Monday, March 18, 2019

The Model Thinker #10 : Broadcast, Diffusion and Contagion.

Image result for r shaped adoption curve

What does it mean when it was written in The Economist that a group of whiz kids hired by Barclays Bank modelled the cryptocurrency craze as a disease and concluded that the bull market in 2017 is not ever occur again ?

After reading this chapter, I suspect that the they used models of broadcast, diffusion and contagion to model the behaviour of cryptocurrency investors - specifically this thing called the SIR Model.

If I am right, then cryptocurrency investments reach fever pitch based on the following variables :

P(contact) = Probability that a non-crypto investor gets exposed to a cryptocurrency idea.
P(spread) = Probability that a person exposed to a cryptocurrency idea would actually invest in it.
P(recover) = Probability that a cryptocurrency investor quits crypto-trading.

Whether a disease or an investment idea can spread through a population depends on this number called the basic reproduction number or R0.

R0 = (P(contact) x P(spread)) / P(recovery)

Where R0 is less than 1, the disease will dissipate. Where R0 is more than 1, the disease will spread through the population.

Policy makers have in their databases different R0 for a different diseases. Measles spread very fast and have a R0 of 15. HIV is a much slower 4. The higher the R0 the more thoroughly a population needs to be vaccinated.

Since I have no access to the original paper, I can only make educated guesses on how the analysis took place.

We have no idea what goes into determining P(contact) and P(spread), but I suspect in 2017, the basic reproduction number was much higher than 1 and this led to the cryptocurrency market overheating. In 2018, the whiz kids figured out that R0 had dipped below 1.

What does this mean ?

  • It likely means that folks who are exposed to an ICO paper or cryptocurrency trading idea are not longer taking action on making actual trades. This is most likely due to the number of scams out there in the cryptocurrency world.
  • Alternatively, folks actively trading cryptocurrencies are leaving the market in droves. Why risk everything on Bitcoins when REITs give a steady 6% every year?
Armed with this model, we might be able to predict whether the FIRE movement would meet the same fate as cryptocurrency trading. 

I would characterise the FIRE movement this way :
  • Becoming financially independent is still not mainstream in Singapore with just a few businessmen making a profit out of teaching folks how to do it. So, rightfully, P(contact) is low and limited to the BIGS and Seedly communities.
  • Some folks might be turned off by dividends investing if it too slow. Right now the industry is still experimenting on a better message to drive investor action. Even my own solution involves leverage to speed things up to motivate the younger investors to do something about their lives. I would peg P(spread) as being so-so. A trainer's success is in managing his P(spread).
  • While my personal bias may get in the way, I believe that FIRE will catch on because P(recovery) is so low, it is close to zero. Seeing money drip into a bank account has been so addictive, it's dominated my life for the past decade or so. 
A small P(recovery) is the reason why "Dividends are the opiate of the capitalist masses. " 

FIRE will survive as a movement and grow stronger simply because once a person starts seeing some results, he's likely to persist until he becomes financially independent. I know because I'm almost a drug peddler myself, getting my own dad to dividends about a decade ago and now seeing it in some of my students. Monitoring his stocks is what keeps my dad alert in his old age.


  1. FIRE has caught on more in high-wage US cities like San Jose or NY (you still need high salary as starting point) becoz of the 10-yr bull plus this cycle of FANGAM growth stocks. S'pore not so much due to the relatively hiccupy performance of stocks on SGX.

    P(recovery) will only get big during prolonged bear i.e. bad recession.

    Now there are some folks who surmise that we are in the middle of a 20-year secular bull, and that any recession or bear these few years will be relatively mild, at least for the US. The next big one will be closer to 2030 leading to another extended period of secular bear like the 30s, 70s, 00s.

  2. Perhaps the folks who think we are in a secular bull are a tad optimistic. I think if US-China does not come to an agreement soon, we'd be in for a bad time. Land lords included.

    But the P(recovery) for FIRE is going take a nasty repeat of 2008 to spike. REITs did not do all that badly in those days. Likely some kind of "flight to quality"