Jamie Dimon, Status Quo Bias & the ‘Internet Replay’
You don’t have to look far to find financial luminaries and talking heads declaring the death of bitcoin. Again…
In just the past few months:
- JP Morgan CEO Jamie Dimon declared bitcoin is “not a real thing, eventually it will be closed”.
- “Wolf of Wall Street” Jordan Belfort called it a “fraud”.
- An article in the Wall Street Journal claimed bitcoin “is probably worth zero”.
- Billionaire investor Howard Marks said cryptocurrencies “aren’t real”.
These talking heads all have one thing in common…
They’re victims of the default bias
Have you ever been overwhelmed by the choices in a restaurant’s wine menu and just decide on the house wine? Or, when you buy the latest mobile phone, do you just accept the factory default settings and not even bother changing the ringtone?
Most people are happy to stick with the standard options. Even when we have several choices, we go with the default choice because it’s easier and more comfortable. Governments and other authorities know this and use it to nudge us in a certain direction.
For example, in one experiment scientists asked people about donating their organs when they die. Normally, only about 40 percent of people choose to donate their organs. But when donating organs was made the default option, more than 80 percent of people opted to donate – twice as many.
Even when there is no default, or standard, option given, we tend to use the past as our default setting. Most people like to stick with what they know and are anxious about making big changes or taking on new risks, even if the change would be good for us.
This default bias is the offspring of two other biases: status quo bias and loss aversion. Keeping things the same (status quo) is convenient, and the pain of losing is greater than the joy that comes from winning (loss aversion).
Put these together, and our brains often tell us it’s just easier to keep things the same and avoid any potential pain that might come from changing things.
For investors, this default bias can stop us from making changes to our portfolio or strategy because it’s too inconvenient or it makes us feel uncomfortable. We tend to cling to the way things are, even if it’s not the best thing for us.
It happened with the Internet
In the early 1990s, the Internet was just starting to go mainstream. And many otherwise smart folks were convinced it was just a fad.
Here’s a quote from U.S. astronomer Clifford Stroll in 1995:
“Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney.”
Even the inventor of Ethernet, Robert Metcalfe, didn’t believe in the Internet.
“I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.”
And telecommunications expert Waring Partridge had this to say:
“Most things that succeed don’t require retraining 250 million people.”
These people fell for the default bias. They believed in what they knew and were anxious about making big changes or taking on new risks. Plenty of investors who fell for this bias too. And they missed out on big gains as the Nasdaq – which is home to many tech stocks – grew 400 percent from 1995 to 2000.
We’re seeing the exact same thing happen with bitcoin and cryptocurrencies today… it’s like a replay of the status quo bias.
Most people don’t understand cryptocurrencies
Anyone who claims bitcoin isn’t “real” or it will “close” (as JP Morgan CEO Jamie Dimon did) doesn’t understand the cryptocurrency at all.
As we’ve written before, bitcoin can be moved around (far more easily than traditional currencies), used to buy goods and services and it has scarcity. Only 21 million bitcoin will ever be mined. And over 16 million have already been mined.
As for the concern that bitcoin is purely “digital”, it’s worth remembering that more than 90 percent of all money that exists today around the world is not physical (i.e., not notes or coins).
And as we’ve written before, bitcoin can’t be “closed”. It’s not an overleveraged credit derivative fund. It’s a highly secure distributed blockchain running on a global network of computers.
Bitcoin is just a cryptographically secure medium of exchanging value. It’s not “fraud” or not a “real currency”.
In short, every now and then something truly different and new comes along. And if you’re willing to go against your default bias, you could make a fortune.
That doesn’t mean bitcoin won’t be volatile
I’m not saying bitcoin won’t be volatile. Like any asset, cryptocurrencies will continue to experience rallies and corrections. Don’t fall into the trap of thinking “this time is different” and that bitcoin will go up forever. The cryptocurrency could absolutely be in for a short-term price bubble. But over the long term, the upside is far from over.
Even though there’s plenty of hype around it, the level of general public participation is still extremely low. Buying bitcoin is still relatively cumbersome. Exchanges need to do know-your-customer (KYC) checks. Depending on where you live, funding a bitcoin account can require a trip to the bank and an expensive bank transfer. And you still need to familiarise yourself with a new asset class, which takes some effort.
But all that means is the opportunity is still there.
The most appropriate course of action for the majority of investors is simply to buy a little bitcoin – and forget about it. Buy, hold and ignore the volatility. It’s not a one-way ride, it’s a bumpy one. Be prepared to stomach big declines and sit tight.
Bitcoin is an asymmetric bet… if it falls or even goes to zero, your loss is small (assuming you’ve put in only what you can afford to lose). But if over the next few years it continues go up, then gains of 10 to 50 times are entirely possible… and even bigger gains lie outside of bitcoin in the cryptocurrency space.
In short, everyone needs to familiarize themselves with the process of buying, trading and storing cryptocurrencies. They’re here to stay. And being on the outside (and not understanding them) will limit your ability to profit from them.
Publisher, Stansberry Churchouse Research
*This has been a guest post by Stansberry Churchouse Research*
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