Bitcoin ‘Scam’ Label Explained by Prospect Theory Psychology

In a recent social media post highlighted by CryptoPotato, commentator Shanaka Anslem Perera argued that steep Bitcoin corrections push retail investors to seek explanations matching their emotional distress. He directly ties this behavior to prospect theory, developed by Daniel Kahneman and Amos Tversky, which earned the Nobel Prize in 2002. The theory posits that losses feel roughly twice as psychologically painful as equivalent gains feel rewarding. When Bitcoin experiences a 30% to 40% drop following a period of euphoric buying, the emotional whiplash is severe. “You need an explanation that matches the intensity of that pain,” Perera wrote. “‘Scam’ fits perfectly.”

This psychological lens shifts the narrative from fundamental valuation to behavioral finance. Online community member Gary Krug supported this view, stating that calling Bitcoin a scam is “usually a response to emotional whiplash, not analysis.” Perera further suggested that the human tendency to chase quick gains, rather than build positions slowly through disciplined accumulation, exacerbates this pain. The core takeaway is that surviving Bitcoin’s notorious volatility requires an extended time horizon, moving from a mindset of seeking rapid profits to one of strategic, long-term holding.

Perera’s argument is bolstered by cited data on investor behavior. He claims approximately 70% of retail traders who buy during market rallies end up selling at a loss within a year. This pattern of buying high and selling low epitomizes the emotional trading cycle prospect theory describes. In stark contrast, the data indicates that long-term holders who keep Bitcoin for four years or more have historically avoided losses, even when their initial purchase was made at a cycle peak. Perera frames every emotional “scam” call as a “wealth transfer receipt,” signifying capital moving from impatient hands to patient ones.

Further evidence of Bitcoin’s maturation, according to the analyst, is the shrinking severity of its bear market drawdowns. From a drawdown exceeding 90% in 2011, the maximum declines have eased to approximately 50–60% in the current cycle. This trend suggests that while still volatile, the asset’s price swings are becoming less extreme as the market develops and institutional participation grows. This maturation narrative clashes directly with the critique from economists like Steve Hanke, who recently declared Bitcoin has “zero fundamental value,” using the current downturn as proof of a failing system.

The psychological debate is playing out against a tense market backdrop. Bitcoin is experiencing one of its longest periods of “extreme fear” according to sentiment trackers, giving critics fresh ammunition while simultaneously reinforcing the psychological argument made by Perera and others. The asset has fallen nearly 31% from its all-time high, recently oscillating between $85,000 and $88,000. Veteran analyst PlanB describes a market stalemate, with selling pressure coming from three groups: long-term holders still shaken by the 2021 cycle, technical traders reacting to momentum indicators, and cycle-focused investors anticipating further downside.

On the opposing side are buyers focused on Bitcoin’s underlying fundamentals and the narrative of increasing institutional adoption. This tug-of-war is reflected in starkly different performance metrics depending on the timeframe. Over a one-year window, data shared by Perera shows Bitcoin with a -15% return on investment (ROI), significantly lagging Gold’s +65% and the S&P 500’s (SPX) +14%. This short-term underperformance fuels the critics’ case. However, the long-term picture tells a different story. Over three years, Bitcoin’s ROI stands at +422%, dramatically outperforming gold’s +141% and the SPX’s +49%. Since its inception, Bitcoin’s return exceeds 2 million percent, compared to +167% for gold and +447% for the SPX over the same vast period.

This performance chasm highlights the central conflict: a clash between short-term emotional reactions, explained by prospect theory, and long-term investment conviction. The current market strain, therefore, is not merely a price correction but a battle of narratives—between those viewing volatility as proof of a scam and those seeing it as the growing pains of a maturing asset class where patience has been historically, and immensely, rewarded.