Bitcoin and the Psychology of Scam Narratives: A Prospect Theory Perspective

The label of Bitcoin as a "scam" has become a recurring narrative in financial discourse, particularly during periods of sharp price corrections. Yet, as behavioral finance scholars increasingly argue, this characterization often stems not from objective risk assessment but from cognitive biases rooted in Prospect Theory. Developed by Daniel Kahneman and Amos Tversky, Prospect Theory posits that individuals evaluate gains and losses relative to a reference point, with losses perceived as approximately twice as painful as equivalent gains. This asymmetry in emotional response, combined with framing effects and overconfidence, shapes how investors-especially retail participants-interpret Bitcoin's volatility and justify their decisions.

Loss Aversion and the "Scam" Narrative

Bitcoin's price swings, often exceeding 30–40% in short periods, amplify the psychological impact of loss aversion. When investors experience sharp declines, the emotional pain of losses triggers a search for external explanations to rationalize their distress. Calling Bitcoin a "scam" becomes a convenient narrative to absolve oneself of responsibility for poor timing or overexposure. Data from recent studies underscores this: approximately 70% of retail traders who buy during market rallies sell at a loss within a year, while long-term holders who retain Bitcoin for four years or more historically avoid losses, even when purchasing at peak prices. This dichotomy highlights how emotional biases, rather than fundamentals, drive short-term panic.

Framing Effects and Criticisms from Prominent Figures

Prominent critics of Bitcoin, such as Jamie Dimon, Peter Schiff, and Tucker Harris, often frame the asset as a speculative bubble or a fraud. However, their arguments may themselves reflect framing effects. For instance, Dimon's infamous 2017 dismissal of Bitcoin as a "scam" resurfaced during the 2022 bear market, when the cryptocurrency's price plummeted. Similarly, Peter Schiff, a long-time advocate of gold, has argued that Bitcoin's lack of intrinsic value makes it uniquely vulnerable to collapse during economic crises. Yet, these critiques often ignore the decentralized nature of Bitcoin's design, which prioritizes censorship resistance over stability. By framing Bitcoin through the lens of traditional assets like gold or fiat currencies, critics may inadvertently project their own biases onto a system with fundamentally different risk profiles.

DeFi and the Illusion of Transparency

Decentralized Finance (DeFi) proponents argue that Bitcoin's transparency and decentralization inherently counter scam narratives. On-chain data, for example, allows real-time tracking of transactions, reducing the opacity that fuels fraud in traditional finance. However, behavioral finance research reveals that DeFi's transparency does not eliminate cognitive biases-it merely shifts them. Investors in DeFi platforms often exhibit "crypto bias," favoring high-risk, high-reward assets despite suboptimal mean-variance trade-offs. The same FOMO (fear of missing out) and herd behavior that drive Bitcoin speculation also manifest in DeFi, as seen in the 2021 Dogecoin surge and the 2017 ICO boom. Moreover, the lack of centralized oversight in DeFi amplifies the risk of scams, with 2025 data showing over $2.17 billion stolen from crypto services, including a $1.5 billion hack of ByBit by North Korean actors.

Probability Weighting and the "Lottery Effect"

Prospect Theory's concept of probability weighting further explains Bitcoin's appeal to retail investors. Individuals tend to overweight the likelihood of extreme outcomes, such as a 100x return, while underestimating the probability of moderate losses. This "lottery effect" is particularly pronounced in Bitcoin's speculative narrative, where the allure of outsized gains overshadows the risks of volatility. A 2024 study found that Prospect Theory Value (PTV) is a significant predictor of cryptocurrency returns, with higher PTV often leading to overvaluation and subsequent price corrections. This dynamic suggests that Bitcoin's price movements are as much about investor psychology as they are about technical or macroeconomic factors.

Conclusion: Biases vs. Objective Risk

The "scam" narrative surrounding Bitcoin, while often emotionally charged, rarely withstands scrutiny when analyzed through the lens of behavioral finance. Critics like Dimon and Schiff may frame Bitcoin as a fraud, but their arguments frequently conflate loss aversion with objective risk. Similarly, DeFi's transparency, while a step toward accountability, does not inherently mitigate the cognitive biases that drive speculative behavior. As the cryptocurrency market matures, investors and regulators must recognize that Bitcoin's volatility-and the narratives it generates-are as much about human psychology as they are about technology.

In the end, the question is not whether Bitcoin is a scam, but whether investors are prepared to confront their own biases when evaluating it.