Over the past several months to a year, exchanging U.S. dollars for Bitcoin has been such a fruitful endeavor that the purchase of cryptocurrencies have entered the public consciousness and many young men in their 20s and 30s have been profiled on CNBC as well as the largest financial websites to publicly disclose their newfound wealth.
Most of the analysis focuses on whether Bitcoin is the real deal–i.e. will Bitcoin become a store of value analogous to gold or hard metals, and then appreciate against other currencies due to a projected lower inflation rate?
Less attention has been dedicated to analyzing the psychology and cultural backgrounds of the individuals that are drawn to trading Bitcoin and other cryptocurrencies. What conditions have allowed this speculative bubble to flourish?
For the longest time, I was always amazed by the fact that people got so caught in the dotcom bubble of the 1990s. I was too young to follow any markets at the time, and having not experienced it, even the benefits of hindsight didn’t provide clarity.
In the late 1990s, there were perfectly respectable men–the type who spent their weekends mowing lawns and wearing collared shirts, rarely consuming more than two alcoholic beverages in a given social setting, showing up to work on the weekdays well before 9 A.M.–who found themselves stuffing their 401(k) and taxable brokerage accounts with businesses trading at 100x earnings or even generating no earnings. They bought soon-to-fail or soon-to-collapse businesses on the grounds of nothing more than novelty and recent price appreciation.
Fast forward two decades, and it is happening again.
The cultural forces that have enabled Bitcoin to rise is the product of the millennial generation’s penchant for high self esteem despite not having a record of accomplishment or an intense work ethic.
In particular, the rise of Bitcoin is being spurred on by young professional men with above-average intelligence who believe that they have some type of edge–they read the right niche blogs and “get” the innovation of blockchain technology, don’t ya know–and the subsequent tradeability of Bitcoin has given these young men an outlet to showcase that they are more intelligent than their fathers and grandfathers.
Often times, these young men also participate in social circles in which some of their peers are provided-for trust fund babies that get lives of leisure, getting inebriated on weekends and vacationing in Hawaii, California, and the Carolinas and posting it on Instagram. As one Bitcoin trader characterized his peers, affluent by way of gift or inheritance, in an e-mail to me: “They’re not any smarter or better than me. Why should they get to lead the good life and not me?”
Already disposed to covet the leisurely fruits of wealth without putting forth the labor, the fact social media makes it easy for them to see other individuals lead their coveted lifestyle provides a haunting proof of concept–“if he can have it all without working, why can’t I?”
They develop this inner monologue without any self-awareness that they are using the wrong measuring stick. When Person X leads a life of leisure, it’s not because he’s so great that he deserves the right to have anything he wants without effort. The proper measuring stick is the Father or Grandfather or Person X, who actually did produce something of value over the long-term, and are choosing to use the fruits of those labors as they see fit.
Bitcoin then becomes the means by which these men can turn their fantasies into reality. If you have a large ego, how do you satisfy it? By coming up with an idea that makes the quick buck so you can humblebrag to others about how smart you are, “See, you should’ve listened to me when I told you about cryptocurrency.” Also, if they bring it back into the real world economy, they can not only create their own sphere of influence and lead a life of leisure, but they can also feel truly equal and superior to their trust fund peers–”He can only go on vacation because his grandpa gave him $2 million, I earned it by coming up with the Bitcoin investment idea and making that money for myself. I was always smarter than him, but now I’m just as rich as him.”
These cultural factors have enabled Bitcoin to grow into a speculative frenzy. It keeps drawing in more and more young men who think they are smarter than everyone else by understanding the appeal of Blockchain, and the recency bias of the extreme price appreciation in U.S. dollars enables them to project these returns forever into the future. The siren call fueling this hope is: “Bitcoin already increased tenfold in a matter of months. It can do the same thing again.”
That is how you create a speculative bubble in 2018. You create a cocktail of ego, wealth and leisure fantasies, social standing comeuppance, all with the additional ingredients of attractive recency bias and seeming proof of concept, and you end up with the 2018 version of the 1999 mid-career professional quitting his job to borrow from his 401(k) and open a Beanie Baby corner store. In each generation, the clowns may change, but the circus remains the same.