Over the past two years, expectations in Bitcoin have been pretty high. Lots of tech luminaries have expressed their excitement about and belief in Bitcoin. The price of one Bitcoin quickly rose from basically zero to almost 1000 USD. Venture capitals have pumped hundreds of millions of Dollars into Bitcoin startups. A whole new industry focused on mining the currency evolved.
But despite the intense optimism, the moral and active support by many very smart people and the increased acceptance of Bitcoin among online retailers, the currency has lost lots of its glamour and energy over the past couple of months. The vast majority of people does not use Bitcoin nor shows any real interest in it. The price has been dropping dramatically to a level that makes mining of Bitcoin uneconomically, which even accelerates the decline. Bitcoin remains, at best, a geek topic.
This certainly does not need to be the end of Bitcoin as a pioneering crypto currency. The price could recover and consequently lead to renewed optimism. There also has been lots of talk about how Bitcoin’s technological core, the block chain, could be used to validate all kinds of digital transactions in a decentralized and thus pretty disruptive way. Even if Bitcoin would go down completely, the technology and lots of new knowledge and experience about its implementation would stay and act as a foundation for new ideas in the spirit of Bitcoin. However, it is safe to say that in the beginning of 2015, 2 years after its media and attention breakthrough, Bitcoin is not even close to where the huge number of proponents would have expected or hoped it to see. And that despite the fact that many of the sector’s most intelligent people were outspoken Bitcoin fans. How could that happen? I might have an answer.
The common belief fallacy
Lately I have been reading a lot about social psychology. I realized that in order to understand information technology, understanding its users can be very helpful. Recently I learned about a phenomenon which partly seems to explain why so many knowledgeable, competent and visionary people apparently completely have overestimated Bitcoin, or at least its short-term potential. Of course, a bunch of specific factors can be pointed out as having impacted the Bitcoin price and the trust into the currency negatively. But things like security breaches, government regulation and reputational damage caused by criminal’s reliance on Bitcoin should have been part of the initial risk assessment of Bitcoin’s supporters. If you have an innovative, technologically complex crypto currency that cannot be controlled by central banks and that allows for person-to-person transactions without middle men, it comes to nobody’s surprise that there is a lot that can go wrong, and a lot that will go wrong.
I suspect that what might have been a contributing cause to the widespread misjudgement of Bitcoin’s near-term prospects is the so called “common belief fallacy”. This term is refering to a way of thinking that tricks us into the misconception that if a consensus is large, it is more likely to be correct. In this case, the logical thought process looks the following: “A lot of people believe X. Therefore, X must be true”. In his book “You Are Now Less Dumb” (which I highly recommend), David McRaney offers a couple of examples for the common belief fallacy and explains why the brain works like that.
If you apply this error in reasoning to the Bitcoin phenomenon, this is what might have happened: A couple of heavyweights and highly respected thinkers and engineers found the idea of Bitcoin exciting and started to talk and write about it. Entrepreneurs, investors, journalists, bloggers and public speakers consequently learned about Bitcoin. Due to the complicated technology and the multidisciplinary nature of the science of currency, many of the people who started to warm up for the idea of Bitcoin had to rely on other’s statements and assessments of the crypto currency. Once the apparent consensus within the technology sector about the great future of Bitcoin was established, the common belief fallacy made sure that an increasing number of distanced observers got under the impression that something massive was going on. Why else would some reputable, uber-smart people get behind a concept such as Bitcoin?! It must be a almost guaranteed hit… The rising price of Bitcoin supported this narrative. There certainly have been many critics of Bitcoin even among leading IT and technology experts. But what mattered was that enough merited industry representatives were buying into the idea of Bitcoin – literally and figuratively. Again, I am not saying that Bitcoin ultimately has failed. Just today Coinbase announced a $75 million funding round, so there obviously are enthusiasts left. But as a currency and store of value it has not established itself the way many have hoped for.
Dotcom boom, Second Life & Google Glass
In the past 15 years, the technology industry has many times seen the common belief fallacy in action. The Dotcom boom, the Second Life hype or the enthusiasm about Google Glass all had some element of the common belief fallacy fueling the public reception. The perception of a real consensus about the massive profit potential of the early Internet companies, the assumed wide-reaching implications of virtual worlds or the idea that augmented reality glasses would be the next big thing for the tech-conscious consumer convinced more and more people – until they later came to realize that they had been misled. At least in regards to the expected time frame.
When focusing on digital business and innovation, avoiding the common belief fallacy is actually quite hard. Because often enough, most of the observers, analysts and reporters have to rely on those alleged experts and their correct mental SWOT analysis and evaluation. If Elon Musk, Stephen Hawking and other big shots express their concern about that artificial intelligence (AI) might become a problem for humanity, many understandably feel that they have to believe them. Or they choose to question those described scenarios where machines are taking over the world. But except if one has deep expertise in the field of AI, simply ignoring the possibility of evil machines could mean ending up with an alternative common belief fallacy – the one stating that machines always will remain inferior to humans and thus under their control.
There are many possible scenarios in which groups of highly-regarded tech “celebrities” might express certain ideas or visions or make forecasts about the impact of a new kind of gadget or app:
- They have the necessary understanding of the topic and their forecast will turn out to be right.
- They have the necessary understanding but will fail with their forecast.
- They do not have the necessary understanding but will turn out to be right by sheer luck.
- They do not have the necessary understanding and will fail with their forecast.
- They have a financial interest which they base their forecast of success or failure on.
- They do not really care and just like to be in the media with bold quotes.
These days, the technology press is packed with optimistic stories and bullish forecasts about self-driving cars, 3D printing, the Internet of Things, virtual reality, the block chain or artificial intelligence. Often, a comprehensive personal analysis in order to form an opinion is impossible due to lack of specialised knowledge, mental power and time. So depending on if one identifies as a technology sceptic or proponent, one goes the easy and often only viable way of fully or partially accepting the common belief of either side.
There is no real solution to the issue. There always will be experts whose thought concepts, initiatives and comments about technological advancements will shape common beliefs within certain groups – sometimes with a positive outcome (for the group), sometimes with a negative one. But for those who follow the industry and who love to muse and discuss about the next big thing, it might be a good advise to stay alert about when the common belief fallacy is triggered. Just because every person in one’s peer group and in one’s Twitter timeline is convinced about a certain crazy disruptive technology, that might say very little about its actual prospects.