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Your Brain on Bitcoin

You buy in with some spare bucks you have lying around. You’ve heard the news of lucky young investors making millions, and you decide to get in on the action while you can. At first, you check every couple of days- whether it increases or decreases, it’s not the end of the world. But over time, something starts to click. The price has increased- you just made some spending money. Checking once in a while turns into once a day turns into once an hour. You start selling and buying more. Just when you think you have it figured out, the price plummets, and when you lose all hope, it spikes again. Regardless of how much money you’ve made or lost, one thing is certain: when that price goes up, it feels good.

© [Parilov] / Adobe Stock

Chances are if you have invested in cryptocurrency or even talked to someone who has, this story sounds familiar. Reaching the price of $10,000 on November 29, Bitcoin quickly became famous (and, to some, infamous), taking only two weeks to nearly double to its peak of over $19,0001 before crashing back down to a measly $8,000 or so. While it is difficult to predict if the cryptocurrency’s value will resurge, it is clear that, at the very least, Bitcoin and its altcoin counterparts have attracted a whole new market of investors2. Whether cryptocurrency is the future of everything or a doomsday bubble sent from the dark web to punish us for dreaming, its explosive growth provides a fascinating look at how our brains respond to rewards. This is because, unlike stocks, it is hard to see the utility of a Bitcoin3 (though the Blockchain, or the technology on which Bitcoin is based, is a different story). Much like a paper currency, the value is almost entirely in the minds of the people willing to use it.

Price of Bitcoin in US dollars, from 2015-today.

This begs the question, what are the psychological drivers behind diving into this new market? What caused the value of cryptocurrencies to rise and fall so dramatically in such little time? To answer this question, we must combine insights from social psychology, behavioral economics, and neuroscience.

Everyone’s doing it, so it must be right.

Representation of stimulus from Asch’s (1951) conformity experiment. The goal was to identify which line on the right was most equal in length to the line on the left. When surrounded by others choosing incorrectly, participants chose incorrectly on 32% of the total trials, as opposed to less than 1% of the time when the participant was alone.

Humans are naturally social creatures. The actions of others influence our own decisions constantly. This generally happens out of a desire to fit in (normative conformity), an idea that others know more about the subject than you (informational conformity), or both. Solomon Asch famously demonstrated4 how social pressure can cause people to make overtly wrong decisions; in this case, judging two clearly unequal lines to be the same length simply because a room full of people said so. While the effect of conformity is not this strong for everyone, it is still an important driver of our decision-making, even at a physiological level. In fact, when we conform, the brain recruits neural mechanisms like those involved in reinforcement learning5. For instance, when our decisions conflict with the group’s, activity in the nucleus accumbens, an area of the brain heavily associated with reward, decreases. Basically, our brains keep track of when our beliefs differ from those of others and may try to nudge us in the other direction.

Locations of several parts of the brain involved in reinforcement learning, including the nucleus accumbens. Brain illustration ©[nicolasprimola]/Adobe Stock

In the case of Bitcoin, it is easy to see the role of conformity. As the number of people championing Bitcoin increased, so did the power of social pressure, especially if you knew very little about cryptocurrency. We start to think that if all those people are doing it, they must be onto something, and we don’t want to be the chumps who missed out.

Of course, conformity works both ways. When the price drops and people start to panic, those more susceptible to social influence often follow the crowd once again and sell. This has been seen in the past few months. As adverse news spreads, often about Bitcoin’s bubble-like nature6 or about potential new regulations7, bearish investors panic and sell before the price can drop. As more people sell and the price drops, those with little knowledge of the market often have one source of recourse- to again follow the group. Thus, the price plummets further, and the panic is fueled until either the market collapses or a change convinces enough investors to start investing once again. This contributes, in large part, to the volatile, swinging nature of cryptocurrency. Importantly, whether conformity results in wise or unwise decision-making, it is an undeniably powerful influencer of our decisions. It is a mistake to view perception solely from the standpoint of the isolated individual, since humans largely do not act in isolation.

Working with what we have

Of course, while conformity can be influential, it is not the only cognitive process at play. Indeed, the way we respond to social influence can vary based on our own beliefs, even sometimes pushing us further away from the group consensus. Thus, a large piece of the puzzle is perception and how we internalize the cryptocurrency-related information around us.

As it turns out, the way we process this information can be influenced as much by our own minds as by the information itself. This is due to the brain’s nature to operate heuristically, or by using preconceptions to inform future decisions.  It does this for an important reason- if we had to fully process all available information every time we were presented with a choice, we would be paralyzed with each trip to the grocery store. Yet, as Behavioral Economics tells us, it can also cause biases that lead to illogical decision-making.

