💭 6 cognitive biases aiding Bitcoin's adoption

CoFounder Weekly #50: July 7, 2019

Good morning, CoFounder Weekly readers.

*sips coffee*

This week’s issue has 2 sections.

An essay (about Bitcoin) and interesting tweets from the week.

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💭 6 cognitive biases aiding Bitcoin's adoption

By: Greg Kubin

Ah, Bitcoin...magical internet money. 

The benefits of Bitcoin make sense -- it’s decentralized, secure, and provides a digital store of wealth.

But how the hell did we get to a place where one Bitcoin is worth more than $10,000? And why is there a decent chance it will eventually be worth multiples of that?

Six cognitive biases are aiding Bitcoin's global adoption:

  • The "Lindy rule"

  • Availability cascade

  • Fear of Missing Out

  • Endowment effect

  • Anchoring

  • Social Proof

Let’s explore each of them.

Lindy rule: The longer an idea has been around without being falsified, the longer its future life expectancy.

The longer Bitcoin exists, the longer it is likely to continue to exist. Economist and author Nouriel Roubini calls this the "Lindy rule", which applies to books, technologies, and ideas. Bitcoin has existed for 10 years. Every day it exists, every day it is more likely to keep existing. And the longer it exists, the more likely it is to be valued as a reliable store of wealth.

Availability cascade: The more people hear about something, the more likely people believe it to be true.

Bitcoin's word of mouth is remarkable. Blowhards like Anthony Pompliano and the Winklevoss twins are preaching Bitcoin's story on Twitter, CNBC, and CNN. The more often people hear about Bitcoin's potential, the more they believe it to be true. This is called the Availability cascade. You hear about something a lot so you start to believe it.

Donald Trump knows this, which is why he repeats the same points over and over and over and over and over again. The same principle applies to local news -- if you watch reports about local murders and fires every night, you’re likely to believe we live in an unsafe world (even though that is not the case statistically).

FOMO: Fear of missing out.

Each bull run creates a new crop of wealthy individuals, who make way too much money and catalyze the next wave of word of mouth. Our society is infatuated with get rich quick stories like lottery jackpot winners. In the future, I imagine local news stories about neighborhood "Bitcoin millionaires!" who will make their whole community jealous enough that they too decide to buy into Bitcoin. Sadly, I think this aspect of Bitcoin brings out the worst in people. Money, money, money. It kills culture.

While this phenomena is local in nature, Bitcoin's reach is global. Anyone in the world can buy it. The total addressable market size is literally planet earth.  Someone in Caracas can buy it. So can someone in East Hampton. That makes for a gigantic market opportunity that is still barely tapped. 

Endowment effect: Caring more about things that you own.

As FOMO grows, access to acquiring Bitcoin is becoming easier. There are hundreds (or thousands?) of companies building products in the ecosystem. With Coinbase or Square Cash, it literally takes 3 clicks to buy Bitcoin. It's almost too easy to buy it.

Other onramps exist too. With Lolli, you earn Bitcoin when shopping. I wouldn't be surprised if we see more cryptogaming companies like Satoshi Games creating the next Candy Crush, but rewarding players with Bitcoin. 

And when you own it, you're more incentivized to root for it. That's the Endowment effect. In a famous study by Daniel Kahneman, participants who are given a coffee mug will sell it for $7. Participants who are offered to buy a mug only offer $3. People value things they already own more than things they don’t own. The moment you own some Bitcoin, start to think it’s worth more than others who don’t own it.

Anchoring: When you are influenced by an initial piece of information that anchors your decision making.

Bitcoin maximalists talk about the price going "to the moon". For some, that means $100K price target by 2021 (10x what it is today). To others, it's $1 million. While these prices are merely predictions, the public's beliefs have already been anchored to an astronomical future price of the cryptocurrency.  

And what’s the thinking behind those predictions? Gold's market cap is $7 trillion; Bitcoin's market cap is $300Bn. The logic is that when Bitcoin becomes accepted as "digital gold" and a digital store of wealth, it's market cap will enter the stratosphere of gold’s market cap. So gold, really, is the anchor.

Social proof: If other people are doing it (or saying it), it must be correct.

The smartest money in the world is invested in Bitcoin. Andreessen Horowitz has a dedicated crypto fund. Square has a crypto division. Peter Thiel and Naval Ravikant were early investors. The social proof has been growing, creating the feeling that you're investing alongside the greats.

So...what's the biggest risk to Bitcoin’s adoption? 

They're not rooted in psychological biases, but worth mentioning what I see as two risks:

1) Governments will try to squash it. Bitcoin threatens fiat currency if citizens can pay for things "outside the system". Some countries will ban it.. This, to me, is the existential risk: If the countries around the world decide that internet money independent of national governments and central banks is illegal. 

On the flipside, we'll probably see other weaker governments embrace Bitcoin and other cryptocurrencies. Maybe even ditch their own weak currency in favor of a globally valued Bitcoin. So perhaps Bitcoin will be legal tender in some countries and illegal in others.

2) Who the fudge is Satoshi? It's mind boggling that millions of people have adopted a currency created by a mysterious identity. That's some biblical shit right there. What if Satoshi has the master code and shuts it all down one day? I get it, the blockchain is immutable. But I'm still uncomfortable with his lack of identify. Show your face!

So where do we go from here?

At times, it feels like this is all an experiment that very well could fail.

Other times, it feels like we’re in very first stage of a century-long transition to digital currency. There’s too much excitement too soon.

But lately, bitcoin’s adoption feels inevitable. It has momentum, brain power, money, a passionate community, and a bunch of cognitive biases willing it into existence.

We'll probably look back on this period the same way we look at buying up domain names 20 years ago. It will look obvious in hindsight. Another bias.

What do you think? Any other cognitive biases at play? Lets discuss it on Twitter.

🐣 Tweeter’s Digest

And now, some interesting tweets from this week.

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More 4 day weekends please,

Greg & Wisam

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