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Science behind crypto misconceptions: The bandwagon effect

Binance Business News Dec - 10 - 2024 , 15:51

Have you ever found yourself adopting a belief or behaviour just because “everyone else” seems to be doing it?

In this edition of our blog series on the science behind crypto misconceptions, we explore the bandwagon effect – a powerful psychological phenomenon where individuals adopt beliefs or behaviours just because they’re popular.

These cognitive bias influences everything from health to financial decisions in the crypto world. By understanding the mechanics behind the bandwagon effect, we can better recognise its impact on our choices and avoid falling prey to its pitfalls.

Join us as we uncover how this bias shapes our perceptions and decisions, especially in the fast-paced realm of cryptocurrency.

What is the bandwagon effect?

The bandwagon effect manifests itself when people think or do something primarily because others are thinking or doing it.

When the bandwagon effect is at play, the hard-wired human desire to conform to group behaviour outweighs individual decision-making or critical thinking.

The psychology behind this effect is rooted in both our need for social acceptance and the inherent trust we place in collective behaviour.

If enough people believe something to be true or valuable, individuals start to assume that the consensus must be right, even if their own experiences or knowledge might suggest otherwise.

Popularity equals effectiveness?

While the bandwagon effect can be observed virtually everywhere, one vivid example is the beauty industry, where social media and influencer marketing are the primary tools for promoting products and launching trends.

Many consumers equate a product’s popularity with quality, assuming that if it's trending, it must be the best option. This often leads to impulsive purchases without thoroughly considering or researching whether it’s suitable for their individual needs.

Take retinol for instance — a popular skincare ingredient widely praised for its anti-ageing and skin-renewing benefits.

Although it’s often marketed as a “must-have” product, research suggests that it may not be suitable for younger individuals, particularly those in their teens or early twenties.

Retinol can be too harsh for developing skin, which is still more delicate and often requires a gentler skincare routine.

Younger skin typically doesn't need the same level of cell turnover that retinol stimulates, and using such a potent ingredient prematurely may disrupt the skin’s natural balance, leading to irritation, dryness and increased sensitivity to environmental factors, such as UV rays.

Hence, blindly following trends may lead to regret, as products are not always as universally effective as they may seem.

Swallowed by the trend

The Tide Pod Challenge is another clear example of how the bandwagon effect can cause individuals to engage in harmful behaviour without considering the consequences.

The trend gained widespread attention on social media platforms, where teenagers were filmed biting into or consuming laundry detergent pods.

What began as an online joke quickly spiralled into a dangerous trend, with participants being drawn in by the visibility and validation that came from participating in a viral challenge.

Many people underestimated the seriousness of ingesting Tide Pods. When ingested, pods can cause health complications such as severe chemical burns and vomiting and may even lead to breathing difficulties.

In extreme cases, consuming Tide Pods can result in hospitalisation due to poisoning and long-term damage to internal organs such as the liver.

Despite the health officials, medical experts and even Tide's parent company warning the public about the dangers of this challenge, the trend persisted.

This case demonstrated how the bandwagon effect overrides critical thinking, especially among younger people who may feel pressured to conform to what’s popular online.

"If everyone's selling, it must be a bad investment"

During Bitcoin’s steep drop from $20,000 to $3,000 in early 2018, many investors who had been drawn to its meteoric rise began to lose faith.

As prices plummeted, media outlets and online discussions were filled with doubt about BTC’s long-term viability.

Influential voices, from mainstream financial analysts to online commentators, questioned whether Bitcoin’s value was sustainable. In response, numerous investors sold their holdings, feeling the widespread negativity and fearing that crypto might never recover.

This mass exit from the market wasn’t simply about avoiding short-term losses; for many, it was a crisis of belief. Even those who had been previously enthusiastic about cryptocurrency began to question whether it had a future when they saw others lose confidence.

In this atmosphere of uncertainty and doubt, the rush to sell seemed like a logical step to avoid further risk. Yet, for many investors, the decision wasn’t purely logical, but one, to a large extent, driven by a perception that everyone else is ready to give up on BTC.

As we all know, bitcoin's story didn’t end there. Over the years, the asset regained and multiplied its momentum, eventually surpassing its previous highs and solidifying its place in the financial world.

While selling in moments of panic may feel like a safe bet, it can sometimes cause people to abandon long-term opportunities based on short-term anxiety fuelled by the perception of mass panic.

"If everyone's buying, it must be a good investment"

In crypto and the broader financial world, the bandwagon effect can also manifest itself in an inverse scenario. Oftentimes, novice traders and investors may come in not fully understanding the underlying technology, the volatility of the market or the specific risks associated with particular tokens or platforms.

Instead of researching the fundamentals of a project or assessing its long-term viability, some tend to base their investment decisions on hot trends, especially when the meteoric success of newly popular assets sparks the fear of missing out (FOMO) in inexperienced users.

When inevitable market corrections occur, or when hype-driven projects lose momentum, some of these investors can experience significant losses. In these moments of frustration, it’s easy to lose faith in the entire cryptocurrency space.

Some can even go as far as to vow never to trade crypto again, seeing the market as too risky or unpredictable.

When the urge to follow the bandwagon replaces comprehensive strategy and proper risk management, investing can feel like a roller coaster indeed.

Yet, it is important to recognise that thoughtful, research-backed decisions can yield more sustainable results.

This bandwagon effect isn’t unique to crypto but is particularly pronounced in such a volatile and fast-moving environment.

For inexperienced investors, the key to long-term success lies not in following the crowd but in developing a solid understanding of the market, performing independent research and being cautious of trends driven solely by popularity rather than intrinsic value.

Final thoughts

Recognising the bandwagon effect is essential for making informed decisions, particularly in a fast-paced and volatile space like cryptocurrency.

This powerful cognitive bias can cloud judgment, pushing us to follow trends or make decisions simply because they are popular.

Whether it's jumping on viral challenges, adopting trendy skincare routines or investing in cryptocurrencies, the pressure of conformity can easily lead to unwise choices.

Avoiding the pitfalls of popularity-driven decisions — whether driven by hype or fear — requires a level-headed approach.

For those looking to deepen their understanding of cryptocurrencies and make informed decisions, resources such as Binance Academy provide valuable insights and education.