the Irrationality behind cryptocurrencies

Abstract

The first theory I ever studied in my university course is that of Homo Economicus. It is a kind of man whose key feature is rationality. It acts for his interests to derive maximum well-being using the least amount of resources possible. It is clear that a man who is completely devoid of morals, although he manages to satisfy his needs, cannot exist in reality. Economics is called social science because it focuses on the study of people's behaviors, and it is known that people do not act according to the homo economicus standard, but according to parameters dictated by events and characteristics that cannot be homologated. Rationality and the ideal of behavior in a perfect economic environment are used to simplify the models, but it always remains a theory and not a fact. The most striking example is certainly the efficient market theorem, criticized by investors of the caliber of Warren Buffet. As beautiful and perfect as the Efficient Market Hypothesis may be, it will inevitably have to collide with the many shortcomings of an imperfect world.

It is undoubtedly true that behavioral finance is increasingly at the center of economic studies today. Its importance has grown with the complexity and technological development of our society. Using it, in addition to making us better understand our irrational side, can help us make better and more thoughtful financial decisions. The consequence of all this is the optimization of utility and the reduction of losses. An individual who knows the irrational part of him dictated by emotions, can point to more rational choices.

Another trend that has been much debated for about 5 years is that of cryptocurrencies. Financial revolution or mere speculative asset? Many have asked this question and I believe that the truth is more complex than it seems. It is undoubtedly a revolution in IT terms but the speculation it has brought is certainly the result of various irrational behaviors that they have provoked, especially among small and medium investors. Furthermore, it should be added that being a very complex and not easy to understand tool, the "mystical" aura behind cryptocurrencies has certainly increased their popularity in terms of the possibility of getting rich.

In my thesis, I aim first of all to explain the phenomenon of cryptocurrencies, how it was born and how it has developed over time. Subsequently I will try to connect the speculative and investment mechanisms in terms of behavioral finance, to understand how their success is the result of thoughtful decisions by investors or simply the choices are the result of partially or completely irrational behavior.