Before now, the crypto market was seen as dubious and obscure due to the largely anonymous nature of its participants, but with each passing day, institutions are beginning to understand how blockchain technology can help improve the global financial system.
The high volatility level in the crypto market has also attracted a lot of speculators. Retail investors have flocked in the market and looking to become the next crypto millionaires, but many have come to realize such high profit cannot be achieved overnight, as there’s a similarity in dynamics amongst traders in the crypto market to those in traditional markets is quite obvious.
In a bid to highlight the importance of holding on to digital assets for a long period of time rather than selling or buying, new terms have become popular among crypto enthusiasts.
For example, HODLers means investors that “hold on for dear life,” while diamond refer to investors who hold back from selling despite downturns or losses.
Cognitive biases restrict one from fully understanding the direction of a trend and as such, many fall prey to hanging on to losing trades, exiting trades too early or deviating from well-considered trading plans.
When investors rely heavily on the first piece of information regarding a given topic, anchoring bias occurs.
Instead of objectively quantifying new information, traders would rather refer to the point of their anchor as the starting point for their reasoning but coming up with reasons why the anchor may no longer valid and also analyzing new data can help overcome this bias.
Recency bias refer to investors laying too much emphasis on new information without considering the validity of the data over the long run.
Traders overestimate the importance of a new data point leading to poor decision making. They fail to recognize that single data points are best viewed in the context of the larger dataset.
Having an investment strategy based on long-term trends is the best way to combat this bias.
When human tendency for losses elicits a stronger emotional response over an equivalent gain, loss aversion occurs.
Once such discomfort kicks in, it induces risk-taking behavior like holding on to a losing trade with the hope of the market turning.
Oftentimes, this leads to even larger losses later down the line. Bandwagon bias occurs when investors follow the crowd or do what most people do, disregarding personal beliefs.
Often, due to FOMO traders panic to sell a cryptocurrency based on herd behavior. To overcome this bias, you need to have a clear framework to analyze investments.
Confirmation bias is seen in investors taking on information that aligns with an existing point of view, disregarding any conflicting data and sticking to existing beliefs instead.
Reasoning clearly and looking for facts that oppose one’s opinion, and correctly checking the validity of an information is one of the best ways to overcome this cognitive biases.
Crypto enthusiasts are beginning to move towards passive investment strategies because sometimes, being aware of the cognitive biases isn’t sufficient for many to overcome the powerful emotional responses that the noise in the markets induces.
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