Crypto is not a Winning Lottery Ticket
In a 2014 study, Marketing professor Raj Raghunathan and Ph.D. student Szu-Chi Huang of the McCombs School of Business at the University of Texas, Austin found that human decision-making is far more motivated by emotion and sentiment than by reason and logic. That conclusion certainly helps to explain many of the ups and downs of the cryptocurrency market since the beginning of 2017.
If you’ve been around the cryptocurrency community for any length of time, you may have heard expressions like “HODL” (hold on for dear life) and other industry-specific jargon intended to instill support and an almost religious optimism about the crypto future. That is very much a mentality based in sentiment, not logic. Whether anyone likes it or not, the reality of cryptocurrency flows is that they are the result of speculative trading rather than investments in the technology.
The explosive growth of Bitcoin and other cryptocurrencies was originally sparked within Libertarian and Anarchist countercultures out of a philosophical cynicism regarding the global economy and its centralized monopolization by a few organizations and governments. That was fine initially, but things began to snowball with the next influx of users: Silicon Valley and Wall Street. For that later group, the move to crypto was considered a sound strategic move. Then, as media coverage increased, that exuberance attracted ordinary Mom and Pop investors looking for something new.
Of course, most people don’t usually have the investment knowledge and financial skill set needed to make the same appraisals of project fundamentals and growth potential as those in the finance sector. Nor do they hold onto their crypto for philosophical reasons like the libertarians and anarchists. Instead, they are often attracted by the novelty and mystique of crypto. They want to make a lot of money quickly, which is why some of these investors treat crypto like a Bitcoin-based lottery — crypto’s ancient history, rather than looking at it like an investment in a world-changing technology that may represent the future of money.
This type of investor, who often expects future gains to resemble those of the past and doesn’t just treat Bitcoin as a currency in its own right, often gets burned by economic reality when there are downwards shifts in the markets. The relatively small scale of cryptocurrency market capitalization results in a great deal of volatility, and it takes more than a strong bull to weather it. While there are a multitude of uses for payment, no single cryptocurrency has yet attained mainstream currency status (Bitcoin comes close) and each new media report brings with it the potential for changes in market sentiment and large price swings.
Overall, the irresponsible and emotion-based belief in the guaranteed winning crypto lottery ticket is hugely destructive to the evolution of cryptocurrencies — especially as people wake up to the reality of a bear market and begin to malign cryptocurrencies as they see themselves losing money.
In a previous article, I asked a profoundly important question that we all need to consider in light of cryptocurrency’s recent history: have we created a global casino? Many of us invest in stocks, bond, and other potential opportunities without doing the hard work needed to assess the risk. Fortunately, there are analysts and other professionals who can help us to make sound decisions with those types of investments.
With cryptocurrency, however, the marketplace has often seemed to forget about those investment principles. Too many people have found themselves captured by the FOMO phenomenon. That “fear of missing out” can cause people to make emotional decisions when they should be acting based on reasoned analysis.
Throughout much of last year, we saw irrational exuberance at its worst. Many people flocked to the digital currency space, eager to take advantage of what they saw as guaranteed investment winners. As always happens in those types of runaway bull markets, far too many investors believed that there was nowhere for the markets to go but up. Unfortunately, that’s not the way things work in the real world.
Those who know me well know that I am not a fan of rampant speculation. In crypto’s case, that speculation has proven particularly problematic. It’s caused many people to forget that this technology was not created to be a speculative asset. Its creator — or creators — designed it to benefit people in their everyday lives.
Some of us haven’t forgotten that promise. Cryptocurrency is not a winning lottery ticket. Instead, it is an innovation that will help create a world where people of all walks of life enjoy greater financial inclusion and self-empowerment.
New technologies tend to be a little unpredictable until they are fully established in the marketplace and institutional and legislative systems catch up. As the Science Fiction author and father of Steampunk William Gibson said, “the street finds its own uses for things”. One might look at how prescient all those privacy activists turned out to be about social media, and at the same time how essential it has become to modern life. In that regard, perhaps a little sentiment doesn’t hurt. Patience is a virtue.
