Cryptocurrencies are digital assets that use cryptographic encryption to guarantee their ownership and ensure the integrity of transactions, and control the creation of additional units, i.e., prevent someone from making copies as we would do, for example, with a photo. These currencies do not exist in physical form: they are stored in a digital wallet and are operated through a decentralized network called blockchain.
In recent years, cryptocurrencies have experienced a spectacular boom, both in their market value and popularity. Bitcoin, Ethereum or Dogecoin are some of the most famous and are also part of the list of cryptocurrencies with the largest market capitalization. Many people see in these digital currencies an investment opportunity, an alternative to the traditional financial system or a way to express their ideology or identity.
But what really motivates people to buy or sell cryptocurrencies? What factors influence their behavior? What role do emotions and logic play in this process? What analysis can we make from a psychological and philosophical perspective?
Emotional buying.
Emotions are psychophysiological reactions that help us adapt to different situations and stimuli. The basic emotions are fear, joy, sadness, anger, disgust and surprise, and each of them has an adaptive function. For example, fear prepares us to flee or fight a threat, joy motivates us to seek more positive experiences, and sadness helps us to accept a loss or failure.
Emotions also influence our decision-making process, both personally and professionally. Sometimes, emotions can help us make better decisions, especially when we have to act quickly or when we have little information. Other times, emotions can interfere negatively with our judgment, especially when they are very intense or when we do not regulate them properly.
In the case of cryptocurrencies, emotions play a very important role in the behavior of investors. Some of the most frequent emotions are:
this is the excessive desire for profit or wealth. Greed can lead investors to buy more cryptocurrencies than they can afford or to hold them longer than they should, hoping that their price will continue to rise. Greed can also cause investors to get carried away by the herd effect, i.e., following the market trend without questioning or analyzing it.
this is the feeling of danger or threat. Fear can lead investors to sell their cryptocurrencies prematurely or not to buy them when they have a good opportunity, for fear of losing money or being wrong. Fear can also cause investors to be influenced by the FOMO (fear of missing out) effect, i.e. the fear of being left out of an opportunity or missing out on something important.
Euphoria this is the feeling of intense joy or exhilaration. Euphoria can lead investors to buy more cryptocurrencies than they need or to sell them too early, believing they got it right or made a big profit. Euphoria can also cause investors to become overconfident and not pay attention to risks or red flags.
Frustration: this is the feeling of dissatisfaction or disappointment. Frustration can lead investors to sell their cryptocurrencies at a loss or not buy them when they have a good opportunity because they feel they have failed or have been cheated. Frustration can also cause investors to become angry with themselves or the market and act impulsively or irrationally.
These emotions can affect both novice and experienced investors, and can lead to irrational or counterproductive behaviors. Therefore, it is important to learn how to manage them properly and not let them dominate our decisions.
Justifying by logic.
Logic is the study of valid or correct reasoning. Logic helps us to construct sound and coherent arguments based on true premises and inferential rules. Logic also helps us to detect fallacies or errors in reasoning, whether intentional or unintentional.
Logic also influences our decision-making process, both personally and professionally. Sometimes, logic can help us make better decisions, especially when we have a lot of information or when we can analyze it calmly and objectively. Other times, logic can interfere negatively with our judgment, especially when we have little information or when we are biased by our beliefs or emotions.
In the case of cryptocurrencies, logic plays a very important role in investor behavior. Some of the most relevant logical aspects are:
Information it is the set of data or facts relevant to a decision. Information can be objective or subjective, complete or incomplete, truthful or false. Investors should seek reliable and contrasted information about the cryptocurrencies they are interested in, as well as about the economic, social and political context that affects them. Investors should avoid falling into disinformation or overinformation, i.e. lack or excess of information.
is the process of examining and evaluating available information. Analysis can be technical or fundamental. Technical analysis is based on the study of historical patterns of the price and volume of cryptocurrencies to predict their future behavior. Fundamental analysis is based on the study of internal and external factors that determine the real value of cryptocurrencies. Investors should combine both types of analysis to have a more complete and balanced view.
it is the set of objectives and strategies to achieve them. The plan must be clear and realistic, adapted to the profile and circumstances of each investor. The plan should include aspects such as available capital, the level of assumable risk, the time horizon, entry and exit criteria, monitoring indicators and control mechanisms. Investors should follow their plan with discipline and flexibility, avoiding deviation due to impulses or pressures.
is the process of measuring and assessing the results obtained. Evaluation should be objective and systematic, based on quantitative and qualitative data. Investors must evaluate both the performance of their investments and their own performance. Investors must identify their successes and mistakes, their strengths and weaknesses, their opportunities and threats. Investors must learn from their experience and continuously improve.
These logical aspects can help investors make more rational and efficient decisions. However, they are not enough to guarantee success. Investors must also take into account other factors that can affect their judgment, such as cognitive biases or irrational beliefs.
Balancing emotion and logic.
Cognitive biases are distortions or errors in information processing that lead us to interpret reality in a partial or erroneous way. Some of the most common cognitive biases in the investment arena are:
Confirmation bias this is the tendency to seek or interpret information that confirms our beliefs or hypotheses, ignoring or dismissing that which contradicts them. For example, an investor who believes that Bitcoin is a good investment may focus only on positive news about this cryptocurrency and discard the negative ones.
Anchoring bias this is the tendency to base our estimates or decisions on the first information we receive, even if it is irrelevant or inaccurate. For example, an investor who sees that the price of a cryptocurrency has risen a lot may think that it will continue to rise and buy it without analyzing other factors.
Loss aversion bias this is the tendency to prefer avoiding a loss rather than making an equivalent gain. For example, an investor who holds a cryptocurrency that has fallen in price may resist selling it in the hope that it will recover, rather than taking the loss and looking for another opportunity.
Hindsight bias this is the tendency to believe that we could have foreseen or avoided an outcome after we knew about it. For example, an investor who loses money on a cryptocurrency may think it was obvious it was going down and should have known better.
Cognitive biases affect all types of investors, and can generate irrational or inefficient decisions. Therefore, it is important to learn to recognize and correct them with techniques such as cross-checking sources, critical thinking or consulting with experts.
Irrational beliefs are false or illogical ideas or assumptions that generate negative emotions or dysfunctional behaviors. Some of the most common irrational beliefs in the investment arena are:
The belief that you can predict the future with certainty this is the idea that you can know what is going to happen with the price of cryptocurrencies based on technical indicators, intuitions or rumors. This belief can generate anxiety or frustration when predictions do not come true.
The belief that one can control the market this is the idea that one can influence the behavior of the market with our actions or desires. This belief can generate anger or helplessness when the market does not behave as we expect.
The belief that you must always get it right this is the idea that you must make money on all investments and that any loss is a personal failure. This belief can generate guilt or shame when you lose money.
The belief that you must follow the group this is the idea that you must do what other investors do or what the media or social networks say. This belief can generate dependence or conformism when you follow the group without your own criteria.
Irrational beliefs can generate negative emotions or dysfunctional behaviors. Therefore, it is important to learn to question them and replace them with rational beliefs with techniques such as cognitive restructuring, emotional self-control or personal self-affirmation.
Cryptocurrencies are a complex and fascinating phenomenon that poses many challenges and opportunities for investors. To invest successfully in this market, it is necessary to find a balance between emotion and logic, between intuition and analysis, between risk and prudence. Only in this way will we be able to take advantage of the full potential of these digital currencies without falling into their traps.
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