As Bitcoin enthusiasts and investors, we can’t let Bitcoin run unbridled across the financial landscape without trying to define it every chance we get. Luckily, there are a variety of eponymous laws, principles, effects, and maybe a razor or two that seem to govern how Bitcoin grows, changes, and interacts with us humans. These laws were not developed specifically to apply to Bitcoin, but they often describe Bitcoin’s behavior or demonstrate the principles behind it spectacularly well. And sometimes we just try to force a correlation because it’s in our nature to look for meaning even when there might not be any. The reason any of this works is that Bitcoin is so closely tied to and dependent on human psychology. In this series, we’re going to look at some of these laws and how they apply — or are misapplied to Bitcoin.
The Laws That Govern Bitcoin Part 2 — Amara’s Law
Markets are often more about psychology than they are about financial metrics, economic data, or the realities of technological innovation. Roy Amara was a researcher and futurist keenly aware of how people perceive new technology. He popularized a saying that is known today as Amara’s Law:
“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
It has been restated in recent years by someone who knows quite a bit about technological change, Bill Gates — “We always overestimate the change that will occur in two years and underestimate the change that will occur in the next ten.”
But where that faulty estimation plays out can make all the difference. Most of the time, the worst that results from overestimating the value or effect of new technology is some bad predictions or some fanciful books that don’t age well. But because the fact that new technologies are traded in the markets in various forms, we can sometimes see over exuberance reflected in equity prices. In the new and unique case of blockchain technology, technological innovation took the specific form of an actual currency or commodity called Bitcoin. The result is that we get to see the effect of Amara’s Law playing out historically in markets trading worldwide.
Few would argue that the bubble and bust cycles of Bitcoin aren’t the result of human psychology. With each cycle, over exuberance drives the market to an unnatural new high only to be followed by a crash and bear market when the fundamentals don’t quite live up to the hype. The overestimation of the value is always tempered by the reality of the evolution and application of the technology which generally takes much longer. This results in an obvious market letdown, especially when we’re talking about technology in the form of a new asset class.
As far as underestimating Bitcoin or blockchain technology in the long term? That book hasn’t been written yet. It’ll take years still to see how it plays out. But if the media is any indication, it is underestimating Bitcoin to an embarrassing degree if our predictions turn out to be right.
Of course, Amara was talking about technology in general, not Bitcoin or blockchain. The amazing thing is that very often those in the industry close to the development of a technology can’t even see the value of it beyond its engineering aesthetics.
“It would appear that we have reached the limits of what is possible with computer technology,” mathematician and physicist John Von Neumann said in 1949. This is easy to laugh at. Most of us today don’t even know that there were computers in 1949. They were so primitive compared to what we have today that we would have a hard time using the word computer to describe them. But Von Neumann was wise enough to know what he didn’t know. He added “although one should be careful with such statements, as they tend to sound pretty silly in five years.” Silly indeed.
In 1968, an engineer at IBM who was clearly not the Chief Visionary Officer reportedly said about the microchip “But, what is it good for?” History can provide plenty of such underestimations of technological advances. But many have noted the similarities between the growth of the internet and adoption of blockchain technology. The argument today is that blockchain is still as early in its development as the internet was in the early to mid-1990s. Of course, blockchain and cryptocurrency proponents are eager to point out that the internet has been a massive and revolutionary technological success. It just took a while to develop and implement.
But some didn’t see the value of the internet, either. Nobel prize-winning economist Paul Krugman wrote in 1998 that “By 2005 or so, it will become clear that the internet’s impact on the economy has been no greater than the fax machine’s.” As if this remarkable lack of vision was not enough, he elaborated further with this doozy: “Ten years from now, the phrase ‘information economy’ will sound silly.” Ten years after uttering those words, the phrase “Nobel prize-winning economist Paul Krugman” began to sound silly.
Well, he’s at it again today.
“I’m on record as saying that crypto is a mishmash of technobabble and libertarian derp. But I guess that I should add that it’s also a giant draw for sufferers from Dunning-Kruger syndrome.”
Maybe he shouldn’t have added that. Dunning-Kruger syndrome is a delusion of mental superiority. Considering his prediction of the internet’s ultimate failure, he may be projecting a bit. Is there a Dunning-Kruger Home Test Kit we can send him?
This brings us back to the psychology behind markets. If we pull it back to the thousand-foot view, we can see the cycles of overestimation and underestimation depicted in the Gartner Hype Cycle, a graphic representation of the adoption and development of new technologies. It’s an updated and refined application of Amara’s Law, with colorfully named phases like the “Peak of Inflated Expectations” and the dreaded “Trough of Disillusionment.”
In its August 2018 report Hype Cycle for Emerging Technologies, Gartner places blockchain just entering the Trough of Disillusionment. Of course, this was in the slowly suffocating depths of the bear market. But even at that time, Gartner noted that blockchain is moving quickly through the cycles. They estimate 5-10 years to reach the Plateau of Productivity where the technology really matures. By that time, we’ll have a better idea of how much blockchain was underestimated or not.