On this episode of The Impatient Investor, Andrew discusses how the volatility of Bitcoin can be an adrenaline rush for investors, but it is ultimately an asset with no underlying value, where the price is determined solely on investor sentiment.
“I get the psychology of shiny investments like Bitcoin, but I don’t subscribe to this type of cult-like devotion to an asset with no underlying value.”
And here we go again. Bitcoin blows past $48,000, hit another record high. As Wall Street fixates on inflation hedges, good luck finding Bitcoin, and Sky Bridges’ Scaramucci puts $100,000 price target on Bitcoin. Bitcoin has been on another tear recently, and there’s no other logical explanation for it. As of this podcast, it is trading at record highs near 48,000. And just about 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 that the Bitcoin frenzy is not unlike a cult. And like cults, those drinking the Kool-Aid are less driven by reason and more motivated by zealous devotion. Bitcoin is more religion than a solution to any problems as 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 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, and 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 or stolen every year with no means of recovery. As an inflation hedge, it’s far too volatile. Over the past five years, there hasn’t been a year where Bitcoin hasn’t been up or down at least 72%. It’s clear, even to the casual observer that Bitcoin has zero intrinsic value. It serves no purpose other than 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 University of California Davis. When you buy Bitcoin you’re buying into a whole scene, Bretton says, and it’s a scene that can be part of your identity. And fueling this scene is social media. Bitcoin is taking up a lot of cyberspace in the social media discussions. Finding other investors talking about the same investments empowers newbie investors, and gives them a sense of pride that they’re 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 an online social environment, 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 subscribe to this type of cult-like devotion to an asset with no underlying value, where the price is determined solely on how hot or cold investor sentiment is for the asset. If you’re interested in learning how to create multiple streams of income, go to www.stoptradinghours.com.