When examining cryptocurrency, a source of bias that immediately comes to mind is the availability heuristic. This refers to the tendency to make decisions based on information that is most readily available in memory. Often, such information will be a particularly salient, emotion-inducing, or a recent event. For instance, if I was asked my opinion on enforcing a mandatory curfew in my neighborhood, I would be much more accepting if I had just seen a news story about a string of nighttime muggings.

With Bitcoin, these events take form as stories of people whose lives were transformed by Bitcoin. As the price started to soar, stories emerged8 of “Bitcoin millionaires,” a lucky group often hailed as “crypto geniuses” who made a fortune from Bitcoin. Whether these newfound millionaires quit their jobs and founded their own companies or simply spent their days traveling around the world, their story sticks with us. It makes us think, what if that had been me. This deep emotional relevancy encodes the story strongly into our memories, so that when we evaluate whether to invest, it weighs heavily on our minds, pushing us to pull the trigger. Of course, for every Bitcoin millionaire, there are many others who lost money through cryptocurrency. Our brains are simply trying to process information as efficiently as possible, causing them to weigh more heavily the information that is easily available. In this case, that happens to be the multitude of striking, get-rich-quick stories. This effect has been utilized in many successful ad campaigns, such as “The Real Cost” series for anti-smoking9. By creating visuals that are particularly memorable and emotionally salient, their campaign sticks in our heads, and in turn, disproportionately drives our decision-making.

Importantly, these perceptions often act like snowballs, in that they are largely determined by initial belief formation. This is mainly thanks to two other cognitive biases, the anchoring effect and confirmation bias. The anchoring effect refers to the tendency to rely more heavily on the information we see first. This is a large driver of the effectiveness of discounts- I will likely attribute more value to $100 pair of pants discounted by 50% than the same pair of pants at a starting cost of $50, because the former situation anchors my perception of how much the pants should cost to $100. Future evaluations are then judged from that $100 anchor. Confirmation bias is the tendency to search for evidence that confirms our beliefs and ignore evidence that contradicts them. This bias often plays a role in customer loyalty. For instance, since my first phone, I have been an Android loyalist, originally due to some of the physical features of the phones when I had first purchased. Now, even though the specs of all the phones have changed drastically, I cannot deny that I evaluate Androids and iPhones differently. When I look at Androids, I usually focus my search on cool features and benefits, whereas when I look at iPhones, I often catch myself looking for flaws.

It is easy to see how these biases manifest in the crypto market. If the first information you see about Bitcoin is a story of a Bitcoin millionaire, the anchoring effect and availability heuristic work together to weigh your perception of Bitcoin toward it being positive. Confirmation bias then causes you to evaluate further information through the lens of “Bitcoin is good,” over-trusting data in its favor and over-criticizing skeptics. By playing off how our brains make sense of the world, these stories become an incredibly effective recruiting tool.

Of course, these biases work both ways, and some may conflict and outweigh others. If the first story you see about cryptocurrency is somebody who lost their savings, you will likely view crypto praise with a great deal of skepticism. Along the same vein, if the market starts to plummet and the stories of Bitcoin millionaires are largely replaced by these strongly negative ones, the availability heuristic can cause a shift in opinion, even if you were originally pro-crypto. The negative stories play an equally important role as the positive ones, spurring the panic and fear that has recently sent the market plummeting back down to Earth.

Winning makes me feel good

Molecular structure of dopamine, © [petarg]/ Adobe Stock

Our description of the crypto-obsessed brain still feels incomplete. While we have described some of the motivators of spikes and panics from an information-processing perspective and an emotional perspective, we are still missing something even more carnal. After all, even amidst panic, something about making money from cryptocurrency just feels good. Quite frankly, it’s fun. To understand this, we must dive into our neuroscience roots and examine everyone’s favorite neurotransmitter- dopamine. Dopamine is commonly associated with reward and addiction. When your brain thinks something positive has just happened, it releases dopamine to make you feel good, conditioning you into further doing whatever brought about the positive outcome.

