The Media Challenge for Cryptoasset Investors

By Manuel Stagars, CFA, CAIA, ERP Posted In: Alternative Investments, Behavioral Finance, Economics, Investment Topics

The media have documented the vagaries of bitcoin throughout the cryptocurrency’s existence.

The latest attention grabber? Bitcoin’s roller-coaster ride from $1,000 to $20,000 over the course of 2017 and its dramatic plunge to roughly $6,000 in 2018.

At the core of the cryptocurrency craze is the fear of missing out (FOMO): Many casual investors feel they need to invest in bitcoin and related products at any cost before prices go to the moon and take everybody else with them.

“For the longest time, when I spoke to people about cryptocurrencies, they tried to convince me I’m betting on the wrong horse.” — Tommaso Bonanata, head of investment management, Base58 Capital

What lies at the heart of FOMO? For John Maynard Keynes, “animal spirits” were at play, and Alan Greenspan blamed “irrational exuberance.” It seems humans have such a profound fear of losing out on something good that we throw out all caution when push comes to shove.

Otherwise rational people fell for the bitcoin craze of 2017 and invested near the peak. Many lost half of their investment and may not recover anytime soon. Imitating successful behaviors is a survival mechanism of animals and humans alike, but we have to be careful where we get our information. Consuming every piece of news, tweet, and YouTube video on bitcoin and cryptos can give a false sense that we have mastered the asset class.

Entrepreneur and investor Ryan Selkis observed,“I get significantly dumber after reading 90% of crypto ‘thought pieces’, marginally dumber after reading the next 9%, and smarter 1% of the time.”

Bitcoin — and crypto in general — will continue to have a severe and ongoing reputation risk unless the quality of the related information and our understanding of it improves.

Relying on the media is a bad investment strategy. The crypto press often spins news to hype the crypto space. For instance, when Goldman Sachs announced its new bitcoin trading desk, did that mean that Goldman approved of investing in bitcoin?

“Goldman never directly said it would invest in Bitcoin,” says Tommaso Bonanata, “only trade CME futures for people who want to buy or sell. Taking a spread between the bid and ask has been a profit center for banks for the longest time. They might as well have opened a trading desk in apples or oranges — it’s all just about the fees they can extract by trading them.”

Obviously, bitcoin has crossed from the backwater into the mainstream, but perhaps only in the perception of its brand, and not in terms of its maturity.

More than ever, investing in crypto — and any other asset — requires more than rudimentary knowledge. If we feel we need to invest in something just because its price is going up, we have the wrong motivation. Instead, we should develop a thesis about the underlying mechanics that drive the price of an asset class.

Unfortunately, most of the popular media is of little help in this regard.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.