How psychology impacts the use of cryptocurrency

December 08, 2018
Darya Karatkevich

If you pause to think about it, psychology has a huge effect not only on how we use cryptocurrency but the rate of its adoption in the general marketplace. Understanding these factors can give you an edge in cryptocurrency trading.

While the psychology of traditional investments is well-known and has been comprehensively studied, there are many key differences in the emerging cryptocurrency trading. Still more psychological barriers exist for a widespread crypto adoption in the marketplace. We’ll take a look at some of these different factors, starting with investment in general.

Investing and psychology

investing psychology

One of the number-one pieces of investing advice you’ll ever hear is ‘don’t invest based on emotion.’ You’ve probably heard that before if you even have a passing interest in investment, but you may not have stopped to think about why.

Statistics show that the majority of people trading financial instruments in any given year lose money. But what separates them from those who consistently gain? The answer is complicated, but can be understood when you examine the psychology that affects our decision-making processes.

Fear-induced actions

Fear is one of the most powerful motivating factors in the human condition. Fear of (further) loss is what causes people to sell off during a market downturn or correction. How can you counteract that fear? One way is by not over-leveraging yourself.

That means, only trading, say, 10% of your assets at a time makes you less vulnerable to acting out of fear than if you have 50% or especially 100% of your assets tied up in one single investment.

Investing money that you can’t afford to lose also causes stress and fear to control your decision-making. Even with the best information available and a very sharp mind, you’re not going to make good decisions if you make an investment with your next month’s rent money.

Most consider investment to be a long-term strategy, but many let fear dictate their actions and sell off at the slightest hint of a downturn. Even day-traders follow strict guidelines to take emotions like fear out of the equation.

Getting too attached to assets

Another emotion to avoid is attachment. If a stock or asset is performing well, it can sometimes lead you to hold onto it longer than you should. This all depends on your goals, and if that is to make a profit, then you should not get enamored by a high value.

Remember, the value of stocks does not equate to cash. Set realistic earning targets and cash out your investments when the price meet targets. Then, take a percentage of that and reinvest if you want — but you will protect the majority of your gains.

The psychology of investing and trading financial instruments is a very complex and tricky thing to navigate. Adding cryptocurrency to the mix adds a new layer to these same concepts.

Specific crypto trading factors

impact factor

With both incredible highs and lows in recent years, cryptocurrency trading has shown far more volatility than more conventional financial institutions. The whole notion of cryptocurrency is wrapped up in a movement for disruption and decentralization of currency.

Those concepts make it easy for people who believe strongly in some of the anti-establishment ideals which cryptocurrency was founded on, to fall victim to one of the mistakes we outlined in standard investment — attachment.

True believers in the future of cryptocurrency are likely to have their judgment clouded by an idealistic will for the solution to succeed. While there’s no question that cryptocurrency will likely transform finance for good, the actual solutions that do make that change might not be the ‘hot’ coins of today.

In fact, psychology is embedded in the concept behind cryptocurrency, where social engineering builds value in adoption of solutions through rewards (i.e. mining). Encouraging people to be participants in the system is part of the formula for success in cryptocurrency, so psychology plays a bigger role than in legacy financial instruments.

But how do you balance that line between ‘buying in’ to a system and becoming attached? It’s a difficult question, and the one that cryptocurrency traders are struggling with on a daily basis. By taking some of the same strategies that create success in traditional investing, you can separate emotion from your trading.

Psychology of widespread crypto adoption

cryptocurrency use

We have to ask ourselves some key questions when considering further widespread adoption of cryptocurrency. For example, “what is bitcoin?” is an important question to ask before jumping in and buying some.

At the core, cryptocurrency is attempting to become a new agent for the purchase of goods and services. We have only had fiat currency for about 300 years — before that humans used a barter economy for thousands of years.

Recognizing the goal of crypto

One of the biggest psychological barriers to adoption is looking at cryptocurrencies for what they are, and not what they have become — which for some is a get-rich-quick scheme. The players that will succeed in the market are focused on the real goal of crypto.

Before you join a cryptocurrency exchange and purchase your favorite coin, ask yourself about what makes that particular investment worth doing. Does the company solve a problem better than the rest? Are they focused on the long-term goal or trying to create short-term gains?

Limited circulation

Another psychological barrier in the way of mass adoption of cryptocurrency as an actual currency is the number of places it is accepted. While that is always increasing, it’s still a limited choice, and that makes people skeptical of getting involved. People won’t really jump in unless they see that they can actually use the currency.

Conversely, businesses won’t be quick to adopt the currency as a payment method until enough people have it to make it worth their while. There’s a psychological hump to get over for both sides, and those in the industry need to focus on the benefits instead of the hype to help push the two sides over.

Ways to overcome these factors

overcoming

One of the most important things to remember is that you need to protect the bulk of your wealth. Having all your wealth tied up in a volatile investment will lead to decisions ruled by fear.

Focusing on the goal of a crypto-issuing company, and how it is working to achieve that goal are better ways to frame your thinking. If their goal is to build wealth, or just to see cryptocurrency succeed in disrupting the market, the way they achieve that should be the same.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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