Time Preference and Hyperbolic Discounting: Understanding Credit Card Bitcoin Purchases

Behavioral economics understands Time Preference and Hyperbolic Discounting as reasons why people choose instant rewards instead of long-term financial stability when making impulsive financial decisions.

Online purchases of Bitcoin along with other cryptocurrencies through credit cards have direct relevance to the behavioral economic principles of Time Preference and Hyperbolic Discounting.

Quick market access through Bitcoin purchases comes with elevated transaction costs, financial risks, and accruing interest expenses. The paper evaluates Time Preference as well as Hyperbolic Discounting effects on cryptocurrency market consumer conduct together with realistic cryptocurrency buying cases.

The Concepts of Time Preference Together with Hyperbolic Discounting Require Understanding

The way people value immediate benefits versus future returns is defined as Time Preference. The people with high time preferences immediately want monetary gratification, which overrides potential rewards in the future.

According to Hyperbolic Discounting theory, people heavily devalue future rewards in their minds, which leads them to make hasty choices although they realize delayed rewards would deliver superior results.

These psychological models help describe consumer behavior when they choose instant Bitcoin purchases despite the high fees, which can lead to debt..

The Urge for Instant Gratification: Buying Bitcoin with a Credit Card

Users can buy Bitcoin online through crypto platforms, such as Coinbase, Binance, and MoonPay, along with the Simple app, by choosing to pay with their credit card for an immediate transaction.

Quick market entry remains possible thanks to this approach, but users must pay considerable expenses:

• Transaction fees: A Credit card is used for cashing out, but consumers have to pay 3% to 5% of the transaction value to use this service. Buying Bitcoin with a credit card on Coinbase for $1,000 incurs roughly $40 in fees that reduce the actual amount of Bitcoin you receive.
• Credit Card Interest Rates: Those who just keep spending and using credit cards have to shell out sweat-inducing interest fees based on the common credit card APRs, which are above 20% in amount.
• Price Volatility: This means that if you invest in Bitcoin immediately, you might not pay the most profitable market exchange rates, as Bitcoin prices vary greatly.

Bitcoin purchase decision is made by users using credit card purchases only because users employ the behavioral pattern of hyperbolic discounting that makes them hungry to have Bitcoin today instead of waiting for the bank transfer fee to decrease.

A Real-World Example: Bitcoin Bull Run in 2021

In 2021, when Bitcoin had a bull run, it was able to reach an all-time high of $69,000. Numerous investors decided to purchase Bitcoin in order not to miss out on the possible future return on the digital currency.

According to an article published on Coinbase, there was an increase in credit card crypto purchases between 2020 and 2021. Many retail investors entered the crypto market. They lacked long-term vision and acted solely on short-term profittability impulses because they thought Bitcoin would only increase and not depreciate.

Unfortunately, by the middle of 2022, there was an unexpected decrease in Bitcoin rates. The coin dropped below $20,000. This fall in rates resulted in debts, which many investors could hardly pay back.

The people who bought when Bitcoin had a higher rate with a 20% APR credit card but couldn’t pay back have regretted their impulsive investment. This is a typical example of the disadvantage of making unplanned decisions on the basis of exaggerated profit.

Delayed Gratification and Smarter Alternatives

Smart and rational financial investors understand that long-term health financial investments are more reliable and profitable than short-term investments that are made impulsively. Instead of using a credit card, smarter alternatives include:

• Bank Transfers (ACH OR SEPA): Bank transfers are a safer way to invest rather than using credit cards. Although it might take a while to process, it is a much better alternative.
• Dollar-Cost Averaging (DCA): When you buy Bitcoin in bits, it decreases the risk. You won't be forced or pressured to buy it at its peak rate.
• Disposable Income: This helps reduce the risk of investors gathering debts with high interest. Use income that doesn’t put you in debt.

How Do Exchanges Leverage on Behavioural Bias?

You need to understand that crypto and digital currency exchange platforms understand how hyperbolic discounting influences investors' behaviours, and they design their websites to be attractive and enticing. They are designed to make you believe they are offering the best deals.

These are some of the ways their websites are designed to ensure you have an impulsive investment:

• One-click purchases: This basically makes impulsive investments and purchases easier. There is no going back once you click on the link. This is because if you need to visit another website to complete the purchase, you might have a rethink.
• Count-down timers: When you see a website that does limited offers with a countdown, they are designed to create a sense of urgency that results in impulsive investment.
• Highlighting Instant Transactions: The marketing platforms of these crypto exchangers emphasize that their platforms are fast and easy. They barely mention the cost and the risk associated with transacting with them.

Conclusion

Time preference and hyperbolic discounting is the basic explanation of why consumers make impulse Bitcoin purchases with their credit card despite the financial disadvantages and risks associated with it.

In the current digital world, where everyone desires to own digital assets, there is a need to consider the disadvantages of accumulating debts, especially on high interest rates. In fact, the reality of crypto market volatility makes impulsive and unplanned crypto purchases risky.

Investors that prioritize long-term wealth accumulation over short-term risky returns have higher chances of achieving financial success in the crypto market. An understanding of these risks and how hyperbolic discounting affects investment decisions, especially in an environment where impulsive behavior is the norm.