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10 Cognitive Biases Explained Through the Bitcoin Adoption Cycle

“The confidence people have in their beliefs is not a measure of the quality of evidence but of the coherence of the story the mind has managed to construct.” — Daniel Kahneman
Phase #1 | Anchoring Bias
Your best friend is a bitcoin maximalist and he’s been spewing his propaganda for some time now. He’s been nagging you and your friends for years, though his efforts remain mostly futile.
Whilst you don’t remember the contents of his passionate rants, you clearly remember the price of bitcoin at the time, which sat at about $1,000 apiece. You turn on the news and see that bitcoin is again breaking all-time highs. $10,000. $20,000. $60,000. It just won’t fucking stop.
And of course, the deep pain of regret settles in and that tired dialogue won’t leave your head: “if I would’ve put in X, I would have now had Y”. I should’ve done this. I could’ve had that. And so it goes, this intolerable thought loop lives rent-free in your mind.
Unfortunately, this is the extent of your cognitive effort placed on bitcoin at this time and when your friend reminds you again for the 100th time, your regret turns into irritation. You tell him, “fuck it, it’s too late for me”.
This is known as anchoring bias: the human tendency to over-rely (or ‘anchor’) on the first information we receive, which in turn causes skewing of perception and leads to poor decision making. In this case, your fixation on the price at first exposure causes you to think: “I missed the boat. It’s too expensive now”.
You fail to realize that the risk profile of bitcoin looked very different at a $1,000 than at $30,000. You fail to take into account the positive changes made in the years since, and that this price appreciation is merely a reflection of the positive state of the network.
Your friend informs you about anchoring bias and suggests that you accurately assess bitcoin on its merits and its future potential as a non-sovereign reserve asset. But, of course, you fall too deep into this cognitive trap and dismiss him entirely. You tell him: “that’s easy for you to say, you got in at a $1,000”.
In his frustration, he tells you the old bitcoin trope: “Have Fun Staying Poor”, because he’s a good friend and that’s what good friends do.
Phase #2 | Availability Heuristic
You, still a nocoiner, mostly subject yourself to mainstream media coverage of Bitcoin, reported by journalists with a cursory understanding of this nascent asset class.
After hearing that a bunch of your colleagues lost their life savings on some pump-and-dump shitcoin, your conviction that bitcoin is the same scam steadily grows.
This is an example of the availability heuristic in use: the overestimation of the importance and likelihood of an event, given the greater availability of that information to you. In simpler terms, you are what you eat and you make judgements based on the information readily available to you.
This is because your brain doesn’t like expending too much energy, unless you really have to. Exploring complex topics from first principles and conducting thorough due diligence is an enormous mental task. A task that most people avoid.
It’s much easier for your brain to go: “I heard this and saw this, so yeah, it must be that”, then to go: “I heard this and saw this. Perhaps I should see if these observations are valid by exploring each major assumption and assess the quality of the data myself.”
But who the hell has the time for all that?
Phase #3 | Loss Aversion Bias
You finally do a bit more research and realise bitcoin might just be an economic revolution disguised as a get-rich-quick-scheme. But the volatility of bitcoin scares you. You’re usually quite smart with your money and played it conservatively all your life.
You watch Bitcoin go up 12% in a day, only to drop 15% the following day. You’ve never invested in a high-risk high-return asset before and this type of price action is completely new to you. So you start doubting yourself: “Is this just gambling?”
Your bitcoin friend tells you that “price volatility is merely a function of market uncertainty and asset class nascency” and he tries to calm you down by pointing to the compound annual growth rate (CAGR) of bitcoin (see Table 1 below).
As he explains this to you, you glance at the price and see it drop another 8%. You nod and nod and pretend to know what he’s talking about. You tell him you will buy it soon. But in the end, you don’t pull the trigger because you’re too afraid of losing your hard-earned dollars.
This is known as loss aversion bias, which describes the people’s tendency to prioritise avoiding losses over potential wins. In other words, we’d rather win less than lose at all. Because we feel the pain of loss more deeply than the joy of winning. This conservative human tendency is one of the first things professional traders learn to unlearn.
