Whenever we hear about cryptocurrency, we forget that what makes or breaks this emerging asset class is the people behind it. Depending on who you ask (and how you measure it), the number of people in the world who currently hold cryptocurrency is anywhere from 0.1% to 20%. This article will take a deep dive into the psychology of this minority of cryptocurrency holders and make some speculations about what this means for crypto today and tomorrow. It should be noted that most of what you are about to read is based on opinion unless otherwise specified.
What kind of people buy cryptocurrency?
People who buy cryptocurrency can be divided into three broad categories. The first are institutional investors like hedge funds and investment banks. You could also include many rich people such as Jack Dorsey on this list, since it is doubtful whether he and other famous individuals outside of the cryptocurrency space are personally investing through platforms Coinbase or Gemini. It is more likely that they arrange for larger purchases through Over the Counter Cryptocurrency (OTC) providers through an intermediary, such as a financial advisor or some other financial middle-man.
The second are regular retail investors – the average person who doesn’t know too much about cryptocurrency and doesn’t care about it until it makes the news. These individuals are generally excited when they see the Bitcoin price pump, but will then claim “it was a scam after all” when the price starts to fall.
Usually brought in by a fear of missing out (FOMO), the average person invests in crypto with blinders on – buying not only Bitcoin but also a bunch of altcoins with good PR and flashy websites. When these low quality assets crash, this can often prompt individual retail investors to liquidate their other cryptocurrencies as well, or just set aside their wallets and forget they ever invested.
The third type of cryptocurrency buyer is the one the rest of this article will focus on, and that is of course the die-hard investor. If you are reading this article, chances are you fall into that category (we know we do!). Die-hard investors are familiar with the technologies underlying the most popular cryptocurrencies, namely blockchain. They know the ebb and flow of the crypto economy and are more or less adjusted to its relentless volatility. They (sometimes) know how to identify the good cryptocurrencies from scammy pump-and-dump ICO projects. There is one critical difference between them and the other two types of investors: they are in it for the long haul.
Before we move on to the next section, we have to address the elephant in the room. Yes, some criminals use cryptocurrencies for their illicit activities. However, they do not use ALL of the 5000+ cryptocurrencies for this end. As we have seen, hackers seem to prefer Bitcoin. This is a bit counter-intuitive considering Bitcoin’s lack of privacy compared to other cryptocurrencies. As such, criminals are slowly turning to assets which offer genuine identity protection such as Monero. Although Bitcoin is still the primary cryptocurrency used by criminals, it is gradually falling out of style and the average Bitcoin user is becoming your average Joe instead of your average prison cellmate.
The psychology of cryptocurrency traders
It’s always entertaining when a major news publication declares Bitcoin or cryptocurrency as a whole to be dead. This has of course been proclaimed multiple times and this perspective has yet to materialize in reality. In truth, it is extremely unlikely that Bitcoin, and much less cryptocurrency as a whole, will die out any time soon. This is because there are both little people like us and big people like Changpeng Zhao, the CEO of Binance, who are quite literally ready to follow this exciting new asset class until it booms or busts. This is because we are all aware of just how much potential there is in the crypto space. Even “non-believers” like Elon Musk have praised Bitcoin’s novel design and goal.
This almost saintly level of faith that many cryptocurrency holders have is both a blessing and a curse. It’s a blessing because no matter what happens, there will always be a percentage of the population which will maintain cryptocurrency ecosystems, even at their own expense. These individuals are likewise the loudest advocates for cryptocurrency and do their utmost to educate the population about its potential to change the world (hey, that’s us!).
Whether it’s to hedge against existing markets or to bring transparency to voting, blockchain technologies are changing the world even as you read this article. In truth, it is only a matter of time before it becomes embraced by both institutions and the public. The question is whether they will truly throw away the key to centralization and this is where things get tricky.
The curse of cryptocurrency is that there is a tendency to get sucked into a bubble. For many of us, the existing benefits and future potential of cryptocurrency is almost divine. However, for the average person, it’s both a mystery and a trick. Fully understanding cryptocurrency involves wrapping your head around concepts like value as a whole, and coming to the realization that the only reason anything has value is because we agree that it does. It doesn’t matter if it’s gold, silver, fiat currency, or Bitcoin. These things only have value because we say so (and yes, there are also practical applications for most of the above).
Cryptomaniacs are quick to point out the baselessness of fiat and cry that the sky will eventually fall. That is not how you win over supporters. Trying to explain the use-cases of cryptocurrency to the average person is unfortunately not very easy for most to understand either. Clear and simple communication, without exclamation, is when cryptocurrency adoption flourishes. This is why Brave has the largest user-base in cryptocurrency. It’s a privacy oriented browser that gives you the option to get paid in crypto for viewing ads. Even a 5 year old can understand how Brave works!
Psychological effects of holding cryptocurrency
One of the most notable differences between cryptocurrency markets and legacy markets is that whereas the stock market pauses overnight and on weekends, cryptocurrency markets never sleep. This leaves many cryptocurrency traders exposed especially during brutal bear markets or parabolic bull runs. Stop-loss settings in exchanges are only so effective and this can leave many cryptocurrency traders in a state of constant stress.
