Sunday, March 29, 2020

Bitcoin Surge Is More About Feeling Good Than Economics

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Sentiment rather than good financial reasoning seems to be driving the value of Bitcoin ever upwards.

From an investment point of view, the Bitcoin bandwagon has no sensible roots.

Jumping on board makes investors feel good as they can see the value going up and up.

Bitcoin prices have already improved by 125% this year – which is the same as the whole of 2015.

In May, the cryptocurrency surged in value by 60%.

Analysts are bemused by the reasons why and can only put the boom down to investors being caught in a bubble.

Buoyant Bitcoin

As buoyant as Bitcoin is today, in the past the value has plunged just as much as it has soared.

And that’s really the point.

Investors are buying into Bitcoin because of the feel-good factor.

Behavioural psychologist Daniel Kahneman explained that in loss aversion, losses make investors feel twice as bad as gains make them feel good.

He argued that investors who wanted to feel good about their portfolios should not check their performance so often, because over a long period stocks and shares rise 54% of the time and fall for the remaining 46%.

Bitcoin investors want that glow of satisfaction from seeing their investments rising in value.

In the short term they are gaining a quick fix, but in the long term, the rises and falls will even out.

That 54% stat comes from scrutinising Wall Street performance since 1926.

Price will fall eventually

The argument is the price of shares and commodities is influenced by investor behaviour more than economic performance.

That’s why economist and analysts can never predict the stock market.

There is no rhyme or reason to why shares or the price of Bitcoin rise or fall, it’s more to do with how investors feel about themselves.

If investors avoid losses by seeking out gains, then logic will prevail for Bitcoin and investors will jump ship when the price starts to slump.

The theory is investors make decisions based on potential values of gains and losses rather than their financial position at the end of the transaction.

Is Bitcoin worth the risk? Probably not as the price will not keep going up for ever.

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