Why do people expect Bitcoin to reach the exact $20,000?

Photo by Aleksi Räisä on Unsplash

On December 1, Bitcoin surpassed $19,888, an all-time high. As I was getting ready to take a break for the evening, a friend suddenly asked me, “What do you think about bitcoin, which is about to break $20,000?” The joy and excitement of my friend were beyond expression. Likewise, when I opened social networking sites, many of my friends were filled with anticipation for $20,000 in bitcoins: “There’s still a little bit left, and after $20,000 there is a boundless starry sky”, “$20,000 in bitcoins, a new beginning”….

In terms of the investment itself, going from $19,888 to $20,000 is only a difference of $112, or 0.56%, which is not exciting. Even if bitcoin were denominated in Japanese yen and British pounds, it would not be so exciting to reach 2,089,400 yen ($20,000) and 14,893,417 pounds ($20,000).

So, why aren’t people interested in the all-time high price of $19,888 itself, but more interested in the fact that it hasn’t reached $20,000 yet? Or why aren’t people interested in $19,999 or $20,001, but rather in $20,000?

Is it because investors in the cryptocurrency market are all “ OCD-ers” and have perfectionist tendencies that they have to offer $20,000? Obviously not. Of course, after analysis based on the theory of investor behavior, we find that this is a phenomenon based on mantissa prices.

So, what is the mantissa price? In fact, these prices are very common in everyday life. In supermarkets, for example, we often see items priced at 19.8 Yuan, 99.9 Yuan, instead of 20, 100 Yuan. Prices such as $19.80 or $99.90 are generally called mantissa prices, while $20 or $100 are called integer prices.

Several recent economic studies have found that mantissa and integer prices have an impact on investors’ price perceptions, such as the aforementioned supermarket purchase, where people are more willing to buy an item priced at 19,9 Yuan than at 20 Yuan. Likewise, although there is not much difference between a $19,888 or $20,100 and a $20,000 bitcoin, people are more likely to view a $20,000 bitcoin as a landmark. From a behavioral economics perspective, there are two main factors that contribute to this phenomenon: the level effect and the image effect.

(1)Level effect

The level effect, also known as the underestimation effect, causes people to underestimate the price level due to their underlying preferences in price perception and processing of price information. There are three main explanations for the reason for the mantissa price level effect.

The first is that people usually “round down” mantissa prices. For example, for a $19,888 bitcoin, people will often round down to “$19,000”, or more than “$19,000”. At this point, a bitcoin that is viewed as “$19,000” is much less attractive than a $20,000 bitcoin.

Secondly, people usually “compare prices from left to right”. Based on daily habits, people usually observe and compare commodity price figures in order from left to right, which causes people to ignore the figures on the rightmost side of the price and thus underestimate the price. This way of processing price figures is not for the purpose of recognizing prices with high precision, but for the convenience of recognizing them. For example, when we look at the price “$19,888,” from left to right, we focus on the left-hand numbers 1 and 9, while 888 is habitually ignored, and similarly for $20,000, we usually focus on the left-hand numbers 2 and 0. As such, a “$20XXX” bitcoin is clearly more attractive than a “$19XXX” bitcoin.

Lastly, people’s memory is limited. For the average person, we don’t remember specific price information at all. For example, for $19,776, $19,658, $20,132, etc., we usually don’t remember the price so carefully, and we tend to remember only the top number of the price as “more than 19,000” or “more than 20,000”. So on a cognitive level, it makes people think that “19,888” is much lower than “20,000”.

(2)Image Effect

Another factor contributing to the preference for “$20,000” is the image effect. Unlike the level effect, the image effect is to show the consumers what the numbers represent through the numbers on the rightmost side of the price. The image effect is divided into the price image effect and the quality image effect.

First, there is the price image effect, where mantissa prices cause investors to have different attitudes towards the future upside and downside of an asset. For example, for a $19,888 bitcoin, people who see a mantissa like “888” tend to think that the market still has upward momentum; similarly, for a $20,100 bitcoin, people who see a mantissa like “100” tend to think that the market has already upward .and the perception is basically “it’s already up.” As you can see above, prices like “19,888” and “19,988” clearly create optimism among investors that a price of $20,000 is within reach.

Just as in traditional commodity markets, products with end prices usually give people the impression of being “cheap” or “on sale,” while products with integer prices usually give people the impression of being “high quality.” In the investment field, bitcoin with an integer price of “$20,000” gives the market an impression that “bitcoin has entered a new era and a new chapter”, which has a strong symbolic meaning to many investors, so people are more interested in bitcoin with an integer price of “$20,000” than bitcoin with a mantissa price of “$19,888”.

As we can see above, although there is no significant difference between a $19,888 bitcoin and a $20,000 bitcoin at the investment level, there is a difference at the perception and psychological level. Under the influence of the level and image effects, people have higher expectations for bitcoins with a price of “$20,000” than for bitcoins with a mantissa price of “$19,888”.

Article from OKEx Research

Translated by Yang(Mengyan Finance)

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To translate some latest policy and issues on blockchain and fintech happened in China

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To translate some latest policy and issues on blockchain and fintech happened in China

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