The Addictive Nature of the Cryptocurrency Market
While Bitcoin, and other cryptocurrencies, are thought to be the future of finance, they have gained the attention of the masses for a very different reason.
(Opinion: Written by Blake Cohen)
Well, at this point, if you haven’t heard of Bitcoin, it could be suggested you need to get out more. Just in case you aren’t aware of what it is, though: Bitcoin is a decentralized form of digital currency that utilizes blockchain technology to discreetly send money from one person to another.
While Bitcoin, and other cryptocurrencies, are thought to be the future of finance, they have gained the attention of the masses for a very different reason.
People are getting rich from them…and quickly too.
Bitcoin is the original massive money maker for investors. If you invested $100 into bitcoin a little over 10 years ago when it was only worth $0.05, you would be worth about 76 million dollars today (at the time of this article Bitcoin’s price is around $38,000). As people realized that these currencies start out with a very small price tag and have the potential to grow exponentially in a relatively short period of time, attention shifted towards finding the next Bitcoin. This resulted in thousands of new coin/tokens being created regularly, hundreds of new trading platforms that provide easier access for retail investors to invest becoming available,, and millions of people are pouring their money into the cryptocurrency market. The problem is, though, many aren’t investing in the functionality or purpose of cryptocurrencies but, instead, are investing in the dream of striking gold.
And, some people have.
Most recently, a coin created originally as a joke named “Dogecoin” spiked from being worth under a penny a share to almost $0.70 per coin. Tech giant and CEO of Tesla, Elon Musk, was even promoting the coin on his twitter. As hype around the coin grew, so did the price. This meme coin (coins that are heavily promoted on social media through the use of, admittingly hilarious, memes are referred to as meme coins) ended up creating millionaires all around the world.
The spike of Dogecoin and the restlessness that Covid-19 restrictions have left us all feeling has taken the world by storm now. All together, as of today, the cryptocurrency market is valued at $1.7 trillion dollars which is up more than 100% from January 2021. Investors, some with $50 and some with upwards of $50,000,000 are pouring dollars into the crypto market with the hopes of making it rich (or richer).
The Thrill of Cryptocurrency
Cryptocurrencies do have real value and, as mentioned, are highly considered as something that will be a major part of our society’s financial future. Sports teams, Fortune 500 companies, and many small business have announced that they will be, or already are, accepting cryptocurrencies as a form of payment. Many of these cryptos are innovative, forward thinking and resolve trust issues that much of the world has with our current centralized banking systems. The intentions of many crypto creators - or devs (short for developers) - are pure.
At the same time, many coin/tokens on the market are “get rich quick” scams with the hopes of creating enough hype around them to raise the price of the coin drastically so that the coin/token’s creators can turn a few bucks into a few thousand or million or billion bucks and then get out as quickly as possible securing their money.
Strangely enough, the philosophy behind this scam doesn’t seem to bother many new investors. That’s mainly because they are looking to do the same thing. Most investors want to get in quickly, hit the jackpot, and then get out to enjoy their newfound wealth. Stories are all over mainstream media about people hitting it big in the crypto world and becoming overnight millionaires. In one recent story that was reported on almost every major news outlet, two brothers invested $8,000 into a speculative meme coin named “Shibu Inu (SHIB)” and walked away a couple months later worth 9 million dollars. Every overnight crypto success story that circulates the airwaves creates more and more interest in the market. As interest in the market grows, so does the amount of inexperienced investors dreaming of sitting on a sandy beach giggling to themselves about how many zeroes their bank account has in it.
What people don’t realize is that there are actually a lot more stories of people going into massive debt, bankrupting their households, and even dying by suicide as a result of trying to become the next crypto millionaire. They hoped their investments would go “to the moon” and afford them a brand new Lamborghini but, instead, their story ends in tragedy. Unfortunately, as common as these tragic stories are, they aren’t as nearly popular to the masses. These harrowing news reports often seem to disappear off the radar as quickly as it takes to read them.
Why is that, though?
How is it that so many people can ignore obvious warning signs and red flags?
The answer lies in the same reason’s people become addicted to gambling.
The Gambler’s Fallacy & Confirmation Bias
According to experts, human beings put too much faith in chance. In the gambling world, there is a concept known as the Gambler’s Fallacy phenomenon. This theory describes the common belief of many problem gamblers that a random event (like hitting a jackpot) is more likely to occur since it’s happened in the past. Relating this to cryptocurrency trading, many people believe they should invest in newly emerging currencies (coins/tokens) because those that got into many other coins early on have become rich (The Decision Lab, 2021).
The truth is: Human’s don’t like to believe incidents like what happened to the two brothers from New York turning $8,000 into 9 millions dollars is random or happened by chance. What we do like to do is rationalize events like that one by searching for patterns or information that supports our belief that the occurrence was intentional however distorted that belief might be. We also like to compare similar stories and use them as further confirmation of our theory despite the fact that the stories may not be related at all or are extremely rare if looked using a larger sample size.
