Cryptocurrencies are part of all the investments that are accessible to almost everyone. However, it’s crucial to have an in-depth or at least a basic understanding of them in order to avoid significant losses in your wallet. Unlike more traditional investments, such as bonds or savings certificates, cryptocurrencies are not only extremely volatile, but are also surrounded by an almost mystical aura: it’s common to find people who are deeply convinced of their assets’ increase in value just 10 seconds after purchase. This explains why there’s a strong tendency to hold them indefinitely (the so-called "holding").
Cryptocurrency investment is a relatively recent phenomenon, but it has already shown a significant impact on global financial markets. However, beyond technical and fundamental analyses, a crucial often overlooked aspect is investor’s psychology, which means how people assess risks or what they think about while purchasing their assets. Understanding the psychological dynamics behind investment decisions, can help us to explain many of the behaviours observed in the cryptocurrency market. This is actually what behavioural finance wants to investigate: it is a branch of finance that focuses on these psychological behaviours, for example by attempting to identify which areas of the brain are activated during economic decision-making processes.
Cryptocurrencies are a type of investment which are constantly attracting new people. The reason is that, if the price rises quickly, they can guarantee a profit in a relatively short period of time. Even beginners can start purchasing them (ideally in small amounts). Emotions play a fundamental role in this context. I heard, days ago, about FOMO, or the “Fear of Missing Out,” a psychological phenomenon particularly relevant here: it refers to the fear of missing out on something, mainly an opportunity. This generates a strong sense of anxiety for the potential investor, who sees an asset’s price increase day by day. The investor follows a +20% rise in one day of that “Shitcoin” (a term used to refer to cryptocurrencies created as a joke, useless in the market, which are often scams), while he is usually a beginner in this case; then decides to jumps in and buys impulsively without calculating any risk. “Surely tomorrow I’ll log in and have gained 40%” resonates in the investor's mind. But is it true? It rarely happens, because it requires a lot of luck! In any case, this is where the need to invest in cryptocurrencies arises, almost as a way of not “missing the train” of the next big deal.
In the digital context we live in, where news and information circulate so fast on the Internet, others' opinions matter a lot: people are strongly influenced by the opinions and actions of others, especially those belonging to the same social group or community. Besides, when friends, family, or people on online forums or social media platforms discuss their investments in cryptocurrencies, it can create a sense of social pressure to participate, to avoid the risk of being left out. This social proof, in turn, can create momentum in the market, leading many to spend large sums without adequate knowledge of this world. This is precisely the phenomenon many have called the “herd effect”: it’s better to follow the crowd rather than analysing the situation alone.
Another type of fear can be the fear of loss, with a tendency to give more importance to losses than to gains. Essentially, losing even a small amount of money causes more psychological pain than the pleasure after earning. This can lead investors to instinctive behaviours, such as selling too soon to avoid further losses (even though it’s often the best solution) or, conversely, holding onto their investments in a declining cryptocurrency, hoping its price will rise again, even when the prospects are negative. I remember what happened to Terra and Luna, with the “stablecoin” UST that crashed in May 2022, wiping out the investments of millions of users, many of whom had deposited their life savings. In that case, unfortunately, rationality and the fear of investing weren’t useless: since it was a “Stablecoin,” which is a directly connected to the price of the Euro or the US Dollar asset; so, it was considered as a kind of stable and safe investment. Unfortunately, many were wrong!
When the perspective is negative, the opposite can also happen: as in gambling, instead of giving up, people may attempt a second investment, risking a second loss. Caution can be crucial in this case.
Our brains and belief systems play an important role in our everyday life, since our minds operate thanks to the so-called biases. According to the definition provided by Wikipedia:
Cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. In psychology, it indicates a tendency to create one's own subjective reality, not necessarily corresponding to evidence, developed based on the interpretation of the information at hand, even if not logically or semantically connected, leading to an error of judgment or lack of objectivity.
This is where the so-called “confirmation bias” comes into play, which is a set of assumptions, information, and positions (including viewpoints and opinions) that confirm our belief system. In short, it’s all those pieces of information or opinions that confirm what we already think. For example, this concept works also with the newspapers we choose to read: depending on how we vote, we choose to read the corresponding newspaper, which will most likely reflect our worldview; it depends also on the left-right political spectrum, and on what we actually are going to vote. There’s also the risk of “overconfidence”, such as feeling excessively aware of our risks, as if we had an in-depth understanding of how the economy and markets work. The euphoria of the moment can lead investors to overestimate the potential profits of cryptocurrencies, and to ignore the associated risks.
So, what can we do to manage these psychological traps? The diversification of our investments can certainly be a first answer: Do you want to invest 100$? The recommendation is not to put it all into BTC; instead, it might be interesting to have some ETH or SOL as well. It’s also important to clarify your goals and know when to enter or exit the market, and have solid bases with concrete analysis rather than just emotions. Finally, continuous financial education could help to be informed and know how to survive inside the financial market of cryptocurrencies and, who knows, even make a profit.
The psychology of cryptocurrency investment is a complex phenomenon involving a range of emotional, cognitive, and social factors. The fear of being left behind, the prospect of quick profits, a sense of excitement, emotional attachment to money, and social proof can all contribute to this behaviour. While investing in cryptocurrencies can be a high-risk, and meanwhile a high-reward endeavour, it’s important to consider that the psychological factors driving purchasing behaviour can be as important as market fundamentals. Balancing market knowledge with a real understanding of our behaviours and cognitive biases is essential. Being educated on both financial and psychological aspects will help to keep calm, even during the most volatile times of the prices.
