The Hollywood portrayal of romantic love is a potent mix of excitement, hope, fear, and delight. The thrill of the chase, the possibility of rejection and loss, and the validation felt when mutual connections spark – it’s an emotional rollercoaster that many find irresistible.
Interestingly, the emotions experienced in romantic love are not too dissimilar to those seen among cryptocurrency enthusiasts. This raises a compelling question: are people ‘in love’ with crypto? Does the blindness we often witness in romantic relationships also manifest among crypto traders? The answer appears to be a resounding yes. The emotional states of fear, hope, delight, and excitement significantly influence the judgment and decision-making of individuals in the cryptocurrency market, much like they do in the dating world.
Of the three emotions – fear, hope/delight, and excitement – fear exerts the most substantial influence. Fear of losing money or missing out on opportunities can lead to panic selling during market downturns, exacerbating price declines. Research indicates that fear and worry are more prevalent among traders who do not employ rational risk-control measures such as stop-loss orders, highlighting the emotional impact of market volatility.
Hope and delight drive us to seek higher returns, often leading to speculative investments in highly volatile assets. The skewness index, which measures market sentiment, captures hope and delight more than fear, suggesting that positive returns are frequently associated with increased excitement and speculative behaviors.
Then there is the thrill of the chase – the excitement of potential high returns that can lead to impulsive trading decisions. This excitement is often fuelled by social media and sensational news stories, amplifying emotional responses and resulting in irrational trading behaviors. Studies have shown that individual investors are more susceptible to the emotional sway of online news, leading to increased trading intensity and market volatility. This ‘love’ phenomenon is driven by several psychological processes and behavioral biases that significantly influence our judgment and decision-making.
Anyone experienced in cryptocurrency trading knows that it is characterized by high volatility and the constant emergence of new and unknown markets, leading to excessive spending and compulsive checking. Traders often overestimate their knowledge and skills, believing they can predict market movements more accurately than they can. The fear of missing out (FOMO) on potential profits can lead to impulsive buying decisions, even when market conditions are unfavorable, resulting in compulsive and obsessive behavior with investments.
Sounds like the dating behavior of someone living in a big city, doesn’t it?
So, what should we do about it? How do we ensure our love of crypto isn’t blinding us to the obvious? Perhaps we need to take a page from the dating advice book and examine the three biases that hinder good decision-making in matters of the heart.
Optimism and Overconfidence Bias
This bias leads us to believe we have a superior advantage over others, overestimating our knowledge, influence, or skills, resulting in excessive risk-taking. This bias is particularly significant among young investors who tend to be more ‘loose’ in their attractions (cryptowise, that is). A good strategy to mitigate this bias is to consider the worst-case scenario and assume that the truth lies halfway between your ideal outcome and the worst possible situation.
Herding Effect
This effect is strong in crypto, where people are more attracted to what others are attracted to. If others show an attraction to something (or someone), we’re more likely to rate the focus of attention as more attractive, irrespective of the reality. This behavior leads to market bubbles and crashes, amplifying market trends and contributing to extreme price movements. To counter this, focus on raw data and facts rather than what news or social media presents. Ask yourself if you would think the same way if this were a stock in any other industry, such as finance or commodities.
FOMO
This bias causes us to avoid actions that might result in regret or loss. Regret aversion can lead to holding onto losing positions for too long, while loss aversion can result in selling winning positions too early. To reduce the impact of FOMO, establish a decision-making framework before investing. This framework should include predefined sell or buy rules based on predetermined numbers rather than relying on decision-making in the heat of the moment.
Engaging with cryptocurrency is complex, as it plays on the same emotions that make navigating romantic relationships so interesting and confusing. Understanding and more skillfully dealing with these psychological influences is crucial for better decision-making in all areas of life. Crypto love is blind – ensuring you’re not ‘in love’ with crypto will go a long way in smoothing out the rollercoaster of crypto fortunes.
Phil Slade is a behavioural economist, psychologist, and co-founder of Emotional Intelligence company Switch4Schools.