Phase #4 | Unit Bias
You get over the volatility and do a bit more reading. You finally commit to investing in bitcoin. For real, this time.
But, you only have $1,000 to spare and feel disappointed that you can stack only a fraction of a bitcoin. Owning a fraction doesn’t feel very good and it makes you feel like you’re too late. So, you start looking for ‘alternatives’.
You scroll through Coinbase and make your first newbie mistake: you buy a low-digit shitcoin, because “it’s cheap” and “I can own thousands of them”. This is known as the unit bias and it’s the human desire to have or complete a whole unit of a given item or task.
Classic case of unit bias demonstrated by the KISS rock star, Gene Simmons.
Falling into this cognitive trap, you fail to take into account the market capitalisation of your shitcoin and fail to determine whether this is reasonable. In fact, you don’t really know what market capitalisation is, nor do you grasp the concept of the total addressable market (TAM) and you subsequently fail to discern and weigh the contributing elements that can fulfil it.
Like so many newcomers, you fail to study the shitcoins that came before you and fail to notice the plethora of pump-and-dump games that transfer wealth from naïve newcomers to insiders and professional traders.
Your friend explains to you that bitcoin will eventually be denominated in SATS (1/100,000,000 BTC) in the years ahead, which in fact is the native unit of the protocol and the base unit for which the miners price their transaction fees.
This pervasive cognitive bias and fixation on unit price, of course, causes you to misprice your investment. All because you wanted to own a whole unit of something, rather than a fraction of something distinctly better.
A real life depiction of a first-class crypto newb as he apes into a low-digit shitcoin, “bEcAusE iS cHeAP”.
Phase #5 | Outcome Bias
Your bitcoin maximalist friend tells you that your low-digit shitcoin is a bad investment. He explains that over half of the entire supply of this shitcoin are owned by the issuing company, who derives almost all their profit by dumping their newly minted tokens on retail investors. He also explains that this company is currently facing legal action from the SEC for securities fraud.
But, as the saying goes in crypto, “scams pump the hardest”, and you see your shitcoin outperforming everything for the next few months.
Your friend tells you that, “you should denominate your shitcoin in BTC terms, and when you do this, your shitcoin typically underperforms in the long run”. He tells you that, the “market can remain irrational longer than you can stay solvent” and that you should be aware of something called wash trading. But you incorrectly cite the efficient market hypothesis and tell your friend he is full of shit.
This is known as the outcome bias: the tendency to evaluate a decision based on its outcome, rather than on what factors led to that decision (through unit bias, for example). Just because you won a bunch on money in Vegas, doesn’t mean gambling your money was a smart financial decision and something you should continue doing.
Phase #6 | Confirmation Bias
It’s 1:03 AM and you tweet your deep and meaningful insight to your bot followers as your shitcoin pumps 20% in a day: “To the moon! Next generation blockchain baby!”. Your newsfeed is rife with bullish shitcoin sentiment and any negative news on the matter, you simply dismiss them as FUD campaigns.
Congratulations, you are now a fully-fledged shitcoiner.
Despite your friend sending you well-researched critiques, you perform the mental gymnastics to turn this into a bullish narrative for your shitcoin. Because proper due diligence is a joke.
This is known as confirmation bias and is the tendency for one to search for, interpret, focus on and remember information in a way that confirms one’s preconceptions.
Your bitcoin maxi friend begs you to reconsider this life of shitcoinery. He tells you that the shitcoin market is mostly a casino for professional traders to take your bitcoins.
You both accuse each other of confirmation bias.
Phase #7 | Choice Supportive Bias
The bear market eventually hits, as it always does, and you see your shitcoin plummet. The so-called developers have long left and the so-called community, once populated by paid bots, are dwindling by the day.
But, you have faith.
And no, you won’t go gentle into that good night.
You defend your actions to your friends and family, and most importantly, to yourself, as you painfully bag hold your shitcoin to its demise.
This is known as choice supportive bias, a justification of past decisions, even if the decision matrix on which you based those actions was painfully wrong.
Phase #8 | Survivorship Bias
In the depths of the crypto bear market, you finally capitulate. You finally come to terms with your shitcoins. You find the courage to let them go.
