It’s impossible to control the exogenous risk factors that come along with any investing, but we can take them into consideration before deciding where to put our money. Endogenous risk factors are the key to better outcomes, and this is something that can be controlled.
Endogenous risks are things that affect us from within, like our perceptions, prejudices, and all around mindset. In this article, I will talk about the five biases and errors in thinking that cause people to lose money in the cryptocurrency game, and if you’re smart, you might want to write these down and do your best to avoid them as much as possible in the future.
It’s human nature to build walls whenever we are told that we might do something wrong, especially when someone says that it’s in the area of our thinking abilities as no one likes to be called stupid. But let me assure you that no one here is doing that, and these thinking issues when it comes to investing are not unique, and many investors share the same traits when it comes to this subject. So take heed, and when you see one that relates to you be honest, and that will help you take control of those endogenous risks that plague us all.
The first thing we will discuss is the Anchoring Bias, or Loss Aversion Bias, which makes people want to hold on to a bad investment for a long period to see if it will make up for the losses incurred for having invested in that asset in the first place. Maybe you put money into an ICO because someone told you to buy it or saw a fancy video that got you excited.
After a drop, you suddenly feel unwilling to sell this investment because you don’t want to lose any money. However; if buying this asset was a mistake in the first place then why do you think anything will change? You need to ask this question: If I wasn’t into this project at the current price, would I still buy in at the actual price?
Sometimes one has to face the truth that their buying habits may be flawed and that this investment was a mistake. If you don’t dump the investment now, it could go much lower, and that would be an even bigger mistake. Like the gambler who doesn’t want to get out of the card game while they still have a few bones in their pocket, you will end up paying a heavy price for this bias. There is a name for this in poker, it’s called being on tilt.
The next thinking error we will talk about is the Martingale Bias, which is when someone doubles down while the prices are falling hoping to make up the difference by lowering their average purchasing price per coin. If/when the market raises up a little, and that coin follows then the investor might make enough to come out even, but most of the time the amount of money you have in that position compared to the amount of profit you might make isn’t worth the effort to start with and many times investors just lose even more money with this bias.
Now we will talk about the Clustering Bias, which is where investors see patterns where none truly exists. Otherwise known as the “gamblers fallacy,” and relies on an investor having an illusion of control where none can exist like the gambler who plays roulette that believes somehow there is a foreseeable pattern to the way the numbers come up, and while luck might help someone out now and then with this type of thinking it isn’t any way to invest in the crypto game. You might win a few times in a row and believe that you have something special, but just like flipping a coin the odds are always 50/50, and though you may win five times in a row, it still doesn’t change the actual odds for the game you are playing.
Hot Hand Bias
Next, we have the Hot Hand Bias, which is where an investor is looking only at the spreadsheets, or listening to others who think they “know” something and dismissing their own research about a project that might warn them off. Previous returns alone are not a good reason to sink a lot of money into a project because they don’t affect in any way what will happen in the future.
Last, we have the Confirmation Bias, which is where investors ignore any information that doesn’t reflect their way of thinking. This leads investors to do things like ignoring bad news during a bull market, and good news during a bear market. This will have investors ignoring a large part, if not all, of the truth when it comes to the projects they have their money in and ensures that they can never see anything happening before it hits them in the face. Even then these investors try and find reasons, true or untrue, that fit with their mindset about the people and organizations they want to believe in. Conversely, they will also ignore information that would lead them in a different direction from something they don’t like. Either way, not relying on ALL the information during the due diligence process is one way to make errors that could have been avoided.
This also has a lot to do with investing while emotional, which is never a good thing to do, and will lead most down the wrong path many more times than it will the right one. Emotional people tend to make irrational decisions when it comes to investing, and will typically make knee-jerk decisions that will prove unwise. Even if investors find themselves on the right path, if it involved this bias then it was just pure luck–and an investor, like a professional gambler, knows that luck is NEVER anything to put your money on.
Five Reasons You’re Losing Money in the Crypto Game was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.