Bitcoin ‘Scam’ Myth Exposed: How Prospect Theory Explains Investor Panic and Losses

Calling Bitcoin a scam reflects investor psychology, not fundamentals, with prospect theory explaining panic selling after sharp declines.

Critics of Bitcoin (BTC) have returned to a familiar refrain, calling the asset a scam as it struggles to return to the five-figure highs it last enjoyed in mid-November.

However, crypto commentator Shanaka Anslem Perera has reframed the argument as a psychological response rather than a financial one, linking panic selling to the Nobel Prize-winning prospects theory.

The psychology behind the ‘scam’ label

In a November 17 post on X, Perera argued that steep corrections often prompt retail investors to look for explanations consistent with emotional pain. The Prospect theory, developed by Daniel Kahneman and Amos Tversky and awarded the Nobel Prize in 2002, states that losses feel roughly twice as painful as gains feel rewarding. And when Bitcoin, for example, drops 30% to 40% after euphoric purchases, labeling it as a scam becomes an emotional outlet.

“You need an explanation that matches the intensity of that pain,” Perera wrote. “’Scam’ fits in perfectly with that.”

The analyst cited data claiming that about 70% of retail traders who buy during rallies sell at a loss within a year, while long-term holders who held Bitcoin for four years or more have historically avoided losses even when buying at cycle peaks.

“Every ‘scam’ call is a receipt of a wealth transfer,” he claimed.

He also pointed to the tapering declines across cycles, from over 90% in 2011 to around 50-60% in the current cycle, as evidence that volatility has declined with maturity.

Perera’s claims found some support among the online crypto community, with user Gary Krug to report that “Calling Bitcoin a scam is usually a reaction to emotional whiplash, not an analysis.” He also added that markets punish impatience before rewarding conviction.

Another account, Bitcoinfinity, wondered why investors struggle to slowly build positions, to which Perera replied that people naturally seek quick profits. The key takeaway, according to the market observer, is that surviving Bitcoin’s cycles requires a longer time horizon, during which traders shift from seeking quick profits to disciplined accumulation.

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Market tension and a clash of stories

The “Bitcoin is a scam” framing has landed at a time when the asset is entering one of its longest “extreme fear” readouts, according to market watchers, giving critics new ammunition while strengthening supporters’ psychological argument. Recently, prominent economist Steve Hanke claimed that the asset has “zero fundamental value,” viewing the current downturn as evidence of a failing system.

The flagship cryptocurrency is down nearly 31% from its all-time high, briefly falling near $85,000 earlier this week before recovering towards $88,000, before falling back to around $87,000 earlier today. According to veteran analyst PlanB, selling pressure is split between long-term investors who are still shell-shocked in 2021, technical traders who are keeping an eye on momentum indicators, and cycle-oriented investors who expect further downside.

On the other hand, buyers are focused on fundamentals and institutional adoption, creating a stalemate until sellers exhaust themselves. That tug-of-war left Bitcoin behind traditional assets within a year, with data shared by Perera showing the digital assets have an ROI of -15% compared to +65% for Gold and +14% for the S&P 500.

However, over longer periods, BTC has significantly outperformed the two, starting from an ROI of +422% over the past three years, compared to +141% for gold and +49% for SPX. Since its invention, BTC has returned over 2 million%, while its traditional counterparts have only returned +167% and +447% in that time, respectively.