Hype and Hysteria – Investing and Risk in the Bitcoin Era
One year ago we started Internet Bull Report. Mostly we write short blurbs, but from now on we will be adding some essay style bigger thought issues. Here’s the first, we hope you enjoy it.
As a once-off money-making opportunity, tickets for the musical Hamilton looked like a good investment to ticket touts. The official price of most tickets for the London production is less than £80, but The Guardian reported on December 10th that some were on sale online for £6,000.
On the face of it, that was a low-risk investment: the ticket tout could buy, for example, ten tickets for £800 and sell them for £60,000. Except there was one problem: The organizers said they could identify most resold tickets and those bought from unauthorized sources and would refuse admission to anyone presenting them at the box office. Suddenly, a low risk investment became a not-so-low risk investment. The touts had to decide whether they could offload the tickets to people who haven’t heard that they might be useless, or sell at a lower margin to punters aware of the risk, but willing to take it anyhow.
That’s an example of two common kinds of risk. The touts take the risk in order to make a profit and their customers take a risk in order to see a much-hyped show. Like any risk taking, sensible weighing of the pros and cons plays a big part. Sometimes, however, the thrill of the risk taking itself plays an equal and often even larger part in the decision process. That’s when risk becomes dangerous.
Casinos and bookies exist, firstly, because many gamblers are addicted to the thrill of the risk as much as the potential winnings, and, secondly, because most gamblers lose more than they win, yet come back for more. Not surprisingly, most bookies and casino owners are rich, and most gamblers are not. What all this shows is that, much as we think we control our risk-taking decisions, our bodies and minds often have a different agenda. Scientists know, for example, that, when we take risks, our brains receive a dopamine reward roughly proportionate to the perceived level of risk taken and that some of us have an extra genetic disposition to risk taking. These are reasons risky behavior can be so thrilling. As well as our genes, our moods and the seasons effect how our brains assess risk. We’re more likely to take risks in spring and summer, and when we’re happy, and when people we know have already taken similar risks. Without the dopamine expectation, however, we measure risk quite differently. That’s why we’re much more likely to urge caution when advising others about risks, especially those close to us.
Bitcoin is a good study in the psychology of risk taking. The recent price surge doesn’t demonstrate how crazy human beings are so much as how very human they are. Because of the media hype, Bitcoin offer every kind of investor a bigger thrill than usual. The price surge is based on purchasers gambling that, when they decide to sell, there will be someone willing to pay more than they paid. With such a volatile commodity, however, at some point that purchaser won’t be there, and the last purchasers will be left with coins worth less than they paid for them. Many will panic and sell off. Some will make a profit if they had bought at a lower price than whatever the current price is; some who didn’t will try to cut their losses, and others will grit their teeth and hold off selling in the hope the price will rebound. For most, their earlier speculative thrills will be replaced by frustration, and depression.
Our approach to risk is often illogical, sometimes harmful, and potentially very expensive. Whether it’s Bitcoin, poker, equities, or theatre tickets, investors come in three main types: the thrill seekers, the overly greedy, and the prudent. The traits may overlap a little at times, but the prudent stand apart in being able to control base urges and focus on logic and expert advice. Their results may not always be spectacular, but in the long-run, this measured approach is much more likely to deliver high returns.
This article started with a mention of the musical Hamilton. Perhaps, it’s appropriate to end with a quote from that wise US Founding Father: “…the passions of men will not conform to the dictates of reason and justice, without constraint.” That’s a good message for everyone, especially risk takers.
Jeff Robinson and the IBR Team