You repent your sins and vow to never touch another shitcoin again. You finally listen to your bitcoin friend and start reading the critical material.
You fall down the rabbit hole.
You form a more balanced thesis.
You make a sensible commitment to bitcoin by way of dollar-cost averaging a proportion of your income. On your staple diet of ramen, you stay humble and you keep stacking sats. Day-by-day, week-by-week, you earn your keep into the citadel.
But this isn’t easy. Your beloved father scolds you on a daily basis and lectures you about stocks, bonds and gold. Diversification and so on. He claims that this is the best way to accrue wealth.
And maybe he’s right…
But you suspect your father might be suffering from survivorship bias: a type of selection bias where the results, or survivors, of a particular outcome are disproportionately evaluated. This overemphasis on the survivors (and their outcomes) can result in a false estimation of probabilities.
In this case, you suspect your father is overestimating the historical performance and general attributes of market indexes — without an adequate evaluation of future possibilities. And of course, you think this boomer framework of investing is outdated and potentially dangerous (only time will tell).
So you tell your father, “given the continued currency debasement and expansion of sovereign debt, concurrent with the decline in productivity and the destabilisation of the geopolitical climate; investment into bitcoin appears much safer than it first appears”.
He, of course, perplexed, scoffs at this.
So you point to Japan and the 30 year bear market that they’ve experienced, and you draw parallels to our aging population and the exponential expansion of the central bank’s balance sheet of government debt.
You tell him that, even though portfolio diversification of stock and bonds is generally sound advice in most circumstances, you retain that, given the timing within the long-term debt cycle and the nascency of the digital asset class, you’d rather invest in bitcoin — the most scarce digital asset known to man.
You further explain that, “bitcoin offers the best asymmetric risk-to-return profile”, and you point to bitcoin’s Sharpe ratio (see Figure below). You explain that this might be the trade of the century and that you will only commit what you’re willing to lose.
Most importantly, you explain this is the best shot to escape his basement bedroom.
Your father’s intrigue turns into concern.
Your father is now convinced that you’re on drugs.
Phase #9 | Overconfidence & Ostrich Effect
The bear market winds down, demarcated by the lack of engagement on shitcoin Twitter. The speculative fever is now long gone and you now find yourself dipping your toes into the technical side of bitcoin.
As you fall deeper into the rabbit hole, you realise that the bitcoin network is on a class of its own. You realise that the bitcoin development is of the highest calibre and working quietly behind the scenes to further upgrade the network: Taproot, Graftroot, Schnorr Signatures and so on.
Second layer solutions — like the lightning network is now working as intended, with adoption steadily growing. Peer-to-peer transactions in developing countries are flourishing, with cross-border and remittance use cases beginning to be fully realised.
You feel good about the regulatory environment, in lieu of the Coinbase IPO, the entrance of the traditional finance industry, and the growing awareness by policymakers.
You feel confident about the state of the bitcoin network and decide it’s time to sit back, HODL and relax. You still think there are some under-addressed risks, but you think, “meh, I’m sure they will figure that out”. So, you scale back your participation in the bitcoin community.
This complacency and disregard for risk is an example of the ostrich effect, which is described as the tendency to avoid or ignore negative information by ‘burying your head in the sand’.
Bitcoin’s inherent flaws such as it’s excessive energy usage and inability to scale aren’t something that will just magically disappear. The network faces many long-term hurdles that shouldn’t just be ignored.
Phase #10 | Blind Spot Bias
You always thought you were pretty well balanced. You feel you recognize your own biases and those in others, and now even more so after reading this article. You feel confident that you’re above average when it comes to cognitive biases — just like the author of this article.
Well, this of course is another bias, known as the blind spot bias: The tendency to see oneself as less biased than other people, or to be able to identify more cognitive biases in others than in oneself. Put more simply, this is the bias-bias and is a precursor to developing a superiority complex.
Concluding Remarks
Congratulations, you’ve made it to the end of this article and now Descartes’s “I think therefore I am”, hits you a little differently. “Doubt is the origin of wisdom” and this author urges you to identify the cognitive biases within yourself and to always think in first principles.
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