Part 2/3: How to Deal with Your Emotions When Investing in Crypto
Being aware of your biases will help you achieve greater investment success.
Investing is an emotional activity, we often base the buying or selling of assets on how they feel as opposed to using rational thought.
That isn’t always a bad thing, in some cases, you might invest in a company or cryptocurrency because you are passionate about their goals or practices, equally, you might not invest for the same reasons, even if the investment is likely to be financially rewarding.
While emotions can be a bit of a compass, they can also be a hindrance, resulting in an undisciplined approach to investments. Discipline in the context of investing means taking a consistent approach to your investments and making rational and occasionally counterintuitive decisions.
We saw a lot of this in the 2017 crypto bull market. There was a large amount of emotional investing that went on with very little rebalancing. This left many portfolios in a situation where investors had a much larger exposure to cryptocurrencies than what they should have if they based their decisions on their usual risk tolerances and financial goals.
A disciplined investor would rebalance during the bull market while they are in a position of strength, and while making the decision to rebalance isn’t one that investors would be unable to make, it becomes an increasingly difficult decision to make when markets are performing really well.
This behaviour is usually caused by the desire to keep generating a strong return and leads investors to take ever-increasing risks to reach their goals. This behaviour puts investors in a position of weakness and when markets correct, and sometimes forces investors to take on additional risk to reach their goals, or in some cases, causes them to dial back on their goals.
Investing biases fall into two main categories: cognitive and emotional biases. If you haven’t already read Part 1: Learn About the Biases That are Costing you Money We would recommend doing so before reading on.
In this article, we take a deeper look into the emotional biases associated with most crypto investors.
Being able to identify these biases in yourself is crucial, so we compiled a list of the most common biases that can affect your investment:
- Feeling like you never know enough to make a sound investment
- Following trends or hype
- Reacting to gut feelings as opposed to thinking things through
- Investing because of a personal attachment
- Overreactions, such as avoiding opportunities due to past experiences
A study was conducted wherein they asked successful investors what the most relevant emotional biases were to them, and as you can see, even professional investors wrestle with their emotions and investing.
Becoming a more disciplined investor
Nobody is immune to bias, however, it is possible to be mindful of the biases that affect us, and actively work to identify and prevent them from taking over our decision making. Biases can lead you to ignore opportunities, or the inverse, lead you to have a cluttered portfolio that doesn’t reflect your goals at all.
“What is necessary to change a person is to change his awareness of himself.” — Abraham Maslow
Here are a few steps to help you avoid emotional investing:
- Establish long term financial goals
- Diversify your portfolio
- Use news and hype for information, and not decision making
- Be wary of popular investment trends
- Past performance doesn’t equal future performance of an asset
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This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose and before investing, please take into consideration your level of experience, investment objectives, and seek independent financial advice if necessary.