The LessWrong Crypto Autopsy

A LessWrong Crypto Autopsy

According to the recent SSC survey, 9% of SSC readers made $1000+ from crypto as of 12/2017. Among people who were referred to SSC from Less Wrong – my stand-in for long-time LW regulars – 15% made over $1000 on crypto, nearly twice as many. A full 3% of LWers made over $100K. That’s pretty good.

 

On the other hand, 97% of us – including me – didn’t make over $100K. All we would have needed to do was invest $100 (or a few CPU cycles) back when people on LW started recommending it. But we didn’t. How bad should we feel, and what should we learn?

This makes the generous assumption Bitcoin stays at $10,000 long enough for everyone to sell. More likely, it’s going a lot lower, so those who didn’t buy in 2015-2016 should not feel too much regret. With the exception of maybe half a percent of the general Bitcoin community, no is making and or has made substantial money with crypto currency, yet the media is trying to stir up a get-rich-quick frenzy, with stories about teenage Bitcoin millionaires [had you listened to this kid's advice to buy in mid December, you would be down a cool 30-50% now, yet he was nowhere to be found when Bitcoin was lower] and incessant remainders of how much the price has gone up. In all my time reading about Bitcoin and other coins, I think I can only count maybe 10-15 people who have made a ton of money (as I define to be above $500,000 at today’s prices, including realized or unrealized gains), and maybe 50 or so have made over $100k. If the market keeps falling, this already small number will dwindle even further.

Part of the reason so few people have made money is because losses typically hurt more than gains. When someone buys Bitcoin at $11,000, watches it fall to $9,000, and then it recovers to $11,000, the instinctual reaction is to get out to avoid pain (withdrawal reflex), but that means forfeiting future gains. Making matters worse, those who have the most to lose are the most risk averse. If you have millions of dollars and out of curiosity you put $10,000 into Bitcoin in 2013, who cares if the price falls 50% (like it did many times), but if that $10,000 is your life savings, you may be more inclined to sell at the bottom in order to preserve what little capital is left. In other words, humans are wired to be bad investors, and investors who need the money the most tend to be the worst of all.

Like almost all aspects of life, IQ also plays a role. Over and over again, one can see a positive coloration between IQ and individual Bitcoin wealth, and the distribution of individual Bitcoin holdings follows a power law, which is like half of a bell curve. Those who have >50 Bitcoin (but also over $500,000 in currencies such as Ethereum, Neo, Litecoin, etc.) , with the exception of the occasional celebrity, have IQs above 140. The very act of buying Bitcoin is sorta an implicit IQ test, with less intelligent people unable to figure out the process. Smarter people are better able to control their emotions and thus avoid selling too soon. But also, smarter people tend to have more money, which means having more disposable capital to take gambles on speculative assets such as Bitcoin, whereas a less intelligent person who has less money would be more risk averse. Less intelligent people would have been more susceptible to making the mistake of keeping money on an exchange, only to be stolen due to hacks, whereas smarter Bitcoin holders understood the risks and kept their coins offline. Smarter people also invested in Bitcoin earlier. Stefan Molyneux, who is a genius and can give detailed, impromptu talks about subjects as diverse as economics, philosophy, psychology, or history, has been recommending Bitcoin as early as 2013 and himself has made over $1 million in Bitcoin. But this is not to say many high-IQ people got Bitcoin wrong, such as over-estimating the likelihood of the U.S. government making it illegal, selling too soon, or predicting that Bitcoin would be a fad.

The biggest and most likely threat to Bitcoin holders is not regulation but that the price falls a lot and does not recover.