Is Bitcoin Volatility All In The Mind?

Yessi Bello Perez
Nov 27, 2015 at 17:30 UTC
Updated Nov 30, 2015 at 02:37 UTC
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Bitcoin in the Headlines is a weekly analysis of industry media coverage and its impact.

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The good news is that bitcoin’s association with terrorism and Daesh played a somewhat smaller part in this week’s coverage.

Although some of the narrative spilled over from last week, and the news did travel far and wide, most mainstream outlets seemed to focus on the digital currency’s price in light of the Black Friday shopping event.

More interestingly, however, was Motherboard’s piece which united the digital currency and the human brain to ascertain the impact of its volatility on individuals.

Who said what and where? CoinDesk has rounded up the top bitcoin and blockchain-related headlines from across the world.

Bitcoin and neuroscience

The award – if there ever was any – for the week’s most creative reporting goes to Motherboard. Reporter Jordan Pearson spoke to a neuroscientist in a quest to find out how the digital currency’s volatility impacted the human brain

“The price of bitcoin is a fickle thing,” Pearson writes, adding:

“Two years ago this week, bitcoin reached its highest price ever: $1,242 for a single coin in US dollars, up from $12 at the beginning of 2013. Almost immediately after that peak, the price began to sink, and today the virtual currency still hasn’t regained its former glory. The price of a bitcoin simply continues to bob up and down, from around $200 to just above $400 this year alone.”

Every value decrease, the piece adds, elicits a “state of emergency” from some members of the bitcoin community and the slightest increase in value, has people “losing their ever-loving shit.”

Despite its volatility, however, the piece points out that there seems to be no explanation for its changing price. Could it have something to do with Chinese ponzi schemes, investor-driven speculation or international market manipulation? Perhaps, the reporter adds, bitcoin is the future after all, adding:

“The answer, it turns out, could be in our heads, because for every change in Bitcoin price, there are neurons that light up like a Christmas tree in response.”

Now, the real interesting stuff begins. Researchers have, the article notes, conducted a vast amount of work into analysing the effects of changes in the stock market on the human brain, and vice versa.

“The stock market’s behaviour is ultimately the result of the collective decision-making of many people, after all (less so today now that high-frequency trading algorithms are popular), and decisions are physiological things; they happen in the brain. And just like the price of a stock, bitcoin price is largely a function of the decisions people make.”

‘It’s all in the brain’

Dr Gregory Berns, a neuroeconomist and director of the Center of Neuropolicy and Emory Unviversity, told Motherboard:

“It’s all in the brain, and looking at specific regions that we know are carrying information about risk and reward is kind of like eavesdropping … If one area seems to be the one that collects all the information from other brain systems, if you will, and integrates it, then it represents an overall barometer for that person at that point in time as to what their expectation is. So, we can listen to that and tease out what they’re likely to do next.”

Berns said that information and expectation are both key elements to consider when teasing out how firing neurons direct the market.

“Information guides your expectations, and depending on what your expectation is – whether bitcoin is about to skyrocket or crash, say – a region in the brain called the striatum will react differently. The striatum associated with decision-making, and has the densest collection of dopamine receptors in the brain,” he said.

Neuroscience, the author notes, may help to explain some of bitcoin’s volatility but the digital currency only has a relatively small community of users, in comparison to the real-world stock markets.

Berns added:

“The smaller the market, and anything with a greater role for human decision-making, is where you’d see greater benefit for understanding the physiology. With bitcoin, information is more scarce, in that each little bit of information that comes out has a potentially big effect on people’s valuation of that thing … because of its history, and its past swings, people gravitate toward and grab onto any information they can, true or not.”

He continued: “With every bit of news about new investors in bitcoin, or perhaps the latest potential market scam or hack, the striatum of a bitcoin trader lights up with activity, and if they’re expecting something positive, dopamine is release. En masse, this big dopamine rush can look like a price rally.”

Again, Berns explained that expectation is key. Positive or negative information, he added, can have paradoxical effects on an individual’s brain, noting:”If something ostensibly bad happens in bitcoin – the bottom falls out of the price, for example – then someone’s brain may actually respond as if that were a positive thing.”

“It’s illogical,” he continued. “But then again people aren’t exactly logical when it comes to money.”

“Or Bitcoin,” closes Pearson.

Bitcoin Black Friday

The digital currency’s price also made a cameo appearance this week in light of Bitcoin Black Friday, a day of discounted online shopping for bitcoin paying customers.

Writing for Inverse, Peter Rugg questioned whether the event could serve to throw the digital currency into the mainstream, whilst also impacting on its value.

He wrote: “Bitcoin Black Friday: The fourth-annual event is projected to include more than 150 participating stores, and if history is any indication could affect the price of the digital currency.”

Historically, Rugg continued, the event has caused a spike in the cryptocurrency’s value:

“About this time in 2014, bitcoin prices were roughly at $350 before going to $380 on Bitcoin Black Friday, a jump that also happened the year before. One reason for this could be the media hyping the upcoming event and getting bitcoin into the mind of consumers, but another might be that people who spent bitcoin on Black Friday deals tended to buy the coins right back, potentially driving up the price.”

At the time of writing, bitcoin’s price looked relatively stable, hovering at around the $360 mark, although it did surge by 12% yesterday, hitting a weekly high.

Human brain image via Shutterstock

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