Have you ever:
- Fomo’ed into a COIN at all-time highs?
- Sell your bluechips for shitcoins?
- Lose 50% on a coin, and lose another 45% because you didn’t cut your losses?
These are cognitive biases working against you They are like “thinking” errors aka bugs in your brain, traps most crypto investors fall into when they get started.
I’ve studied hundreds of cognitive biases to become a better Crypto investor. Here are the 10 most important ones:
1) UNIT BIAS:
People prefer to buy a “whole unit” of a token, rather than a fraction of it.
This is why meme coins exploded. Don’t overweigh the value of a token because it’s “cheap.” Understand how market caps work:
Imagine you want to buy a ‘fraction’ of a house, you have 2 houses on the market for the same price and $5,000 to your name.
Assuming all else equal the first house is fractioned into 5 big units, and the second house is fractioned into 500 small units.
If you wanted to invest it wouldn’t matter if you got 1 big unit house A, or 100 small units house B, right?
Now you can see that the only thing that matters is the price of the house and not the price of units.
In crypto terms, the house price is the Fully Diluted Valuation (FDV), and the unit price is the token price.
Another way to look at it:
2) ANCHORING BIAS:
Over-reliance on the 1st piece of information you have.
You heard about Bitcoin at $1,000 for the first time, You missed out. Then it GOES UP to $5,000. You don’t want to buy it anymore. It’s “too expensive” in your head.
You heard about Bitcoin at $20,000 for the first time, It went to $3,000, You don’t want to buy in, It’s a ‘dead coin’ in your head,
Every day, look at your investments with fresh eyes, focus on the potential of the coin, not the past, ask yourself what are the possibilities of this project.
3) Confirmation bias:
You only seek out information that confirmes what you believe and tells you what you want to hear.
You only follow people that say good things about X coin.
You unfollow and block anyone that spreads “FUD.”
When you invest, always seek and research the fear uncertainty and doubt to see if it’s valid.
Watch debates, read the bull and the bear case and address any criticism the project has, you only need one project to make it, so learn how to form an opinion knowing the pros and cons of any coin.
4) Sunk cost bias
A cost that has occurred and can’t be recovered.
We have a tendency to keep investing more money or OVER-committing because we’re scared of losing our original investment.
You’ve invested $10k into your friend’s Frozen yogurt shop. It’s doing horrible. “I need another $5k for a milkshake machine” You might be tempted to invest more to “save” your $10k. Don’t throw good money after the bad.
You’re -70% on a coin. You still have 30% left. That 70% is gone. That 30% could be better off investing somewhere else, rather than hoping the original investment bounces back.
Cut your losses early and don’t add into a losing position.
If you buy a coin, you were expecting the price to do X, if the coin didn’t do X, get out.
5) Loss aversion
Losing money feels worse than gaining money.
Winning +$100 in a casino does not feel the same as losing $100.
Losing is painful. A study shows that the brain typically assigns 2.5x to a loss. +250 = -$100
An example is when your investment is down 50% and there’s more bad news. You can close the trade and cut your losses. Loss aversion means some people will PREFER to wait it out. They’re afraid of “losing” the money by selling,
Hint: You have already LOST the money, move on.
Loss Aversion also leads to risk avoidance, Your grandfather will never invest in crypto, he doesn’t know it, he is afraid of it.
There has been a handful of rugs in DeFi. I’ve seen some people vow to never invest in DeFi again! Their loss aversion means they’ll be missing out on life-changing gains.
Weigh the risk/reward ratio properly.
If you have a fear of losing that’s hindering your progress you’re probably investing too much, lower your position size, and only invest what you can afford to lose.
6) Recency Bias:
We overweight RECENT information and events.
“ETH’s price is boring. I’m going to chase after low cap coins”
Then you get wrecked in bear markets.
You can beat recency bias by zooming out on the charts.
For an Investor, you are in it for the long term, recent events/news don’t really matter that much for you, relax.
7) Overconfidence Bias:
We overestimate our own abilities.
We get lucky a few times and think we’re smarter than we really are.
You know nothing about crypto and yet you have opinions on everything, your confidence is at all-time highs you invest your life savings on 100x leverage shitcoin with a cute picture of a dog, that’s the peak of ‘Mount Stupid’
Price goes against you, you get liquidated, but you’re still convinced this is the future of finance, you get in again with borrowed money, price proceeds to do a 90% drawdown, you lose everything, that’s the Valley of Despair.
At this moment, most investors leave this field and never come back, but you are different, you stick in and start to learn more about these things the right way, you start to climb back as your confidence and competence start to grow, you develop a sense of skepticism that will filter out most scams, and a sense of curiosity to explore the cutting edge of these technologies, you are a millionaire now, that’s your story.
Listen to Cobie advice about this:
The key to beating Overconfidence is solid risk management strategies
8) Survivorship Bias:
Concentrating on the people or things that made it past some selection process and ignoring those that did not.
Brad Pitt moved to LA and was a waiter before becoming a movie star, many people have followed his path hoping to do the same. You don’t hear about the THOUSANDS of other people who tried the same and failed.
Someone turned $8,000 of $Shiba Inu into $5.7B.
You don’t hear about the thousands of others who turned $8k into $500, the media prefers writing about the winners, no one want to hear from a loser, even social media algorithms will favor winners stories over losers, this skews your perception of the odds.
Investing in crypto is hard, there are so many things to learn before you’ll succeed, only a small percent will succeed, most will lose money and you’ll never hear from them. that’s a fact.
10) Herd Mentality Bias:
Investors’ tendency to follow and copy what other investors are doing.
They are largely influenced by emotion and instinct, rather than research and independent analysis.
If you’ve ever felt FOMO, it could be because of herd mentality, the fear of missing out takes place when you see other people/friends/neighbors make substantial amounts of money and you feel like you missed out.
If you feel FOMO, know that most likely all other investors are feeling the same way, so don’t buy in, it’s already at the last stage and will flip down on you, there is always another opportunity.
Don’t chase the market, exercise patience and let the market come to you.
If the price of a TV is 10x higher than yesterday you’d think it’s ridiculous, you won’t FOMO into buying it, don’t do it with stocks/coins then, wait for a discount.