No matter what the data says or what kind of resources you have available, at the end of the day, you’re the one making decisions. However, you’re only human, not an algorithm that will always base its decisions on facts and numbers. This means that psychological influences and your mindset might play a key role in your future success (or failure). With that in mind, here are the top five mindset flaws that ruin a lot of crypto traders.
- Loss aversion
The first major flaw is the psychological phenomenon known as loss aversion. This is a scenario where you’re so afraid of loss that you would rather avoid losing $100 than you would want to gain $100. This is a serious problem, and you might need to struggle hard to overcome it.
The biggest problem with it is the fact that you’ll avoid exposing yourself to any risk. Sure, risky behavior is never a good thing, but there’s no investing without accepting the risks involved. Instead of avoiding risks, you need to understand the concept of risk assessment and, even more importantly, learn how to do proper risk management.
This is deeply regretful, mostly because there are a lot of amazing new cryptocurrencies, neither of which has a significant market capitalization, at the moment. This means that even a relatively small investment could end up being significant in the long run. Still, this won’t happen unless you learn how to overcome your fear. (Source: https://www.techopedia.com/cryptocurrency/new)
Fear of investment is completely normal, but unless you can overcome it, you’ll never be able to invest (and you definitely have nothing to do in a field such as crypto).
- FOMO
Another problem that crypto traders (and investors, in general) sometimes experience is the idea of missing out on a potentially great investment. This one is relatively fresh in everyone’s mind, and it has a lot to do with the 2017 BTC explosion.
This was the big crypto event of our lifetime, and every time you see a crypto millionaire out there, you instantly think to yourself that that person could have been you. Trauma comes in all shapes and forms, and it doesn’t have to come from anything violent or life-threatening. The trauma of missing out on a life-changing deal is all that it takes to fuel your fear further.
The problem with this is that it’s not just financial – it’s also deeply personal. You don’t want to admit loss or that others have noticed something that you didn’t. So, it’s not just about missing an opportunity. It’s about everyone else getting it right and leaving you behind, feeling inferior. This is where the “missing out” part comes from.
This fear is further strengthened by concepts like recency bias, where you observe the last, short time span like it were an entire history. This creates an impression that a specific token was always on the rise, and this will never change. This just gives you more of that false confidence.
- Confirmation bias
This is one of the biggest fallacies that can completely ruin your research. Namely, there’s so much content online that, regardless of what you’re looking for, there’s a ton of content out there to support it.
Just try it! Google something that has an answer in the keyword, like why are phones bad for your mental health? Now, read the article, and as soon as you’re done, look up why phones are so good for your mental health and mindset. Both of these will give you some incredibly confident-sounding results.
The problem is that the majority of people won’t google both of these things. They’ll look up just one, be happy with the answer they’ve gotten, and be done with it.
Most people don’t care about the truth. They just want to confirm what they already believe.
It’s so easy to see how this could backfire during crypto research. All you need to do is be a bit reckless while typing the question in your search box. So, try to be as neutral as possible when using the search box, try deliberately to find pieces claiming the opposite, and, most importantly, try to always get all your information from trusted (ideally the same) sources.
- Anchoring effect
Many people base their opinions on what something’s worth based on a specific event. This is not just the case with cryptocurrencies but with prices in general.
Have you ever talked to someone a bit older who constantly raved about how the X product was a lot cheaper in their time? Well, prices are dynamic, and that price from their childhood wasn’t the original price either.
You probably don’t acknowledge that you’re doing the same thing yourself. The problem is that, with prices, it’s more or less clear that the price is only going one way (up), and this complaint is more of a criticism than some deep analysis. With investments, things are a lot more dangerous. Why? Well, because there’s this myth of market correction.
You believe that if the price was once X, it has to reach this point again. In reality, however, these numbers are completely arbitrary.
Another manifestation of the anchoring effect is the scenario where you imagine a number (almost exclusively a round number) and wait for the value to reach that number before you buy/sell. This can make you lose out on so many opportunities because of this arbitrary number that doesn’t exist outside of your mind.
- Emotional trading
This is, by far, the most dangerous of them all, especially since it could mean a number of things and result in a number of different outcomes. One thing is certain, though: it never gives a reliable outcome, and every success achieved via emotional trading is temporary and accidental.
There are so many emotions governing how and why we trade. For instance, greed is a pretty common and unforgiving one. Here, you’re so blinded by potential gains that you don’t even pause for a second to think about what you’re risking. Moreover, people who are greedy often feel like the universe owes them something, which is why they expect a reward. In reality, this is not how trading works.
It’s also not a good idea to trade while you’re ecstatic or distressed around something else. At moments, you’ll feel like you can’t lose; in other scenarios, you’ll feel like you have nothing else to lose. Neither of the two is true, and it could (and probably will) result in some pretty bad trades.
Ideally, you want to automate your trades. This way, you’ll set up the system (stop orders) while level-headed and, by taking away some agency of direct trades, minimize the odds of acting emotionally.
Understanding why you make decisions is key to making the right decisions
Sometimes, the decision will just feel right; however, if you can’t rationally explain why, this might not be the best decision or the safest course of action for you to take. So, backtrack all your decisions carefully and compare them to one of the above-listed fallacies.
Is this really a good idea, or are you just afraid of missing out? Do you believe that the market will correct itself back to the “original” number, and do you have a preconception that you just want to confirm via research?
Answering these few questions will help you figure out exactly where you stand.
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