Most articles I post come from a place of experience; projects I’ve worked on, clients I’ve assisted, tough conversations I’ve had, or wisdom stolen from some of the best business thinkers.
This one is different.
I’m coming from a place of inexperience, a place of complete irrationality.
I’ve been looking at cryptocurrencies.
And I’m no expert.
This is obviously a hot topic, and one that will seem obvious in the future.
Right now though, the situation is really murky at an intellectual level, and powerful at an emotional level.
By the time people read this in 2018, the price of Bitcoin, Ethereum and Litecoin will have changed drastically from where they are today (December 2017).
What I don’t want to overlook is how this situation is simultaneously a golden opportunity and an example of stupid herd mentality.
Like Schrodinger’s Cat, famously simultaneously dead and alive.
But like Schrodinger’s real point, it’s an example of where logic and reason run out.
So we end up telling ourselves bizarre stories to justify our own actions.
In the future, we’ll probably look back at this time with regret; either the regret of missing out, or the regret of sinking money into an intangible and unproven currency.
Let’s start with the news
Bitcoin has recently gone up in value, from A$7,000 up to A$22,000 in the space of about two weeks.
For comparison, it would take an investment at 5% interest 23 years to do the same thing.
This has come out of seemingly nowhere, with cryptocurrencies now responsible for a high portion of business news headlines.
In my general newsfeeds, bitcoin’s price is a hot topic, with many people in my demographic (Male commerce graduates with disposable income) getting involved and espousing strong opinions about what the price will climb to.
That’s the news, here’s the emotion
My gut response to this has been both powerful and irrational.
Regret: I could have bought in for $300 or $700, and yet I hesitated
FOMO: concern that I will miss the bus and have more regrets in the future
Optimism: Based on nothing, I think the price will go higher
Pessimism: This has all the signs of being a speculative bubble.
Reputational risk: I don’t want to be known for either missing out or wasting my money. In fact, the story is a stronger motivation than the actual cash I’d lose.
Anxiety: The uncertainty makes me nervous
Excitement: This could get really interesting, and change how global finance works.
Engagement: I check the price several times per day. It’s like watching a sport.
This is the crucial bit.
My decision to buy or not to buy has been entirely driven by these emotions.
Not because of my understanding of the underlying products, or because I have a strong sense of how these currencies could be used in the future.
That’s important because it explains a lot about irrational human behaviour, especially where money is concerned.
For example, my outlook on bitcoin’s future hinges on how much of it I own.
If I owned 10 coins, I know I’d be an optimist and wouldn’t shut up about how high it’ll go.
If I was unable to own any coins, I’d be a pessimist, like Aesop’s fox declaring that the grapes must be sour.
So instead of my opinion dictation my position, I’ve let my position dictate my opinion.
This applies to a lot of other parts of business.
If you work for a huge corporate, guess what you’ll tell yourself about huge corporates?
If you own a house in Sydney, guess what you’ll think about future property values?
If you stand to benefit from a corrupt or unfair system, guess what you’ll think about the ethics of that system?
Our mind’s power to rationalise our decisions is incredible, and that can work for you or against you.
The underlying mechanics of the coins are irrelevant to the next wave of investors.
It’s a lot of unsophisticated buyers (like me) making a deceptively simple call.
Are we in, or are we out?
That decision won’t be based on objective research.
It’ll be based on what our peers, trusted experts and news sites tell us.
The problem is that our choice of peers, trusted experts and news sites is already biased, which makes our “objective research” massively flawed.
Warren Buffet is famously anti herd behaviour, encouraging investors to “Be fearful when others are greedy, and greedy when others are fearful”
The trap here is; is the minority who invest in cryptocurrencies the herd or the rebels?
Are we supposed to ignore the fear of the investors who are wary of bitcoin and be greedy, or are we better to fear the greed of the crypto fanatics?
If you don’t think it’s greed and FOMO at play, get this:
In Australia, our crypto platforms allow you to buy into the currencies, but don’t yet allow you to sell.
If that’s not the sign of a bubble, what is?
So for today, I have a tiny stake in the market, especially because Coinbase limits new users to $300 per week.
Yes it feels like gambling.
Yes it’s been a fun few weeks already.
No, I’m not selling my shares to buy a bitcoin.
Yes, I might regret that in the future.
But here’s the vital part:
No matter what happens, I am not a genius.
I’m an irrational punter who’s playing with money he can afford to lose.
Just like everyone else.
This is how innovation works; it all looks like gambling at the start.
The question is, can you tell the difference between “reading the market” and getting caught up in hysteria?
And will you let your current position dictate your opinion?