The Gambler’s Fallacy — Cryptocurrencies

Gambler’s Fallacy is the idea that a certain outcome or event is more likely to occur given a previous set of outcomes or events. For you sports fans out there, think of it as the hot-hand fallacy, where a player starts making basket after basket and each time you are convinced he will make the next shot he takes.

The gambler misjudges whether events are independent and in turn wrongly concludes that the next outcome will the opposite of the preceding events.

Enter in everyone’s new favorite topic, cryptocurrencies. This week I heard on CNBC, one of the founders of Coinbase (which IPO’d through a direct listing — a topic for an article to come) said he was not worried with the cycle of price rising to falling as it has in the past several cycles. While he admits it is likely it will fall, his view is that the opposite will take place in that the price will go up once again.

The Gambler’s Fallacy is right in front of our own eyes. Are we certain that the pattern of prices falling and returning to set new highs will happen? So when thinking about putting your hard earned money into cryptocurrencies, take a second and think, is now the time to buy the dip? Do I really have conviction or am I following in the footsteps of the Gambler’s Fallacy?

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