Probabilistic thinking or a probabilistic thinking model is a way of thinking based on possibilities, not certainties, which is very appropriate to apply to the crypto world that is full of uncertainties. So, how can we as crypto investors develop probabilistic thinking?
1 Change Mindset From 'Certain' To 'Possible'
The easiest first step for retail investors is to understand that everything is a game of probabilities. With all the thesis and analysis you have, you can still be wrong. That’s why it is very important to build and change the mindset from 'certain' to 'possible' because there is nothing certain in the market, especially in the crypto market.
2 Always Create Bull, Neutral, and Bear Scenarios.
That’s why it is very important in our minds to create scenario brackets. What happens in a bull, bear, or sideways market. For example: bullish probability 60%, bearish probability 30%, and sideways probability only 10%. By creating these scenarios we can allocate investment sizing according to the probabilities.
3 Create Potential Risk and Drawdown.
According to the bullish, bearish, and sideways scenarios, size your investments correctly. For example, if the scenario is bullish, I will risk Rp10, if bearish I will only risk Rp5, and if sideways I will only risk Rp4. Then, think in your heart, are you ready if the amount you risked fails and is lost? If you are still not ready with the amount, reduce it until you feel confident.
4 Use the Expected Value Framework.
We can use Expected Value which can be calculated using:
EV = (Probability of winning × profit) – (Probability of losing × loss).**
Example:
- You want to buy altcoin $ABC
- Probability of increasing 100%: 30%
- Probability of a 50% decrease: 70%
Therefore: EV = (30% × 100%) – (70% × 50%) = 30% – 35% = -5% (A bad decision).
EV > 30% falls into the very good category, EV 15% to 30% falls into the good category, EV -5% to +15% is worth trying, EV -5% to +5% Neutral, EV -15% to -5% Bad, and EV <-15% falls into the very bad category
