Psychology in Crypto: How do Cognitive Biases Impact Successful Investments?

As more crypto exchange platforms enter the fray, retail investors have easy access to crypto investments. People with minimal prior investment experience funnel millions into the crypto market, driving its explosive growth. This new crypto investor profile is entering a market characterized by little regulation, information asymmetry, and high volatility. The resulting friction and common psychological biases spark irrational behavior in cryptocurrency investment.

Human psychology and investing are intertwined. The potential for huge gains and losses in crypto intensifies a market condition driven by emotions rather than fundamentals. Common cognitive biases, from confirmation bias to FOMO, cloud investors’ judgment leading to irrational investment decisions.

Psychology of crypto investments 

Cognitive biases are a natural part of human behavior and psychology. These biases develop due to our brains’ attempts to quickly streamline and process large amounts of information. These shortcuts are called heuristics. Unconscious and automatic responses shape our perceptions, thoughts, and decisions. 

Cognitive biases also have an impact on our financial decisions. The psychology of an investor dictates how information is processed, what is prioritized, and ultimately, what has the most significant influence on their behavior. A field of study called behavioral finance focuses on this and investigates how psychology influences investors’ decision-making. 

Image Via: CoinDesk

The Wall Street cheat sheet is a very useful indicator showing the impulses that drive each market cycle.

Psychological biases exist in traditional markets like the stock market, evidenced by the FOMO-enticing fiasco with Gamestop. However, cognitive biases heighten in crypto due to several specific factors. 

Read more: Psychology in Crypto: How do Cognitive Biases Impact Successful Investments?