared to five years ago, most people’s current situations might have improved significantly, even if they may feel inferior to others when browsing social media.

The Power of Motivation

Morgan pointed out that motivation is an important driver that influences people’s behavior, whether it is in the cryptocurrency field or other fields. Understanding the motivation factors of an individual or organization is crucial for predicting their behavior and decisions.

Morgan pointed out that short-term incentives may drive market behavior, but in the long term, true value and fundamentals will determine market performance. Market dynamics are often driven by different motivations of participants, which may include the pursuit of quick profits, avoiding losses, or long-term investments.

Morgan mentioned that understanding motivations can help investors better assess risks. For example, if market leaders are investors pursuing short-term profits, the market may be more volatile and unstable.

Morgan advised investors to reflect on their motivation factors, such as financial goals, risk tolerance, and investment timeframes, in order to develop more suitable investment strategies. If a person’s primary motivation is capital preservation, they may choose a more conservative investment strategy.

Morgan emphasizes that although the market may be influenced by various incentives in the short term, in the long run, sticking to an investment strategy based on solid principles and understanding is usually more successful.

Manage risks well and don’t overexert yourself

Morgan emphasizes that investors often try to over-optimize their investment strategies, such as trying to accurately predict market tops and bottoms. However, this kind of overexertion is often unnecessary and may even be harmful. Accepting imperfections and allowing room for mistakes is crucial in investment. In a world full of uncertainty, striving for perfection means there is no room for error, which can lead to serious consequences during a crisis.

Morgan believes that a long-term perspective is more important than trying to accurately grasp market dynamics in the short term. He advocates for long-term investment and holding strategies, rather than frequent trading and attempting to predict short-term market trends. Investors should avoid overreacting to short-term market fluctuations. Market volatility is a normal phenomenon, and overreacting can lead to unnecessary trades and additional costs.

Morgan points out that simplifying the decision-making process in investment can reduce errors and pressure. For example, regular investment (such as investing the same amount each month) can avoid the pressure of trying to buy or sell at the perfect timing. Investors should cultivate patience and resilience to cope with the unpredictability and volatility of the market.

Morgan emphasizes that successful investment often takes time, and frequent trading usually leads to higher costs and lower overall returns. Investors should maintain consistency in their strategies and avoid frequent portfolio adjustments due to short-term market fluctuations.

Understanding basic economic principles, market dynamics, and financial instruments can help investors make wiser decisions. Investors should focus on long-term goals and the big picture. As the market environment and individual circumstances change, it is necessary to make appropriate adjustments to investment strategies. The market has its natural cycles of upturns and downturns, and understanding these cycles can help investors better position their strategies.

Optimism and pessimism

Morgan believes that to achieve long-term success in investment, one needs to have both an optimistic and pessimistic mindset. Optimists believe that there will be good returns in the long term, while pessimists are prepared for short-term difficulties. He suggests being frugal like a pessimist and investing like an optimist.

Morgan mentions that one asset allocation strategy he likes is the “barbell strategy,” which involves maintaining high liquidity and low debt on one end (a pessimistic short-term strategy) and long-term investment in stocks on the other end (an optimistic long-term strategy). He emphasizes that various challenges and surprises may be encountered in the short term, but if one can persevere, the returns in the long run can be huge. Therefore, he recommends being cautious in the short term and optimistic in the long term.

Morgan emphasizes the importance of combining optimism and pessimism in a balanced way. Excessive optimism can lead to overlooking risks, while excessive pessimism can lead to missing opportunities. Optimism is an important driver for investment and innovation. Optimists tend to see long-term growth potential and opportunities, which is a valuable perspective in investing.

At the same time, Morgan also emphasizes the value of pessimism. Pessimism can serve as a risk management tool, helping investors identify potential issues and challenges, and make more cautious decisions. Many significant advancements in history have been driven by optimists, but they have also been accompanied by warnings and balance from pessimists.

Morgan points out that market cycles can influence investors’ optimistic and pessimistic sentiments. During market upswings, optimism may dominate, while during market downturns, pessimism may be more prevalent. He suggests individual investors consider their own optimistic and pessimistic tendencies when formulating investment strategies. Understanding one’s emotional inclinations can help in developing a more balanced and suitable investment strategy.

Good things happen slowly, bad things happen quickly

Morgan believes that good things often come from compounding, which is essentially a slow process. In contrast, damages are often caused by single failure points that can have immediate catastrophic consequences.

Building a good investment return takes time, while market downturns or crises can happen in a short period. Investors need to understand that wealth building is a long-term process and should not expect rapid significant returns.

Morgan points out that due to the rapid occurrence of negative events, investors need to have strategies in place to mitigate these risks, such as diversifying investments or maintaining a certain cash reserve. Market psychology plays a significant role in this phenomenon. During market panic, investors tend to react quickly, leading to sharp price drops. Morgan advises investors to learn from history and understand the cyclicality and volatility of the market.

Morgan emphasizes that regardless of how experienced an investor is, they should maintain humility and an open-mindedness towards new information. The market is complex and unpredictable, and there is always something new to learn. Investment decisions are always made based on incomplete information, so understanding and accepting this uncertainty is a key part of successful investing.

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