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The Psychology of Crypto Trading: How Emotions Affect Investments

Emotions play a much larger role in trading cryptocurrencies than one might expect. A trading strategy might look ideal on paper, but when it’s time to buy or sell, the emotional part of your brain might have other plans.

Everything changes when you have skin in the game. Having money on the line changes the way you psychologically view a situation, may it be a trade, investment, or career shift. The purpose of this article is to explore the common emotional triggers and pitfalls that traders find themselves in and arm you with strategies with how to overcome them.

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Two of the most prominent emotional triggers are FOMO and FUD, that is “Fear of Missing Out” and “Fear, Uncertainty, and Doubt”. FOMO will prompt you to buy more of something near the top, or not take profits and sell near the top.

FUD will prompt you to not buy an otherwise sound investment when it’s at a relative bottom, or sell something you’re holding at a loss out of fear of further losses.

Overcoming FOMO

The way to overcome FOMO is by setting clear and concise targets for your investment. If you buy something at $1.00 and write down that you’re going to sell some amount of it at $2.00, then it is a good idea to stick to your plan, regardless of market conditions.

You may want to employ a strategy such as selling 50% of the asset for 100% of what you put in when the price of the investment doubled. This is a fine strategy for overcoming FOMO, as if the asset continues to rise in price, you still are exposed to upside, while completely removing any downside.

Overcoming FUD

The way to overcome FUD is by getting to know your investments. What did you invest in, and why did you invest in it? In general, not a lot changes about the investment if it is $2.00 per share vs. when it is $1.00 per share.

In fact, if the asset you have your eye on continues to fall, this should be an appealing turn of events as it allows you to accumulate more units of it for less.

Deriving Investment Principles

From these scenarios, we can derive two investment principles.

  1. Set price targets and be principled about sticking to them
  2. Know your investments.

Both of these will help you remain objective and take emotions out of the equation of evaluating the investments you make.

Don’t Marry Your Bags

It is unwise to get attached to any one asset. However, I routinely break this rule with respect to Bitcoin. I am very attached to Bitcoin. In general though, it’s not a good idea to fall in love with an asset to the degree that you will never take profits, or let it blind and prevent you from capitalizing on its relative highs.

I can tell you a story from my own investment experience that will illustrate my emotional error. I had bought a good handful of KuCoin Shares (KCS) when they were $0.50 per unit. Then, I became really impressed with the tokenomics model and the exchange in general.

This was right before December 2017, and by mid December, KCS took off and quickly rose to $20.00 per unit.

I could have sold for a 40x return, but I held onto them because I was blinded by my love for the asset. I ended up taking a loss on the asset because I didn’t sell high, and on the downturn, I believed it would pick back up again, which never happened. This is a rather common experience for anyone investing in crypto.

Remain Objective

If I were objective about what was happening, then I could have realized that the dramatic and sudden rise in the price of KCS was a knock-on effect of the 2017 crypto bubble. It wasn’t because KCS was producing a ton of value and thus the shares were increasing in price. It was that KCS was a novel cryptocurrency with limited liquidity in a frothy market.

Beware of Greed and Surprise

The last emotion that I want to cover is greed. This does play into FOMO, especially when breaking your plan to sell at $2.00. Instead, rationalizing not selling until $3.00, is an example of you getting greedy. Again, stick to your investment plan, and be principled, there is nothing wrong with taking profits too early, rather than not taking profits at all.

Greed can also rear its ugly head when experienced in conjunction with the emotion of surprise. You may be presented with an investment opportunity that is novel and appealing for reasons that sound good in the moment. Beware of buzzwords that make something sound revolutionary and paradigm shifting.

Some examples of this include blockchain, AI, DeFi, and Yield.

While those words may actually factor into the value proposition of the investment, alone and without context, they are just words. Don’t let your greed and surprise convince you that they’re backing a shady investment.

Train your Awareness

At the end of the day, these tips are useless unless you know how to recognize these emotions within yourself.

I know this might sound like I’m recommending picking up Buddhism to enhance your trading game, but you’re going to be a slave to your emotions if you’re not aware of when they’re happening.

While 20 minutes per day of meditation may objectively benefit you, I am more so recommending that you keep a trading journal, at least when you’re starting out. Write down your investment plan, why you’re making it, price targets you want to hit, and what you’re going to do when those prices are hit.

Over time, you will refine and train your trading strategies, your psychology, and your awareness to work for you, instead of against you. Happy trading.

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About the Author

Keegan Francis

Keegan Francis is a cryptocurrency knowledge expert and consultant. He recognized the opportunity in cryptocurrency early in his career and has been invested in it since 2014. His passion led him to start the Go Full Crypto, a project that documents his journey of totally opting out of traditional financial services. Keegan has been living entirely off of cryptocurrencies since 2019.

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