This is exactly why experienced traders like Bob Loukas recommend investing no more than 10% of your total liquid assets into cryptocurrency. This is because you won’t be able to stomach the nasty shakeouts, like the 65% price crash in March of this year, and you won’t be able to sell at optimal points during the peaks of bull runs after each Bitcoin halving.
Another nerve racking part of handling cryptocurrencies involves transferring and storing crypto. Very few cryptomaniacs doubt the security of hardware wallets like Trezor and Ledger, and even of many mobile wallets like Trust Wallet or Mycelium. However, getting your crypto from point A to point B never ceases to be a stressful procedure. As shown in the viral YouTube sketch, a single error in the receiving address means your crypto is gone forever.
This element alone can be enough to turn people off from dealing with cryptocurrencies, especially those who aren’t particularly tech-savvy. Keeping track of your assets can also become extremely complicated if you’re not careful, and even finding a secure place to store your wallet seed can be incredibly difficult to do.
Dealing with exchanges is also a cumbersome task. This may be speculation, but it seems odd that so many of the biggest most reputable exchanges seem to run into issues when there is a surge in trading activity on their platforms. Whether it’s Coinbase going offline, Binance crashing, or various other lesser known exchanges suddenly running “maintenance”, it seems like interacting with even the same exchange can be a radically different experience from day to day. Between all the hidden fees, the lack of transparency, the fake volume and wash trading, there is of course that eternal risk that the exchange will pull a QuadrigaCX and suddenly disappear from the internet along with your crypto. This is why you must always store your assets on your own wallet whenever possible.
Finally, it’s important to discuss the most troubling aspect of the cryptocurrency space: misinformation. Consider that the majority of news about cryptocurrency comes from two sources: Cointelegraph and Coindesk. The former is apparently heavily influenced by the exchange HitBTC, according to posts in a Monero Reddit thread.
Recently, Binance bought the most popular cryptocurrency statistics website, CoinMarketCap. Unfortunately, there is no amount of news which will convince anyone in the cryptocurrency community that CoinMarketCap is still independent. Case and point: they recently added a metric which places Binance at the top of their list of exchanges which they had previously omitted (number of web page visits). This should raise more than a few eyebrows.
A critical problem in the cryptocurrency community
This topic deserves its own section. The cryptocurrency community is packed with scammers and bounty hunters which do nothing but hurt the asset class. If you need proof of this, just pull up any Telegram group related to cryptocurrency. The quality of interaction in most of these groups is dismal. It’s a constant stream of ICO advertisements for shady projects, giveaways where no winner is ever announced, and female moderators which don’t seem to exist outside of Telegram and Twitter. Similarly, Facebook has no shortage of fake “crypto girl” profiles which are constantly on the hunt for victims in even the most reputable cryptocurrency groups. This underworld of the cryptocurrency community is nothing like the marketing we see on the surface on platforms like YouTube and Medium.
The reason why this is endemic in the crypto world is quite obvious: there is no regulation. If you scam someone’s Bitcoins from them, what will any government do? Most politicians have no idea what cryptocurrency is, and you’d probably get a shrug from any police offer you reported the crime to. That being said, this lack of regulation certainly has its benefits, namely that many governments around the world don’t pay attention to cryptocurrency assets until they’ve been converted into fiat.
If the cryptocurrency community wants crypto to become mainstream, they must implement some system which identifies these bad actors and removes them from these channels. This doesn’t need to be done with a centralized authority. Instead, it can be done using something like the Erasure Protocol which requires users to place a stake on the information they share with others. This will disincentive trolls and scammers from clogging cryptocurrency networks both online and offline.
Cryptocurrency: Putting things into perspective
The world of cryptocurrency has a lot of growing up to do. Bitcoin is only 12 years old, and many elements within the crypto sphere seem to reflect that as a biological age. Emerging technologies are often seen as threatening. This is because at their early stages, the only people involved are those who built the foundations of this new technology. Many of them are extremely smart, and we’ve seen it. However, it is also often the case that when you’re really good at one thing then you aren’t very good at others. There is only so much time in a day that you can dedicate to certain tasks and if you spent your whole life building blockchains and creating novel strings of code and decentralized applications. It should come as no surprise that these same individuals have a hard time explaining what exactly it is they made in a way that appeals to the average person (not gonna name names).
Cryptocurrency adoption is happening in real time but the integration of this asset class will be very gradual. Just how much it will change the world cannot be estimated at this point, especially not when we consider what developments in artificial intelligence and quantum computing could mean for the space.
To those skeptical of cryptocurrency: take a minute to watch a few videos and read a few articles. We are finally starting to see some digestible communication coming from various news outlets and influencers within the community. You might be surprised at what you find.
To cryptocurrency holders and traders: remember to pull your head away from the data set every once in a while. The Stock to Flow model is after all just a speculative data model, and many notions of price support and resistance are fundamentally arbitrary. Although you want to get on with it and enter this new world where you get rich because you were an early adopter, there is still a long way to go. Be patient, and consider bringing some open minded friends along for the ride. Being rich will be no fun if you’re surrounded by a bunch of greedy cryptomaniacs and computer geeks.