Why Is Everyone Investing In Bitcoin?

Niklas Göke
May 20, 2018 · 7 min read
Disclaimer: This is not financial advice. I am not a financial advisor. What follows is my personal, subjective, biased opinion.
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Bitcoin’s price through 2017.

Three Types Of Bitcoin Bias

I like to think of cognitive biases as raindrops on your mental windshield. A few won’t cloud your vision too much, but once it’s full, you better turn on the wipers. When it comes to Bitcoin pre-ownership, there are three in particular that mess with your mind.

1. Unit Bias

This is our tendency to want to measure things by whatever metric the world gives us for them. Originally discovered in a study about food intake, what it means is that you’d rather eat one burger than half a burger, even if both should work out to 250g of meat.

2. Probability Neglect

Another tendency we have is to only respond to the magnitude of an event, not its likelihood. We estimate the size of the risk or the reward, but don’t factor in probability. As a result, we don’t judge based on expected value, as good poker players, investors, and traders do, but by the severity of the threat or the joy of the upside.

3. Endowment Effect

An investor’s worst enemy is impatience. But, once we own an asset, we expect it to go up in value immediately, simply because it’s ours. On the other hand, we’re rarely willing to pay the current market price for something, because, well, it’s not ours yet!

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A Chronology Of Bitcoin Price Predictions

Giving in to biases doesn’t mean we don’t doubt them. First and foremost, there’s FOMO, the fear of missing out, as we see others making money — or at least claiming to — left and right. The space provides many opportunities to make a fortune beyond investing. Naturally, we’re scared to be left in the dust.

How likely is it that every one of them is wrong?

Oh Holy Context, Where Art Thou?

I don’t know anything. Bitcoin could go to $0 tomorrow, for all I know. What I do know is that making good decisions requires lots of context. This is where psychology hits its limits. Context is the environment of facts surrounding your subjective opinion. And there’s nothing more factual than math.

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Source

If all Bitcoin does is stay around, supply and demand dictate that the price, in the long run, should go up.

That’s a big if, but the math that backs it pierces a potential first-time investor’s doubts because it’s simple, yet sound. Another valuable piece of context comes from placing Bitcoin and cryptocurrencies against other asset classes as a whole.

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Yes, the size relation is accurate. Calculated for a $200B total crypto market cap back in November.
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There are many ways to spin the math so that it works out. There are few ways to spin the math so it doesn’t.

Putting It All Together

To recap, potential investors into Bitcoin are initially held back by three biases. The fear of missing a big opportunity along with a plethora of price predictions, among other things, gets them to doubt these biases. Furthermore, the mathematical context around Bitcoin is simple and convincing, which is what gets many to ultimately pull the trigger.

This is part 4 of 5 of our Bitcoin For Beginners series.« Go to part 3 || Go to part 5 »

The Crypto Times

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Niklas Göke

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I write for You. That’s my promise — and the name of my daily email full of inspiration, smart ideas, and emotional support: https://youletter.substack.com/

The Crypto Times

The latest crypto news, deeply researched, fact-checked, and thoroughly analyzed.

Niklas Göke

Written by

I write for You. That’s my promise — and the name of my daily email full of inspiration, smart ideas, and emotional support: https://youletter.substack.com/

The Crypto Times

The latest crypto news, deeply researched, fact-checked, and thoroughly analyzed.

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