How emotions affect crypto investments
Crypto fever has gripped the world—there has been a surge in decentralized digital currencies that many forecast will one day replace traditional money. The price of cryptocurrencies has been known to rise astronomically and crash within a single day. This bubble has been attributed to the mood or emotions of investors rather than economic indicators, largely due to the popularity of cryptocurrencies.
Studies linking financial decision-making, hormones, genetics and brain activity have culminated in proof that our biology and psychology significantly affect our decision-making ability without us fully realizing it. Recent experiments that monitored brain activity with magnetic resonance imaging (MRI) and electroencephalography show monetary gain activates the same pleasure centre associated with food, drugs and sex.
The market price and the investor’s mind
As a result of the uncertainty that rules the market, investing without emotions is easier said than done. During periods of market boom, investors tend to listen to stories from friends, family and media hype about the expected growth in the market.
In Germany, three out of 10 citizens were found to be interested in cryptocurrencies “as a form of investment, according to Cointelegraph auf Deutsch, quoting a survey conducted by German bank Postbank. Conversely, stories about volatility or negative turn in market compel seven in 10 crypto investors to sell their stake at bottom prices. These statistics, provided by studies, are evidence of the fact that not all crypto investors are willing to wait for the coveted ‘bull market,’ i.e. periods when the market tends to go up indiscriminately.
Evidence from recent studies suggests that crypto investors are swayed by emotions during periods of uncertainty. Many individuals jump ship in a downward trend or climb aboard during periods of stability and upward trend. Financial columnist Jason Zweig commented about seasoned investors who have mastered their emotions in his book, Your Money & Your Brain. According to Zweig, “Excitement becomes a cue that it’s time to consider selling, while fear tells them it may be time to buy.”
“Understanding those emotions and impulses can help us limit their disadvantageous backlashes,” remarked Robert Stammers, director of investor engagement for the CFA Institute’s Future of Finance team. “Once you realize what your temptations are, then you can begin to control those behaviours that result.”
Undoubtedly, emotions affect the logical thinking of investors. While some are affected by personality, biology, mood, public sentiments and perception of cryptocurrencies. The ability to control one’s emotional response seems to be an important factor in decision-making. A study by California Institute of Technology revealed that successful traders often have high levels of emotional regulation, which helps them avoid the impulse to conform to the herd.
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Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as SegWitCoin BTC coins. Altcoins, which value privacy, anonymity, and distance from government intervention, are referenced as dark coins.
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