For Bitcoin Traders It’s Still Buyer Beware, The Same As With Lottery Tickets

For Bitcoin Traders It’s Still Buyer Beware, The Same As With Lottery Tickets

There is a very wide spectrum of opinion about how investors should interpret bitcoin's extraordinary price rise. In this post, I discuss key findings about bitcoin investing that derive from recent research which I conducted together with two colleagues, Hoje Jo and Haehean Park.

Bitcoin's price trajectory during 2021 has been nothing short of amazing, rising 78% between January 1 and the third week in February, and crossing the psychologically important value of $50,000. Many commentators have compared bitcoin to gold, and in some respects the recent trading in bitcoin is not unlike a gold rush, mixing fundamentals with strong streaks of irrationality.

It is easy for investors to lose perspective during asset pricing bubbles, as emotional forces come to dominate calm, dispassionate thinking. Market sentiment refers to excessive optimism, or froth, in the overall market. An important finding of our research is that the historical return to bitcoin has featured what behavioral economists call a high "sentiment beta.“

What exactly does a high sentiment beta mean? Most investors understand the concept of traditional beta, namely the degree to which an asset's return moves relative to the overall market return. Likewise, sentiment beta refers to the degree to which an asset's return moves