The Pirate Effect

Or: how I learned to stop worrying and love market fundamentals.

An interesting thing is happening in the Bitcoin community of late. We’ve always been a naturally suspicious lot, questioning the motives and track record of anyone or anything placed before us, but lately these suspicions have been… shall we say, overzealous? Since day one of their existence, for example, healthy skepticism has surrounded Butterfly Labs. Their actual history has shown them to be quite good at some things and not so good at others and while I have assurances they’re working to correct these things, it’s not unreasonable to be skeptical about them. It’s not just BFL though, the complaint rate of nearly every Bitcoin business seems to be through the roof right now with accusations of fraud flying toward reputable business after reputable business. It seems that any time something doesn’t go perfectly these days, someone shouts “fraud!” – Welcome to the Pirate effect.

It’s not hard to find stories about the PirateAt40 fiasco, they’re everywhere, I’ve even written a few myself – what can I say, the readers love them. It’s a great story, full of drama and deceit, a bad guy getting away with untold sums of money, no one certain of his whereabouts or even if his identity is real. It’s like a real-life spy novel, without the laser cutter wristwatches or the high explosive boat chase. It’s also got a lot of folks panicking. Should we be worried about this mass hysteria in the Bitcoin market?

We find ourselves in an interesting predicament with Bitcoin. Psychology has long understood that the stereotypical Hollywood imagery of people running panicked during a disaster is in fact a very rare case. Mawson’s (PDF warning) social attachment model, for instance, fairly accurately describes the way we social beasts tend to flock together in times of crisis, gathering around what he refers to as “attachment figures” – our children, families, familiar places or objects. Even at a subconscious level, we recognize the obvious power in numbers and tend to group during times of distress, rather than run. In instances of panic, we tend not to run around like crazy people so long as there’s something familiar to flock around. But what happens when those “attachment figures” are the very things we’re frightened of?

Bitcoin is a young project and while it’s gathered quite a following so far, the number of legitimate businesses involved thus far is fairly small. Of those, only a tiny subset of the Bitcoin market could qualify as an “attachment figure” and not everyone will agree on which ones those should be. Some will rally around MtGox, for example, while others hate them or are at least fearful. BitInstant seems like a pretty solid operation, but there’s no small number of people complaining on the forums that their particular transaction didn’t happen just perfectly. It seems we are losing confidence in what few points of stability we have, and that’s not a good thing.

Markets, you see, only behave as sanely as their participants. When tough times hit the Bitcoin community, be it a scam of epic proportions or a massive hack, a market filled with attached groups of individuals doesn’t run amok. We don’t sprint panicked into the digital streets screaming that the sky is falling, we rally together into our little tribes and stand stoic in the face of tragedy. It’s what we humans do, and that’s been proven time and again. Only when the odds are tremendous and we’ve nothing left to cling to does such panic ever actually occur. The instinct to run is strong, but it only becomes truly destructive when you’ve no place to run to.

In such times I suggest an alternate rallying point, an “attachment figure” that to date has never been hacked, crashed or broken any promises – the Bitcoin protocol itself. Any good investment counselor will tell you that the best way to avoid “panic selling” is to evaluate the fundamentals – has anything really changed or are we just looking at another bump in the road? The Bitcoin road has been bumpy thus far, but the fundamentals remain the same. The best reason for you to be here is because you think this project can work – if that’s your motivation, if that’s your rally point, your attachment figure, then everything else is just a bump in the road.

So delete the draft of that angry forum post you were about to make, drop the conspiracy theories about everyone and everything and just relax a little. Don’t play with anything you can’t afford to lose and spend a little more time enjoying the game. The players may win, lose, stab you in the back or make you filthy rich – but they come and go. The rules of the game are immortal, known and trusted. As the British Ministry of Information would say: Keep Calm and Carry On - tomorrow is another day, new companies will step in to replace the old, take a deep breath and enjoy the ride.

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  1. Great job. Totally agree. Fundamentals! Hammer. Nail. Head.

  2. Just want you to know that this is my favorite blog.

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