Digital currency is money that exists only in electronic form. Several nations are developing forms of digital currency, which would be controlled by the country’s central bank. Cryptocurrency, which is one form of digital currency, is a created unit of encrypted data maintained by a computer network that records transactions and controls the creation of new currency. Cryptocurrencies are controlled by the developers and are largely unregulated. The transactions are private and don’t go through any banking system. The biggest drawback to cryptocurrencies is the extreme volatility of their price. This lack of stability makes them risky for transacting business.
I’ve warned against “investing”—which is really speculating—in cryptocurrencies since 2017. I don’t think they have any place in any conservative investment portfolio. They need to be seen as risky speculations that you should never borrow to purchase and should only buy with money that you are totally comfortable in losing.
Given this high risk, what kind of person would choose to speculate in cryptocurrency? A survey of 566 investors, conducted by Di Wang, Brett Martin, and Jun Yao and reported on in Social Psychology, tried to answer that question.
They found, unsurprisingly, that people who own or would like to own cryptocurrency are drawn to high-risk investments and tend to distrust government. They assessed these individuals further to see if there was any commonality of personality traits. Again unsurprisingly, they found the reasons for speculating in cryptocurrency were not just about the money. The speculators all held personality traits in what psychology calls the “dark tetrad”: narcissism, psychopathy, Machiavellianism, and sadism.
Narcissists, who tend to be self-centered and experience feelings of privilege and predominance over others, tend to like crypto because they are confident that their decisions are better than those of others. They are absolutely confident that they are going to be right. Because of this overconfidence, they may even borrow money to speculate in crypto and they don’t know when to walk away from the table. Because walking away when they’re down means they lose, and losing is just unpalatable.
The next personality type is psychopathy, which according to the research is a callous and impulsive antisocial personality trait. Psychopathic parts of people often lack empathy and find it difficult to perceive or understand emotions. This makes them pretty reckless, and that recklessness makes them more resistant to stress and anxiety. They like stimulation-seeking and risk-taking and are prone to gambling and gambling addiction.
Those with Machiavellianism tendencies are good at deception and interpersonal manipulation and tend to strongly believe in government conspiracies. They like crypto because they think that politicians and government agencies who control traditional currencies are inherently corrupt.
Sadism relates to a personality that enjoys another person’s suffering. Sadists often are aggressive and exhibit cruelty. Now, buying crypto doesn’t seem like it’s likely to harm others, but the research found that sadists like crypto because of the fear of missing out on investment rewards.
While I found this research fascinating, I don’t mean to be diagnostic or to label cryptocurrency speculators. Nor do I want you to assume that everyone who invests in cryptocurrencies falls into this dark tetrad. If you’re curious about whether you have these traits, there’s an assessment you can take that includes three of them (excluding sadism). The address is openpsychometrics.org/tests/SD3/.
When I took the assessment, I was glad to see that I ranked in the lower ten percentile on each. That’s probably why I don’t have crypto in my investment portfolios. I prefer boring. Those who speculate heavily in crypto, on the other hand, have a part of themselves that enjoys walking an investment tightrope—one strung over the Grand Canyon in extremely high wind conditions. And it usually does not end well.
Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.