Crypto-Psychology: Behind the Hype

Everybody wants to catch the next big wave.

We place a lot of value on being right about the future. Some of the highest-paid people are either good at predicting, building, or influencing the future. Outside of the futures traders and celebrities, people who get more than a few big public predictions right are venerated (hello Michael Bury).

So, it makes sense that people want others to know that they’re good at predicting and building the future.

A theory of human behavior that helps explain this is “Social Signaling”. Human peacocking, in other words. We signal to others about our virtues and fitness as partners (romantic or not).

I see a lot of signaling going on with the recent crypto hype.

When we get predictions right, we want everyone to know it. People love showing off winning bet slips, stock market wins, etc. In the long run, it matters even more. Catching a career wave can say a lot of good things about our intelligence and personality. You saw the wave before it got too crowded, had the courage to paddle out to it, and had the ability to catch it. In terms of behaviors and signals that reward us with social capital, this is prime among them. It helps that catching waves tend to net you a nice amount of capital as well.

The advent of the internet and the digital economy it created made for some biiiig waves. With cheaper access and distribution to the world’s consumers, internet companies had the potential to grow faster and bigger than traditional companies. This made both founders and investors who could see the waves and capitalize on them rich and famous — fast.

People who saw this happen thought, “Wow, that looks amazing, next time a big wave like that comes along, I’m paddling out!”

Enter crypto.

I don’t know if you spend much time online, but the debate over crypto’s role in our future has been hot as of late. It’s either going to upend our current digital economy or it’s a hype machine with too many flaws to make it out of the crypto-bro corner of the internet.

There are a lot of people who think crypto is the next big wave, and they want you to know that they’re on it. This is the first signal behind the hype. I’m on Twitter (too often), and there are lots of people who have some sort of crypto-signal on their profile. Whether it’s name.eth, an (emoji, emoji) in their display name, a crypto-punk pfp, it’s everywhere.

Then there are NFTs. Purchasing NFTs may be the ultimate signaling tool in our modern world. With one purchase you are signaling that a) you have so many resources that you can spend anywhere from $2k to $2m on a piece of digital art and b) that you’re in on the latest trend.

Look, I’m glad that people paddle out. We need risk-takers and early adopters. However, the hater in me can’t help but think that a lot of them are eager to signal how ahead of the curve they are.

There’s a famous Upton Sinclair quote that says, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” It’s usually meant to apply to curmudgeons and Luddites, not those on the frontier of new technology. However, it applies to crypto-believers as well.

Essentially, there’s a lot of cognitive dissonance that resists valid criticism of crypto-projects. If you’re invested in bitcoin, Ethereum, NFTs, Solana, etc., it’s going to be uncomfortable to accept information that they are not the game-changing, money-making ideas that you thought they were.

There’s self-interest involved, as well. If you own an asset, you want it go up. It’s in your interest to convince others that it’s valuable as well. It’s not nefarious, crypto supporters aren’t trying to pump and dump (well, not all of them), but it’s not exactly 100% intellectually honest either. This is the second signal behind the hype.

This is why I and others get frustrated with the so-called, “crypto bros”. They’re missionaries of the church of crypto. They profess its pros, but highlight its cons and they will call you a non-believer, a Luddite, an idiot, or worse. They may be well-intentioned, but so much of it comes off as grift-y that it’s hard to get on board.

The third and final signal: people love to say that they are for the people. Nobody wants to say, “I’m for the entrenched elite”, they want to say, “I’m for the liberated masses”. To be fair, crypto does hold promise here. It’s one of the few asset classes that isn’t already owned by the wealthy, and the only barriers to entry are cash and internet access. You don’t have to have enough money to buy property, be an accredited investor, or have access to exclusive angel deals.

There’s also web3. Whereas the idea and excitement of crypto-currency came after the 2008 financial crisis, decentralized web apps have caught a lot of hype at a time when we’ve seen companies misuse our data in a myriad of harmful ways.

Our data is either used to sell us stuff, keep us hooked, or is hacked and exploited later. What if instead of exchanging data for apps, or exchanging content creation for ad dollars, we could own the data or be part owners of the platforms?

That’s the promise of web3 and the part of crypto I am excited about. I’m old enough to remember an internet without powerful middlemen and gatekeepers and yearn for its return. I see the early success of some DAOs, and sites like OpenSea or CryptoKitties and think it may just work.

Do you know who isn’t so sure, though? Elon Musk and Jack Dorsey. If there are two people who understand technological trends and internet culture… it’s them. (The thing is, they’re both big bitcoin advocates so you can’t call them haters outright)

For now, I side with Jack here. I’m not sure the incentive structures line up well enough. I also saw this tweet the other day (told you I’m on a lot).

The modern digital economy is built on ads. It kinda sucks but it also kinda rocks when you think about it. It’s created clickbait, ragebait, fake news, and influencers. But if you can ignore that stuff you get a lot of awesome functionality for free. Ads are fueled by data. The amount of data collected and crunched to feed you with an ad that you MIGHT click is insane. There are whole layers of industries built around this.

In web3, you control who your data is used by, but do we actually want this? Yes, people get upset when they learn that Facebook used data to polarize people or addict teenagers to Instagram. People don’t get upset when Netflix serves them up that new show, when Spotify shows them their new favorite song, or when Google knows to direct them home at the end of the night.

People love convenience, often above all else. Most people are still willing to trade their data for enhanced convenience and curation. Amazon has eaten nearly all of retail because people have associated them with reliable convenience. They have what you want, and they can get it to you quickly. They do this with data.

This is why I’m skeptical of web3’s widespread consumer appeal. It may feel like a big deal because a lot of tech influencers are all in, but that’s not enough to replace the current ecosystem of the internet.

So where does this leave us?

You have to be careful surfing. There’s so much money and clout to be had pointing out and riding big waves, that it naturally attracts people who are overly eager to signal their surfing skills. Is crypto a massive swell? Or one of those false alarms?

I don’t know, and in fact, nobody knows. People that claim to know the future will be should be taken with a pinch of salt. They’re likely either signaling or self-interested.