Biases, barriers and bitcoin

I stumbled across a fascinating video this morning, about cognitive biases and money. Watching this, I realized that many of us bitcoin holders fall into the same trap.

The video talks about how we mentally segregate our “assets” into different compartments, which affects how willing we are to spend them. This is curious, since in the end it’s just money, right? And money is fungible, right?

So, why are we willing to spend some types of money and not others?

The video gives the eye-opening example of the movie ticket, the result of a study by renowned behavioural psychologists Kahneman and Tversky. If you go to the cinema and pay for a $10 ticket with a $20 bill, in exchange you get the ticket and a $10 bill. Now, say you lose the ticket. Do you buy another one with your remaining $10 bill? Most participants in the survey said no, they’d just go home.

But say instead the cashier gives you two $10 bills, and you are to hand in one of them to gain entrance to the theatre. If you lose one of the $10 bills, would you use the other one to see the movie? Most say they would.

This is notable, since the end result and cost is the same. (I think time and hassle should also be taken into account since they are an invisible cost, significant to some – but the point holds.)

Put any kind of barrier, even just one of form, between us and our money and we spend it less readily.

We all have things that we wouldn’t part with, even if it would get us in to see Hamilton. That’s because they have more than monetary value to us. They give us pleasure, they stimulate a memory, perhaps we know we couldn’t replace it easily… But a movie ticket? Not much sentiment attached there.

Now, sidestepping over to bitcoin, I have often pondered why some pundits point to bitcoin’s lack of acceptance in stores as a sign of failure. I couldn’t see the sense in spending something that you think might go up in price. You spend it, it’s not in your wallet anymore, and you lose out on the appreciation.

Through a different lens, I see now that that is totally stupid a narrow way of looking at things. And what’s more, misses the point of bitcoin.

It’s money. And it should be used. Holding onto it because “it’s bitcoin” denies it that use, which contradicts the interest that got us into the asset in the first place.

Plus, it might go down in value, so spending it now would be a good asset management decision. Or it might go up, but you can always buy more with the money that you would have used had you not used bitcoin. By using the cryptocurrency you perhaps saved money or time, so that would also have been a sensible decision.

But we’re not sensible, as Kahneman and Tversky – and all of us who prefer to hold bitcoin rather than spend it – show.

Most bitcoin these days is held for speculation. We buy it thinking it will appreciate in price. With that, from the beginning we are not regarding it as money. Those of us who buy in because we love the concept and we want to try out using it, end up falling victim to the rising market mentality of “can’t miss out on appreciation”. We stop seeing it as money and start seeing it as a ticket to riches.

We can offer in our defense the fact that merchants don’t take bitcoin. True, but take a look at the number of merchants who did and stopped because no-one was using it, or the number of merchants that don’t even bother because no-one is using it. It’s hard to deny that we are perpetuating the problem.

For bitcoin to reach its potential, it needs to circulate, and it needs to be used for more than portfolio diversification. The longer we let the current trend of market obsession continue and the longer we let our cognitive bias rule, the more we delay bitcoin’s debut as a global currency.

It’s strange how sometimes you can be searching for an answer to one question and end up understanding a completely different one a bit better.

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