The Psychology of Investing in Cryptocurrencies: How To Control Your Emotions and Decisions?

Why Is Crypto Attractive To Investors?

For starters, it is important to explain why people choose to invest in cryptocurrencies.

Cryptocurrencies have become well-known for their ability to deliver substantial returns in a relatively short time frame, largely because of their volatile nature.

Another reason is their decentralization. Unlike traditional currencies, they are not controlled by any government or central bank, which can be particularly attractive in regions with unstable currencies or restrictive financial systems.

Although investing in cryptocurrencies may seem like an “easy profit,” crypto beginners should definitely be well-informed before investing any amount of money.

Otherwise, they might risk money loss because of the volatility of the crypto market - and also because of the irrational decision-making caused by the emotional drivers.

What Are The Emotional Drivers in Crypto Investments?

Emotions play a significant role in cryptocurrency investments, often influencing decisions just as strongly as financial metrics or market trends.

Here are several key emotional factors that can influence investor behavior in the crypto market, which you might recognize in yourself if you become “carried away” at any point:

FOMO (Fear of Missing Out)

Probably the most common emotion that drives crypto investors is the so-called FOMO.

FOMO, or Fear of Missing Out, is a psychological phenomenon where individuals feel anxiety or concern that they are missing out on a positive experience or opportunity that others are enjoying.

When it comes to cryptocurrency investing, FOMO is often triggered when investors see rapid price increases or hear about the large gains others are making - while they aren’t.

FOMO can be a slippery slope, especially if you are not educated enough on the crypto market and its behavior.

FUD (Fear, Uncertainty, and Doubt)

FUD refers to the spreading of pessimism or misinformation intended to create fear and doubt among investors.

This can lead to investors selling off their assets out of fear that prices will fall, which can then actually lead to price declines, eventually creating a self-fulfilling prophecy.

The sources of FUD can be diverse, including media reports, influential tweets, or comments from prominent figures that might question the legitimacy, stability, or future of a cryptocurrency.

One of the most familiar FUDs that some people still (!) believe is that Bitcoin will die. In other words, it will crash so bad that it will be worth almost nothing.

As 99Bitcoins (news portal for crypto newbies) shows in its tracker of Bitcoin’s death press releases, the poor thing has already died more than 450 times.

And will probably keep on dying due to FUD :)

Greed and Chase for the Quick Profits

Many enter the crypto market with the mindset of making quick profits, treating cryptocurrencies more like lottery tickets.

If you trade mainly to make quick money, you're at risk of losing your investment fast. Many people hope to get rich quickly, but they forget that trading isn't a quick way to make a lot of money.

This is why greed can cause just as many problems as fear if you don't manage it well.

If you aim to succeed over the long term, it's crucial to move away from the idea of quick gains.

Instead, focus on polishing your trading skills and refining your strategies. This approach can lead to profitable trading without the constant worry of losing your money.

Fear and Panic Selling

On the other hand, there’s the “lethal” combination of fear and panic selling.

Panic selling occurs when investors sell off their assets hastily and often irrationally due to fear of further losses. It's a more extreme reaction compared to cautious selling due to fear.

Panic selling is usually triggered by a sudden, severe downturn in the market or alarming news that suggests more declines could be forthcoming (refers to aforementioned FUD).

Why is it important not to succumb to panic selling?

Well, because you might end up like our fellow trader who bought DEVIN coins with Solana coins when the price of DEVIN was high.

Naturally, the price started to drop, he panicked and sold everything and lost 239 SOL.

If he had waited, he would’ve eventually turned a profit.

Although it may seem scary in the beginning when the price starts to drop, you should bear in mind that cryptocurrencies are volatile.

And if it’s a relatively “stable” currency and you’ve seen the graph beforehand and how the price changes, try not to make irrational decisions and be patient.

How Do Behavioral Biases Affect Investments in Cryptocurrencies?

The majority of us like to think of ourselves as intelligent and rational people, right?

The reality is that we all have biases that shape how we view the world and make decisions - especially those that regard investing money.

But that doesn’t mean that your biases are necessarily correct.

Here are the three most common biases that crypto traders and investors deal with sooner or later so you can notice them if they happen to you as well:

Confirmation Bias

Confirmation bias is when people favor information that confirms what they already believe and ignore or undervalue information that challenges their views.

It's like when you only listen to opinions that agree with yours and disregard the ones that don't.

This can make it hard to see the whole picture or consider other possibilities.

For example, you may choose one cryptocurrency for trading just because you’ve heard that many other people have turned a profit from that cryptocurrency.

But that can’t guarantee the same success for you.

And since people who have confirmation bias ignore negative information about a certain cryptocurrency, they risk potential loss. Additionally, by disregarding other options, they might miss out on different investment opportunities.

Overconfidence Bias

Overconfidence bias happens when someone has too much faith in their own abilities, thinking they are more informed than they actually are.

Crypto traders with overconfidence can feel “too” confident if they have collected many pieces of information about a certain cryptocurrency, even though the quality of the information and its sources may be questionable.

That’s why this bias leads people to think they can predict market moves more accurately than they really can - resulting in underestimating the risks or overestimating the expected returns of their investment.

Herd Mentality

Herd mentality happens everywhere, not just in crypto world - voting, sporting events, opinion-forming, etc.

Why? Because it is easier for people to just follow the pattern of others instead of conducting their own research.

When it comes to crypto trading, herd behavior is quite common actually. For example, this happens whenever Bitcoin starts going up in price, or when it reaches a new all-time high. There’s usually a fuss about it in the media, and suddenly everyone is buying BTC, even your grandma.

What Are The Strategies To Overcome These Psychological Challenges?

As you may have noticed, all of these emotions and biases have the same core emotion, and that is - impulsiveness.

This habit of making quick decisions without careful thought can often lead us to make mistakes. To overcome these psychological challenges, especially in volatile markets like cryptocurrencies, you should have a mix of self-awareness, disciplined strategies, and practical tools.

Here are several strategies that can help crypto traders manage their emotional responses and avoid common cognitive biases:

• Be well-informed about crypto trading and the crypto market. Without this, it will be like a walk in a maze for you and pretty stressful.
• Be more educated about these types of behavior and learn how to recognize them if they happen to you.
• Have a clear trading plan, as this will certainly help you avoid emotional decision-making.
• Diversify your investments, or in other words, don’t put all your eggs in one basket. Invest in different cryptocurrencies so you don’t get too attached emotionally to just one.
• Define what you want to achieve with your investments and set boundaries for acceptable loss and desired gains.

The Key is in Balancing Your Knowledge and Market Behavior

Remember that succeeding in the fast-paced world of cryptocurrency investing takes more than just knowing the market—it's also about understanding yourself.

By recognizing the emotional and mental traps that can trip you up, you can make clearer, smarter investment choices.

It’s key to balance your deep market knowledge with a real understanding of your own behaviors and biases. Being educated on both the financial mechanics and the psychological aspects will help you stay calm and collected, even in volatile times.