Yet, as with most neuroscience, it’s not quite that simple. The release of dopamine is not a binary process (yes for positive and no for other). It is modulated by expectations; more dopamine is released for outcomes that are better than expected10. The encoded difference between the positivity of outcome vs our expectations, referred to as the reward-prediction error, is heavily related to our brains’ roles as pattern-seekers. Essentially, our brains are constantly looking for patterns in the environment- this is key to learning and adapting. And though brains are great at finding patterns, they are not as good at detecting randomness. Even when there is no pattern to be discerned, the brain will try to find one anyway, using dopamine as a signal that something might be working. This adds further clarity to why Bitcoin became so popular. The incredibly volatile nature of the coin means that discerning a pattern in the data is incredibly difficult. Thus, the crypto-holder’s brain is never able to adequately establish a reasonable expectation of reward, instead stuck in a state of uncertainty. This uncertainty causes the brain to respond to each price surge with maximal amounts of dopamine, since an expectation of reward can never be properly established. “Winning” with cryptocurrency then becomes proportionately more addicting than achieving low but steady yields on a predictable, blue-chip stock. The same process is reminiscent of that of habitual gamblers11. These effects may wear off when losses become more consistent, potentially compounding the effects of sustained price drops, but often all it takes is a single spike to hook us back. Perhaps the most interesting aspect of all of this is that the volatility that scares so many investors away may actually play a large part in keeping crypto-holders in the game.

Lessons to be learned

©[zeman88]/ Adobe Stock

Of course, the cryptocurrency market is far more nuanced than can be explained in 2,500 words. For one, investors are beginning to realize that not all cryptocurrencies are created equal- what is true for one currency may not be for another. Indeed, as the flash of the Bitcoin boom starts to settle, it would make sense for the specifics behind each coin to start to garner more focus. Thus, there are several deliberate thought processes that may start to play larger roles in buying a cryptocurrency. Perhaps you trust the potential of the technology upon which the coin is based, or the coin raises funds for a cause you support, or you just find it funny (you mean I’m supposed to let something called Dogecoin go un-bought?).

There are also many other psychological processes that likely factored into the rise of the crypto castle. Furthermore, the effect of these biases can vary among individuals, especially among those with different levels of knowledge of finance and the crypto market. Yet, the phenomena I discussed here share a common ground in that, in addition to affecting the crypto market, they are also essential to the field of neuromarketing.

On the marketing side, it is important to keep these biases in mind when attempting to influence consumer purchasing. Marketers already do this every day, whether it is paying social influencers to convince their peers to buy a product, using highly emotional ads to increase relevancy, or adding an element of randomness to reward deals to stimulate dopamine release. If you do not similarly take advantage of the consumer brain, you will be fighting an uphill battle against a competitor who does.

On the research side, biases are less tools and more plagues that we, as scientists, must do our best to combat. It is easy to conform to the beliefs of other researchers who you think may be more knowledgeable than you, even though the point of rigorous science is to ask questions and disprove hypotheses. It is also easy to fall into the traps of availability, anchoring, and confirmation bias, where we get so attached to our initial theory that we fail to accurately examine subsequent evidence. Finally, it is easy to get caught up in the rush of finding unexpected but positive results, drawing conclusions before first questioning or replicating them. This is particularly dangerous in neuroscience, where the sheer amount of data means that careless researchers can find “significant” differences simply by chance and not because of any underlying neural mechanisms.

At HCD, we constantly remind ourselves that, as with investing, it is important as researchers to recognize that we are flawed. We must keep conscious the limitations of not only our data but of ourselves as people, and actively work to overcome them. While the thought can be discouraging, it is essential to performing good science. This is a problem that we can overcome through rigorous questioning and understanding. But, as with most problems, the first step in solving it is to realize it exists.


  1. Bitcoin Price.

  2. Domm, P. (2017, December). Bitcoin fever is drawing investors into the stock market, Laszlo Birinyi says.

  3. Cheo, J. (2017, December). Why Blockchain Is Real And Bitcoin Is A Mirage.

  4. Asch, S. E. (1951). Effects of group pressure upon the modification and distortion of judgments. In H. Guetzkow (Ed.), Groups, leadership and men; research in human relations (pp. 177-190). Oxford, England: Carnegie Press.

  5. Stallen, M., & Sanfey, A. G. (2015). The neuroscience of social conformity: implications for fundamental and applied research. Frontiers in neuroscience, 9, 337.

  6. O’Brien, M. (2018, January). The bitcoin bubble is a joke, and you’re the punchline.

  7. Sundararajan, S. (2018, February). Mnuchin Calls for Crypto Regulatory Talk At G20 Summit.

  8. Robinson, M. (2018, February). This 24-year-old said he quit his job after making a fortune in bitcoin and other cryptocurrencies — here’s how he did it.

  9. The Real Cost Campaign.

  10. Bayer, H. M., & Glimcher, P. W. (2005). Midbrain dopamine neurons encode a quantitative reward prediction error signal. Neuron, 47(1), 129-141.

  11. Linnet, J. (2013). The Iowa Gambling Task and the three fallacies of dopamine in gambling disorder. Frontiers in psychology, 4, 709.



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