The Psychology of Shiny Investments

Here we go again…

“Bitcoin blows past $48,000 to hit another record high.”

“As Wall Street fixates on inflation hedges, good luck finding Bitcoin.”

“SkyBridge’s Scaramucci puts $100,000 price target on Bitcoin.”

Bitcoin has been on another tear recently and there’s no logical explanation for it. As of this writing, it is trading at record highs near $48,000. Just a week ago, it was trading at $32,500. There are no underlying economic indicators that would explain this recent jump.

Fresh stimulus checks may have something to do with it as a stream of new buyers jump into the feeding frenzy, but why Bitcoin?

What is the psychology behind shiny investments like Bitcoin?

It turns out the Bitcoin frenzy is not unlike a cult. And like cults, those drinking the Kool-Aid (crypto crows) are less driven by reason but more motivated by zealous devotion. Bitcoin is ″more religion than a solution to any problem,” says billionaire Mark Cuban. Truer words have never been spoken.

Like Trekkies, Bitcoin aficionados have their jargon full of acronyms and phrases, with pre-COVID conferences that attracted thousands of attendees.

Besides the religious angle, Cuban is right about another aspect of Bitcoin and that is it doesn’t offer a solution to any problem. In other words, it doesn’t serve much purpose – at least to explain its high price.

  • It’s not a great medium of exchange.
  • It’s a terrible insulator against inflation.
  • It’s not secure.

Judged on its value as a currency, Bitcoin fails miserably. It remains unregulated and unbacked by the full faith and credit of any government. As a medium of exchange, very few businesses accept it as a form of payment.

Initially touted for its security, Bitcoin has been anything but – tens of billions of dollars of Bitcoin are stolen every year with no means of recovery.

As an inflation hedge, it is far too volatile. Over the past five years, there hasn’t been a year where Bitcoin hasn’t been up to or down less than 72%.

It’s clear – even to the casual observer – that Bitcoin has zero intrinsic value. It serves no purpose other than as a vehicle of speculation – changing hands between investors for no rational reasons. Characterizing the Bitcoin frenzy as a religion or cult is the only rational explanation for its attraction.

“The culture around bitcoin is part of the appeal,” says Finn Breton, professor of science and technology at the University of California Davis. “When you buy Bitcoin, you’re buying into a whole scene,” Breton says. “And it’s a scene that can be a part of your identity.” And fueling this scene is social media.

Bitcoin is taking up a lot of cyberspace in social media discussions.

Finding other investors talking about the same investment empowers newbie investors and gives them a sense of pride that they’re a part of the financial machine. The dark side of this social interaction is that social media tends to fuel more risky behavior.

According to Utpal Dholakia professor of marketing at Rice University, who studies consumer financial decision-making, “Research has shown that when people talk about their investments in online social environments, they tend to become more risk-seeking in the types of investments they make.”

Besides empowerment, two other factors driving young and newbie investors are volatility and FOMO (fear of missing out).

For some investors, the volatility of Bitcoin is an adrenaline rush. This isn’t surprising since many of those armed with stimulus checks view the cash infusion as free money and play like they’re playing with house money.

I get the psychology of shiny investments like Bitcoin but I don’t ascribe to this type of cult-like devotion to an asset with no underlying value where the price is determined solely by how hot or cold investor sentiment is for the asset.

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