Stimulating Your Pleasure Center
Back in 2018, we launched our Blockchain Believers Portfolio, an easy-to-use investment strategy that combined traditional stocks and bonds with bitcoin and cryptocurrencies.
Back then, the idea was radical. Today, it’s common sense.
In this post, I’ll tell you how this portfolio has performed, then explain the mental models that we use to make such profitable crypto investments. It has to do with the brain’s “pleasure center,” which can be either the investor’s worst enemy, or our best friend.
First, the good news: as of the end of 2021, investors who used our “Big Believers Portfolio” have more than doubled their money.
In the traditional investing world, these would be considered incredible, improbable, inconceivable returns. The stock market has returned 10% per year on average. Doubling your money in three years, without taking on a lot of additional risk? Come on.
Unfortunately, in crypto circles, doubling your money in three years is considered kind of boring.
After all, these are the crypto gamblers who are trying to 10x their money in three months. So they’re always chasing the next big thing, jumping on the next big spitcoin, and usually — over the long term — losing money.
Here are two recent quotes that illustrate this illusion perfectly. Brady Dale, a respected crypto journalist, writes in The Defiant:
DeFi had a good 2021 but the tokens underlying the big protocols did not. DeFi tokens have been hammered, and many of their investors are wondering if they shouldn’t have just bought and held ETH instead. (My emphasis)
He then goes on to talk about the latest way of pumping up a token’s price (instead of, you know, building great products on top of it that people want to use).
The second quote comes from a top-rated post on the popular r/cryptocurrency Reddit forum, talking about the problem of following daily price movements:
Gazing at [crypto] charts the entire day defeats the purpose. In the long run crypto is going up, at least BTC and ETH are. Buy a coin you believe in, stake it and let it grow.
Deep down, they know.
Bitcoin (BTC) and Ethereum (ETH) are the two crypto investments in our Blockchain Believers Portfolio. We buy them, hold them, and don’t mess with anything else. Because we remember the story of the Goose and the Golden Egg.
The Goose That Laid the Golden Egg
A classic fable attributed to the Greek storyteller Aesop (circa 500 BCE), the story is about a farmer who owns a goose that miraculously lays a golden egg once every three years.
Upon discovering the first egg, the farmer is delighted at his good fortune. He treats the goose like royalty, hoping another egg will come. When the second golden egg arrives three years later, he realizes his life will change forever.
As he learns the three-year timing of the golden eggs, he begins to rely on the steady stream of income to upgrade his farm, hire more help, and provide a lavish and comfortable lifestyle for his family.
But the farmer, growing impatient with the three-year delays, begins to wonder if he can goose the output, so to speak. He theorizes there must be a huge lump of gold inside of the bird, or some magical inner working that he could automate or sell.
So he kills the goose that laid the golden eggs.
Upon doing so, he finds the bird is perfectly ordinary on the inside, leaving him once again to toil away at his farm, and bitterly resent geese for the rest of his life.
There is another version of the fable from the Polish poet Ignacy Krasicki (1735–1801), about a farmer and his land:
A farmer, bent on doubling the profits from his land,
Proceeded to set his soil a two-harvest demand.
Too intent thus on profit, harm himself he must needs:
Instead of corn, he now reaps corn cockle and weeds.
The farmer, not content with his profitable business, brings it to ruin. The modern version of this poem might go like this:
An investor, bent on doubling the profits from his coins,
Proceeded to create a DAO and get friends to join.
They 10x in just ten days, then lose it all with a moan:
Instead of mooning, he now lives on Earth, alone.
The moral of the story is TO BE THRILLED WITH DOUBLING YOUR MONEY IN THREE YEARS.
Why Our Portfolio Has Doubled in Three Years
In 2021 alone:
The NFT market exploded. Since most NFTs are built on Ethereum, this boosted the price of ETH. Long-time readers will remember we originally held XRP in our Believers Portfolio, but removed it when the SEC sued Ripple, moving that money into ETH. This turned out to be a good move.
Coinbase launched an IPO. This was good news for crypto in general, but especially for bitcoin, which received a huge boost in public confidence and awareness. (Full disclosure: I’m an investor.)
El Salvador made bitcoin legal tender. While the jury is still out on whether this experiment will be successful, it certainly made headlines and was a giant “I told you so” for the bitcoin believers.
The launch of EIP 1559: In simple language, this was an upgrade to Ethereum that allowed the “burning” of ETH, among other improvements. This means the amount of ETH is still growing, but more slowly: think of it like slowing the rate of inflation on ETH.
The rise of Layer 2: There are so many people now using Ethereum that the service charges (i.e., gas fees) are unsustainable. Many new technologies are being developed to sit on top of Ethereum (thus, “Layer 2”) and process the transactions more quickly and cheaply.
- Bitcoin (BTC) is still the #1 crypto asset, by price, market cap, and global recognition.
- Ethereum (ETH) is still the #1 crypto development platform in the world, with an incredible lead.
So why aren’t crypto investors happy with these returns? The answer has to do with the pleasure center of our brains.
Stimulating Your Pleasure Center
The latest neuroscience tells us that the nucleus accumbens is the “pleasure center” part of our brain. During pleasurable moments — whether taking a hot bath, making love, or hitting blackjack — this region gets flooded with dopamine. It’s literally our “happy place.”
Unsurprisingly, this region is also associated with addiction. Rats with an electrode planted into this region of the brain, who could stimulate it at will by pushing a lever, soon did nothing else.
High-risk crypto investing can be like that lever, triggering your nucleus accumbens. (Coincidentally, we even call this high-risk trading “leverage.”)
The nucleus accumbens gets flooded with dopamine not just with the reward, but with the anticipation of reward. Anyone who’s experienced the possibility of a sexual adventure knows what I’m talking about: the anticipation is as good as the real thing (if not better).
This is why chronic gamblers begin to rewire their own brains so that an almost-win gives them the same dopamine hit as an actual win. The problem, of course, is that an almost-win is really an actual loss. So perception becomes divorced from reality.
We see this playing out constantly in the world of crypto, from “moonshot coins” to overpriced NFTs. It’s addictive! The peddlers on YouTube specialize in this kind of content: just do a search for “crypto moon.”
Great investors, on the other hand, think long-term. We’re happy with our “boring” 122% returns. This doesn’t flood the nucleus accumbens in quite the same way, because it happens over three years. And that is a good thing: it encourages self-control.
To help you build the mindset of a great investor, we’ve been releasing our new Investor Mindset audio series (think of them like guided meditations for investors). Our latest episode will help you build this quality of self-control.
It’s perfect for your New Year’s resolutions, and perfect for building long-term wealth. Download it here.
John Hargrave is the author of Blockchain for Everyone: How I Learned the Secrets of the New Millionaire Class, the bible of blockchain investing.