Why Crypto Traders Should Avoid Emotional Investing

Why Crypto Traders Should Avoid Emotional Investing

Today’s digital connectivity gives us virtually unlimited access to every kind of information available. You might simply input your keywords into a search engine and find extensive resources for your query in a split second. With so much knowledge within easy reach, one might think that this ensures that we always make well-informed decisions and smart choices. However, as human beings with flaws and limitations, it is inevitable to make some mistakes.

One such mistake is allowing emotions to influence investment decisions. This is particularly important to avoid doing this in crypto investments. As a highly volatile market, coin prices fluctuate quite often in cryptocurrencies. This offers opportunities for investors to make a lot of profit but it also leaves them vulnerable to suffer huge losses, like when a promising crypto project fails.

Making an investment will always involve some risk of loss, but negative emotions aren’t the only drivers for poor investment decisions. Overconfidence and gut feel can also lead to emotionally-fueled investments that increase your risk. Read on to better understand the pitfalls of emotional investing and to help you recognize behavioral red flags to watch out for.

Knee-Jerk Reactions Reject Data

Have you ever experienced panic-selling your coins? This is a common occurrence among investors who get swayed by fluctuations in cryptocurrency prices, which in itself is not unusual for the market to experience. Some buyers may also get swayed by opinions shared on social media and quickly dispatch their coins for fear of experiencing a bigger loss.

While it is definitely a good idea to cut off bad investments before they worsen, it’s important to base this decision on facts rather than FUD (Fear, Uncertainty, and Doubt). Before dumping your crypto, check its historical performance as well as that of other cryptocurrencies. Then, try to determine the factors causing the fluctuation. It may simply be a temporary event caused by a volatile market, or it may be the start of a downward spiral for a failing project.

Before you open your Monero wallet or any other crypto wallet of your choice and start selling off coins, make use of active crypto communities to stay up to date on relevant news as well as to get insights from fellow crypto enthusiasts. While you need not necessarily follow their lead, having this information will add to all your other data points and help you better evaluate your next steps.

Regret Leads to Losses

On the flip side of the coin, there is a difference between HODL-ing and not being able to let go of a bad project. HODL is an acronym for “Holding On for Dear Life” and refers to purchasing crypto with no intention of trading it. Instead, these types of investments bank on the long-term price appreciation of their coins for value. This strategy is not a bad way to resist the volatility of cryptocurrency, and in some cases, investors may even take advantage of price dips as an opportunity to buy more crypto.

However, regret might be the emotion fueling the hesitation to sell. Investments aren’t only purchased with money, but they also require a lot of effort in data collection and analysis, backed up by confidence in the potential of the project. This can make it difficult to let go of a project sooner rather than later, before it becomes thoroughly devalued.

Because there is such a fine line between the two, having your own set of trading rules prior to buying is a must. Make clear guidelines for how much of a loss is an acceptable limit and conditions for making your exit. You might have varying baselines for different investments, but once you set these rules, stick to them.

Overconfidence Can Be Too Much of a Good Thing

The most stable cryptocurrencies are usually the most popular ones, so it’s understandable for most users to focus their investments there. However, it would be a mistake to become overconfident and only buy and trade a single type of coin. A good crypto investment portfolio is marked by its diversity rather than trade frequency. Not only does this increase your opportunity for higher returns, but it also spreads out your potential losses.

While exchanges can be quite profitable, make sure to divert some of your efforts into investing into other crypto. Doing so can also offer you more functionality and strategize your transactions based on each crypto’s strengths and weaknesses.

Emotions and investments don’t mix very well, but as humans, how we feel will have an effect on our actions. To minimize this, recognizing situations that can trigger emotional investing can be helpful for avoiding them. It also helps to make full use of available resources and set ground rules to guide your investing activities. The volatility of cryptocurrency makes it likely to experience some losses, but if you can ride the wave, it can pay off with high returns.