Normally, when people like Warren Buffett and Alan Greenspan say to stay away from an investment, others, at the very least, will approach that investment with additional caution. But with the cryptocurrency bitcoin, the usual bets appear to be off--people are still flocking to put their money behind it. So you have to ask, why in the world is this happening? What is so different about bitcoin that it's able to keep such a grip on everybody's wallets?
1. Perceived potential
As Liza Visser points out, bitcoin has legitimate value largely because it offers several areas of usefulness. It's verifiable and divisible, for example, and it's fast and borderless. It's also more integrated into systems and businesses than other competing digital currencies are. The problem is, its long-term value is based on an almost incalculable number of variables. Other investments, such as real estate, certainly have variables too, but with a technology like bitcoin, much of the value is based on the potentially hundreds of ways the currency could be improved. Some of those ways, as Visser points out, haven't even been thought up yet. Subsequently, people might see bitcoin as more of a sure bet--some of that insane potential has to pan out, right?--and perceive the many pathways to success as negating risks.
It's a little like the stereotypical salesperson of the old Wild West. Tell people a tonic will cure a cough, and you'll sell a few bottles. Tell them it will cure arthritis, headaches, indigestion, limps, and stupidity, and you'll sell by the case.
2. Herd mentality
The herd or mob mentality is a phenomenon in which people tend to follow whatever the group is doing. While individuals certainly can contrast a group (such as Buffett and Greenspan are with the enormous number of bitcoin investors), research has shown that we've evolved to be overly influenced by others. In fact, scientists have found it takes just 5 percent of a crowd to influence the physical flow of that crowd.
Right now, the chatter about bitcoin is deafening. Subconsciously, a person might not want to be the odd man out. The person will follow what others do with the cryptocurrency so as to avoid negative judgment and isolation, or because the commonness of the behavior increases its perception as "right" or moral. And what's more, as more and more people buy bitcoin, it becomes more and more likely that people will follow the investment behavior of individuals they personally know, such as a co-worker or family member. The saying, after all, is that people buy from people they trust.
3. Fear of missing out
Fear of missing out (FOMO) ties to both of the points above. With bitcoin now easily topping $10,000, people know the growth of the currency is unlike anything they've seen before. Jason Abbruzzese, for example, notes that bitcoin is up 1,000 percent in 2017 alone. He goes on to assert that, by comparison, the Dow Jones Industrial Average has gone up just 193 percent since 1997. While some see this as a bubble, others see it as a once in a lifetime opportunity and don't want to be left behind as the price of bitcoin keeps going up.
4. Anticipation of reward
As Stanford University neurology professor Robert Sapolsky explains, it is the anticipation of reward, not the receipt of reward, that stimulates the release of dopamine in the brain. Dopamine helps you feel both happy and motivated. Unlike other investments, which experts can project returns on, nobody really knows what the return on bitcoin is going to be (see No. 1 above). Every day, there's a new ceiling to reach, a new record. The anticipation keeps growing, people get "addicted" to the good feelings they have watching the price rise, and they hold on to their bitcoins hoping for more. You might have seen this at play before. It's the same reason people buy increasing amounts of tickets as a lottery jackpot reaches millions.
Investment bubbles aren't new. Some of the most notable ones are the tulip bubble in Holland, the South Sea bubble, and the Mississippi bubble. Many of the psychological factors that drove these phenomena are driving the bitcoin rise, and they'll drive bubbles after bitcoin too. The more you stay conscious of these factors, however, the less likely it is you'll jump on a bandwagon you'll regret being on.