Coinbase ($COIN) #6 - Mental Models & Human Misjudgement
Thinking it through Charlie Munger style
03-07-2022
I ran my checklist this morning and wrote out a big summary of all the research I have done so far. I won’t publish that portion, because it would be redundant. I noticed a few things were missing when I ran my checklist and verified them. The last step of my checklist is the Charlie Munger Mental Models & Human Misjudgment checklist. I took about 45 minutes of meditating and thinking and when I came back to the computer I wrote the following below. You can see that I made all the mental models and psychological tendencies bold for you.
Misjudgment & Mental Models
Incentives creating havoc at the Competition
COINs competitors have all run a regulation second approach. The results of this approach have rewarded them handsomely, because they were able to grow to huge volumes in a short period of time. Binance started in 2017 and became the largest exchange by volume. This momentum shaped the inner workings of the organization. Procedures for legal checks were not in place from the very start, thereby setting up procedures and a culture that did not consider regulations. Once something is on motion it exhibits Inertia, and it won't want to change its course easily. This is what happened with Binance. The rewards were great so the entire company culture rejoiced in their system creating a feedback loop with additional social proof that they must be doing it right. Unfortunately for them their behavior reinforced itself and manifested itself throughout the last 5 years and now they face a large obstacle: Regulation.
China banned Crypto and the USA and Europe will regulate Crypto. These regulations are acting like a force against the Inertia of Binance creating a lot of friction. Now they must adapt to this new environment created by Governments, when all their internal momentum created a culture that is not built for regulations. Another mental model acting on Binance is the primacy of having created a culture of no regulation first, now having to unlearn all the habits associated with such a culture. This viscosity will be difficult to overcome. The CEO was defiant at first when regulators started questioning the company and other successful CEO’s left after just three months, because of this internal discord. There is a lot of headwinds for the competition now. It remains to be seen how FTX handles it, but I find it probable that Binance’s decline has begun.
Liking / Disliking Tendency
The company and the reaction of their CEO to regulators shows that they are now feeling a disliking tendency. The CEO and the company will have a hard time pro-actively working with regulators unless they can make quite the mental shift. The CEO has also stated some of these things publicly, which reinforces his mindset. With these biases (feelings) fueling the discourse it will be difficult for the CEO to go back and truly self-reflect about what is actual goal and mission is. The stated goal is economic freedom for all, and as far as I can see he wishes to do this without regulators involved, because he at his core doesn’t believe in government or he thinks crypto at its core is the opposite of government. This could even lead to pure self-denial. Now as a result his company is associated in the USA and Europe with illegal activity and bad business practices causing the brand to suffer in the eyes of the public. And when you have a choice between a brand that is associated with legality and safety vs. the opposite you won’t conduct a research project to make your decision.
Now let’s contrast this with COIN. They chose the regulation first approach. They decided that as part of the law of primacy they’re going to build a culture which focuses on legality from the start. Now all the self-reinforcing tendencies described above are working with the new force of regulation and not against it. COIN has rules and procedures built deeply into their culture that focus on regulation first. This momentum got of to a slow and steady start and has now been in progress since 2012. The inertia of this movement is currently not counteracted by stronger force but is simply in a little bit of turbulence. Social Proof and the other tendencies are contributing to a long-term better outcome and now the public associates COIN with regulation first and safety. In addition, their products are easy to use, customer focused, and the entire world knows COIN.
For example, when I first saw COIN was public it was literally the only name I knew. I will not be the only one and I am tech savvy. Most people who are now the new target market are people who haven’t been deeply involved in crypto. We must remember that the current heavily engaged customers are in the minority still. Everyone who knows the scene is already involved. COIN is not going after them, they are going after the new customers and all of them will have the name COIN in their minds and they will associate them with safety etc.
COINs entire culture was built on avoiding contrast-mis reaction, because they have focused on small incremental improvements, done properly, over time. That means in the end their velocity towards the goal is greater than the competition who moved at great speed but forgot that speed doesn’t matter in comparison to velocity.
COIN also focuses their attention to first principles by building simple and easy to use products and putting their customers first. They ignore the noise around them and only focus on what they can control. They know that through their actions the second order effects will be a more valuable company, because nobody ever lost when focusing on their customers without going crazy with the balance sheet.
I am personally trying to think about availability mis-weighing in writing this, because one of the biggest factors I think creates so much momentum is something we cannot measure. The fact that many crypto companies have a VC arm speaks volumes for the industry. This means that the ecosystem is one of corporation. They are all working together to build. This in turn reinforces other tendencies I won’t go into again. I place a lot of value on this simple piece of information which seems to have passed by the market all together.
I believe this mental model exercise is the key to understanding why COIN is more likely to beat the competition than the other way around. There are several effects working with COIN and against the others. This does not mean it will come to pass this way. But in my view the probability is favoring COIN’s success.
This concludes my research process for COIN. I truly hope that this blog will add value to someone out there. I have been blessed to be in a community where sharing and teaching is on the front of most people’s minds and this is my way of giving back. You may not hear from me for a while now until I find the next worthy deep dive candidate.
03-08-2022 Update
The importance of Culture & Mission
https://www.theblockcrypto.com/post/126411/sushiswap-cto-threatens-to-quit-as-infighting-escalatesThis is another example of why culture and mission are so important in the context of the above described mental models. A new platform can simply rise out of nowhere and challenge an existing one. There are no barriers to entry in the beginning. The only thing that differentiates one from another in the end are the Network Effects of having more users. And the only way to achieve that is by offering superior product and having your customers trust. And as I have laid out above (even if it is intensely portrayed) the only way to do that is with a clear mission and an authentic culture build around the mission.