That brings us to the topic of another phenomenon that occurs with problem gamblers, and now crypto investors, known as confirmation bias. As stated by Simply Psychology (2020), “Confirmation bias happens when a person gives more weight to evidence that confirms their beliefs and undervalues evidence that could disprove it.” In the cryptocurrency market, this means that investors seek out information that confirms their belief about any potential investment in a coin/token only and ignores any warning signs they’ve seen along the way. Any confirming information found, regardless of the source’s poor creditability or the content’s questionable validity, serves as reassurance they are making a good decision with their money.
What so many investors don’t realize is that they are just falling victims of pump and dump scams that are intentionally playing off the fact that the two aforementioned phenomena exist. Reality tells us that making lots of money from the market in a quick and easy fashion has a very low probability of occurring. Reality also tells us that most people are willing to ignore low probabilities based on fantasies, dreams of “what if”, and Cinderella stories.
In an article discussing the lack of regulation in the cryptocurrency financial market, cryptocurrency legal expert, Tal Lifshitz, Esq., writes, “The allure of the world of cryptocurrency to fraudsters has undoubtedly been strengthened by the lack of any crypto-specific regulations.” He also goes on in the article to indicate that the promise of a major return on investment or any type of sure-thing in the cryptocurrency market is highly unlikely. Unfortunately, I am afraid that few will heed his warnings.
By the way, problem gambler’s also disregard the low-probability of winning when playing slot machines or other chance-based games. Luck, chance, or odds don’t play a role in their thought processes because, in their minds, they are either: 1) due for a win based on the length of time they’ve been playing and losing or 2) have either won once before or know someone who has which confirms the belief that it’s possible (Clark et al., 2013). As a result, they spend countless dollars believing their big day is coming but, far too often, that big day never comes. Sound familiar?
To Invest or Not to Invest
There are clearly many parallels between a gambling addiction and what we are seeing occur in the crypto financial markets today. The same cognitive distortions that effect problem gamblers are rearing their ugly heads toward investors hoping that they are going to win a decentralized jackpot and, for that reason, pre-cautions must be taken. No person who develops problematic gambling ever walks into a casino expecting to become addicted. It sneaks up on them as they ride the highs and lows of winning and losing. Eventually, it’s no longer about winning money but, instead, it’s about chasing the thrill of risk. The same applies to trading cryptocurrencies.
When considering the possibility of putting your hard earned cash on the line in the crypto market, remember these few tips:
Invest in what you know…nothing more.
Don’t invest more than you are willing to lose.
Do your own research (due diligence) before investing (credible sources only).
If you have a history of gambling, behavioral, or substance addiction, do not make risky or impulsive investments.
If it seems to be good to be true, it probably is.
Invest because you believe in the quality of the product, business, or currency. If you are putting money into something and are hoping to make a quick buck…that’s gambling.
There is nothing wrong with investing your money if your investments are carefully calculated. The issue we are seeing with problematic investors is that they are seeking the thrill of winning instead of looking to make a wise financial decision. Take the time to educate yourself before making any investments with your money. Don’t invest emotionally and avoid anything that smells like a scam.
Be careful out there and be wise with your money! You’ve worked hard for it!
If you or someone you know has a gambling problem, you can call 1-800-Admit-It.
Next Level Recovery Associates Inc is a team of addiction and mental health professionals that offers coaching, counseling, interventions, case management, and companion services. If you’d like to schedule a free consult with a team member, click here.
This article does not contain any financial advice or guidance.
Information Sources:
Clark, L., Averbeck, B., Payer, D., Sescousse, G., Winstanley, C. A., & Xue, G. (2013). Pathological Choice: The Neuroscience of Gambling and Gambling Addiction. Journal of Neuroscience, 33(45), 17617–17623. https://doi.org/10.1523/jneurosci.3231-13.2013
Gambler's fallacy - Biases & Heuristics. The Decision Lab. (2021, January 22). https://thedecisionlab.com/biases/gamblers-fallacy/.
Noor, I. (2020, June 10). Confirmation Bias. Confirmation Bias | Simply Psychology. https://www.simplypsychology.org/confirmation-bias.html.
Rotstein, G. (2021, April 9). My Father, The Problem Gambler, As Defined By National Report And Me. USBets. https://www.usbets.com/my-father-problem-gambler-defined-national-report/.
Shalvey, K. (2021, May 15). Shiba Inu coin investment turned New York brothers into multimillionaires a few months after they bet $8,000 on the 'parody' cryptocurrency, reports say. Business Insider. https://www.businessinsider.com/shiba-inu-coin-cryptocurrency-turns-brothers-multimillionaires-2021-5.