A Psychological Explanation

Some months ago we saw the fall and disappearance of a macro project (Terra/Luna). This week we said goodbye to FTX, the second (or fourth, depending on the metric you use) biggest exchange in the ecosystem. And also this week, , a big international scam with hundreds of workers affected 17.000 investors and took 2.400 millions of dollars.

But how is that possible? How many black swans do we have to suffer?

There are a lot of approaches to understand what really happened here, And I’m pretty sure you have read a lot of them, but let me try to offer you a different point of view to understand what the hell is happening here: the psychological approach.

People want to believe. 

There are two psychological explanations deeply studied in obedience studies:

  • Normative social influence: people accept the group norm in order to fit in, feel good, and be accepted by the group.
  • Informative social influence: people accept the norm because they believe the group is competent and has the right information, especially when the task or situation is ambiguous.

These two mechanisms can explain a lot of things. The first one, the need to fit, will let you reduce the control points, the judgment, even the moral and the ethics.  You would never believe how cheap we sell our ethics just because we want to fit.

You can find a lot of examples of this illogical behavior when people cover their colleagues (policemen, doctors, business partners, journalists, …). We prefer to be silent than to raise our voices against our “colleagues”.  That could explain why there are no internal alerts, no sneaks, in those mega cases of corruption till the bomb is so huge that affects thousands of innocent investors. I’m thinking of FTX. How is that possible that no one rang the alert bell?

The second one, the informative social influence, explains not only how we easily decide where to invest our money, but how fast we run when we see someone running. Let me put an easy example of how it works: 

Imagine you are at a concert and you see smoke coming from under the stage. It could be a dangerous fire or just a special effect. You have your doubts. If you look at other people and they stay calm on their seats: you’ll probably remain seated without worries. But if you see someone leaving and running, for sure you’ll grab your things and you’ll start running from hell. When the first crypto user started running from the theater that was the end for FTX and for a some other affected projects. 

The collective measures of control have failed once again. We trusted the community hoping that someone with more info than us is looking at it. Confident that it is impossible to create an empire like FTX, with hundreds of workers and partners, literally hundreds of investments, out of the air without any warning from anyone from inside or outside.

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The normative social influence made thousand to invest in the new Warren Buffet. The informative social influence made them run away (too late) from the next Madoff.

And now what? Well, some voices are saying that the solutions is: Regulation, regulation, and regulation. 

I’m in favor of regulation. For sure we have to move forward into more regulated institutions to protect investors. That confirms our bet to be the first regulated specialized fund in this new crypto economy is a hit. But this will not solve all the problems, sadly. In the regulated economy, this happens as well. Just remember the financial crisis of 2008 where auditors, regulators, rating houses and central banks were unable to protect investors. 

In the meanwhile we will keep on avoiding bullets like we were in The Matrix, thanks to this extraordinary team we have in the fund that is able to understand the code that hides behind this metaverse.

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There are a lot more reasons that explain from a psychological point view our behavior in this cases: the sensation of superiority that gives us to know something that others don’t, the greed, to be smarter and richer than our neighbor, … Some of those are behind also the growth of the fake news, consìracy theories and populisms.

This psychological behavior explains also this:

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The solution, if there’s one, comes from more education.

Our only path to salvation is to become more conscious of our own limitations. In a truly decentralized world our personal critical thinking is the key to survive.

Please, choose the wise line:

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Yours in crypto