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Day 5: Is Crypto the New Tulipmania?

Posted on July 7, 2022

Behavioral economists talk about something called confirmation bias, which is the tendency of human beings to look for confirmation of what they already believe. For example, if you believe that Porsches are the best car, you will tend to look for evidence for why this is true. You are probably inclined to read articles written by other Porsche lovers. You can elaborate in great detail on all your great experiences driving Porsches. Maybe your dad or another significant person in your life loved Porsches. In your mind’s information-gathering center, other cars just don’t stack up: you remember how your friend’s Ferrari broke down, or how Hummers were being recalled a few years ago (this didn’t actually happen, and is just for illustrative purposes). And you know why Lamborghinis are clearly overrated. Either way, if you have the conviction that Porsches are the best, well, you will find the evidence to support that opinion!*

I’m experiencing a similar thing right now when it comes to Crypto, which has recently been struggling.** I have been secretly waiting for years for evidence of my anti-crypto bias coming to fruition. When I read an article like this one that I saw today, I find myself thinking, “Aha! You see? This is proof that cryptocurrency is no good!” Could this be confirmation bias? Could I just be trying to feel justified for not getting on the Crypto bandwagon?

I admit, I was curious and even envious of crypto-philes in recent years, especially as Bitcoin rose to astronomical heights from 2017-2021. At time, I was a little jealous, so it feels validating now to think I was “right” for staying away. Yet confirmation bias or no, I have never heard a convincing argument for why Crypto is actually a good investment (other than its popularity… which does NOT automatically mean something is a good investment!).

On the contrary, I have read enough economic history to know that every so often, the public gets bewitched by an asset that seems to promise fortune and riches for all. Centuries ago, a little thing called Tulipmania swept through parts of Europe. Many people literally mortgaged their homes just to obtain one tulip bulb (!), which they believed they could then sell for many times its already-astronomical cost. For awhile, this is exactly what happened. Economists call this the Greater Fool theory, because, well, you always need a greater fool to buy your already overpriced asset. In the throes of greed, people’s judgment can get impaired, and they often do what seems completely ridiculous to outside observers.

Ultimately, people realized they were losing their fortunes over flowers, and the bubble burst. If only humanity had learned its lesson with the tulips. But investment crazes have continued over the centuries. A few decades ago, we experienced the Dot-Com Bubble, which was basically similar to Tulipmania: the world, betwitched by the Internet, raised the valuations of many Internet companies to completely ridiculous and unjustified levels. Many of these companies did not make a single cent of profit, yet they were treated like they would all become the next Amazon (which only Amazon did). Finally the bubble burst.

Could this be what is happening right now with cryptocurrency?

I think it could be.

Of course, I could be wrong. Bitcoin and other cryptos could prove immensely successful in the long run, justifying the hoopla of being touted by celebrities and 20-somethings and recommended by financial companies as a good investment for your retirement accounts.

Or… maybe it will prove to be yet another mirage, tempting millions of people to chase a rabbit down a rabbit hole leading to nowhere.

As for me, I acknowledge that sometimes I can’t see past my own biases.

But that doesn’t mean I am going to be buying Crypto anytime soon.

After all, look what happened to the tulips.

*Incidentally, I don’t have many opinions when it comes to cars, other than a preference for good gas mileage, reliability, and affordability. However, the car analogy just popped out for me, probably because I know how strongly lots of people feel about cars.

**In fact, the stock and bond markets have also been struggling, although as far as I know, not to the same degree. Nonetheless, they have struggled, yet you don’t see me writing an article about how “I knew all along stocks and bonds were bad investments!” Confirmation bias, again? Perhaps. Ah, well.

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