Growing up, I worked the cash register at my family's grocery store. Every Saturday like clockwork, a well-dressed elderly woman would come in to buy scratch tickets. The amount varied, but she always paid in pristine $20 bills, as if she'd ironed them. I can still remember her voice, hoarse from decades of smoking. She would take her tickets, walk calmly back to her car and scratch them off right away. I know that because should she win she would often come back in immediately to cash in. Any winnings would go to buying more scratch tickets on the spot, and the cycle would repeat itself until she was out of money. Her bills were crisp because they were coming straight from the bank. The dynamic was obvious: she started out with a budget for the day, an amount she was willing to lose, and played until she lost it all. Anyone who's spent time gambling in Las Vegas can relate. Given the math, the gaming sessions of the woman my cousins and I knew only as "scratch ticket lady" didn't last too long- Maine's lottery pays out just 68 cents on the dollar, on average, with much of that coming in the sort of large spiky large wins that create buzz.

Though she'll always be lodged in my mind, scratch ticket lady was far from alone in her behavior. Those who won at scratch tickets overwhelmingly redeployed their winnings back into more tickets. I only remember a few cases where someone took their winnings and walked away.

It would be easy to chalk this experience up as a depressing example of gambling addiction, and to be sure there's an element of that. There's another factor at play though, a dynamic helping to fuel the ICO bubble and scratch tickets alike. It is called "mental accounting," a phrase first coined by Richard Thaler, who happens to have just won a Nobel Prize in economics for his body of work melding psychology and economics together. Mental accounting is when people take something intrinsically fungible (money, in most cases, given that this is economics we're talking about), and divide it into non-fungible accounts in their heads. This takes lots of different forms, ranging from "gas money" to saving for vacations in a jar. In the gambling world, it often means that people treat winnings differently than the rest of their money, viewing "house money" differently. A gambler who starts out by doubling their money playing roulette will likely gamble far more in absolute terms than one who loses. Other gamblers will add up their winnings and place the whole lot on red on their way out. Here's Thaler's paper on mental accounting applied to gambling specifically.

To be clear, there's nothing bad about with mental accounting, per se. It is a feature of humanity's firmware, and "wrong" only in the context of clean mathematical economic models that assume we're perfect maximizers. Extending the example, though, it is easy to see how mental accounting is fueling the ICO bubble.

Here's how: between Bitcoin and Ethereum $120bn of value has been created. Bitcoin, especially, has come into its own as a virtual store of value, a use case very different from the rest of tokenspace which is full of what amounts to startups. Despite using it as an analogy, I'm not comparing all Bitcoin investors to gamblers. Many, including some of my colleagues here at Matrix, have well-reasoned theses behind their positions and as such "deserve" their winnings as the result of some intellectual decision rather than sheer luck. Still, they as a Bitcoin holders have benefited from one of history's great windfalls- and watching the behavior of people in similar situations, including scratch ticket lady, tells us that many of them will view this "found money" as a separate mental account suitable for more risky investments. Many may even see it is a "crypto-account" that they will reinvest mostly into other crypto assets.

Where this gets interesting is that the sheer value of Bitcoin (and the store of value use-case in general) is massive relative to amounts involved in early stage VC, for which the ICO market is arguably a substitute. The total size of the non-healthcare Series A market in 2017 in the US was probably only a few billion dollars. If even a quarter of Bitcoin investors decide to diversify by shifting 10% of their Bitcoin into other crypto assets, that's a level of investment approximately equal to a year of early stage tech VC. If they happen to consider the merits of the investments less rigorously than they might otherwise because they feel they're playing with "house money," that amounts to rocket fuel for the little bubble we're seeing in ICOs. I think this is happening at scale in tokenspace today, and helps to explain some of wilder things we're seeing. Small town gamblers and crypto-millionaires share the same firmware.