THE PSYCHOLOGY BEHIND BITCOIN

January 12, 2018 Yulia Konovnitsyna

INVESTING IN BTC? CRYPTO-CURRENCY ISN’T THE ONLY THING YOU’RE BUYING

Unless you’ve been living under a rock, you’ve heard of crypto-currencies, most notably Bitcoin (BTC). There are a lot of reasons for the value of BTC to go up or down, but one thing propelling it upward is basic human behavior.

Bitcoin’s rapid rise in value has been increasingly popular fodder for headlines of late. As I write this, BTC is currently trading at more than $17,500. A recent Wall Street Journal article stated that if you bought $100 worth of BTC when it first came out and sold it when it hit $2,500 per BTC, you would have made $100 million. $100 million! That is a sweetheart of a return for any right-minded investor and a life-changing event.

Long-time Silicon Valley investor Tim Draper thinks that Bitcoin is here to stay. He bought 30,000 BTC from the U.S. government at a cost of $600 per BTC (total cost of $18 million). That BTC is now worth over $500 million. John McAfee, a pioneer in security software, predicts that each BTC will be worth $500,000 three years from now. On the other hand, Jamie Dimon, chairman of J.P. Morgan Chase, suggests that it is all a bubble that will eventually implode.

Investment Or Lottery Ticket?

So the question remains, is bitcoin a great investment or a bubble? The answer is that BTC is somewhere on the spectrum between a rock solid investment and a lottery ticket. In fact, the psychology that drives people to buy lottery tickets is quite comparable to the emotion that drives a purchase of BTC. The emotion of HOPE!

The current odds of winning the Powerball jackpot are 1:292 million. You have a 1:700,000 chance of being hit by lightning this year. This means that you are 417 times more likely to be hit by lightning than to win the Powerball jackpot. Are people buying a prudent investment opportunity when they buy a lottery ticket? No. They are buying hope. Until the numbers come out and show that someone else won, you have hope that you will win—hope that you could improve your life and never worry about money again!

Two Driving Forces for Growth

Why buy BTC? Two reasons. First, just like the lottery, it has the ability to bring you more money than you ever thought you would earn. If McAfee is right, owning 10 BTC means you will have $5 million three years from now.

Second, and this is more unique to BTC and other crypto-currencies than to the lottery, you have a fear of missing out (FOMO) on a once-in-a-lifetime opportunity. FOMO is extremely powerful. If you bought stock in Apple or Amazon a decade or more ago, you could be quite wealthy today. But you didn’t. The accessibility of BTC paired with these huge projections of its growth triggers your FOMO. You don’t want your friends becoming multi-millionaires while you go to work everyday.

Is BTC a risk? You bet. Many crypto-currencies have some underlying rationale to them and are not an all-or-nothing bet (like the lottery). You could buy BTC at $6K and decide to sell it when it hits $20K. You may miss the ride up to $500K, but you will still have made $14K on a $6K investment, which makes any Wall Street trader sit up and take notice. But if you are buying BTC, you want returns that you can’t get in the stock market. Selling at $20K still leaves you with FOMO on the run up to higher numbers.

Bottom Line: Should You Buy Btc?

You need to really understand your own personal appetite for risk. The most important aspect of any investment is not the reward you might get, but the risk you are willing to take. Can you afford the loss if the BTC you buy at $10,000 dropped back to $10 and never recovered? Also understand why you are buying it. How much of what you are buying (and not selling) is hope or FOMO?

To make a good decision on whether or not to invest in crypto-currencies, only invest what you can afford to lose and do your research on WHICH crypto in invest in.