Psychology behind trading in cryptocurrencies

Cryptocurrencies are really new and it's knowledge taxing. It all started with bitcoin 9 years ago. Bitcoin revolutionized the way we transact money, which also poised to replace the old banking system. The old banking system has too much power on our course of economy. Printing money just to create the illusion that we paid out debts and etc. This of course resulted the largest economy recession we had seen since 1930. Arrival of bitcoin seems to be the savior of all the inflationary currencies out there. But how many of us truly understand this bitcoin? Does it really deserve the current 10000+ dollar evaluation?

Many of cryptocurrency traders have no idea what the coin is even about, but invested their life saving in it anyway just because of unstoppable growth rate of certain coins. To further complicates thing, cryptocurrencies are taxing a lot on your knowledge about tech, this makes it hard for newcomers to learn about it. From this phenomena, we can project it in our trading charts. We can analyze the psychology behind the chart.

I found this image from google that I think perfectly described the picture. Let's have a look.

First stage : Social proof

You heard from news, the price of bitcoin is at 1,000$!! Bitcoin matching price of gold! And in just a month bitcoin is at 2k now! So you opened your laptop and you try to invest. But wait other than bitcoin there's also tonnes of other coins! So which one do I invest?

So you try to read all kinds of forums and watch some youtube videos, or some advices from friends. If so many people are gambling their money to this and that coin, there must be tonnes of money to be made! If not, there won't be so much cashflow into crypto space right? That's the phenomena of SOCIAL PROOF. Looking at what majority are doing to guide your own decision. Other traders exploited this through shilling. Shilling is when traders spreading rumors that seems like a lot of people are investing it. That's why it's always wise to invest due diligence and look past the herd mentality.

2nd stage : Authority/Give me some instructions!

As more inexperienced investor attracted to the crypto field, most of them don't have a clue what they want to invest in. They say love is blind, so does crypto. To compensate for the lack of knowledge and experience, they seek out those who earned a lot in crypto trading. This will put that someone in the figure of AUTHORITY. Why people tend to do this? Cause we learned from a young age to listen to our parents to our teacher and etc. This indirectly rewired our brain to seek out a figure to tell us what to do. Why do you think most of the news always quoting what a lead figure in banking field have to say about crypto. For instance, Roger Ver who is one of the largest holders of bitcoins in world. He tried to persuade everyone to believe bitcoin cash is a better investment to bitcoin. And people listened to him, followed what he said and slowly investing into bitcoin cash. Which resulted in the price we see today.

3rd stage : Inaction Inertia/ It's too late anyway

This is when you open the coinmarketcap.com and saw that 10% growth. Oh dang, I should've invested in it when it was 1 dollar. I would be earning that percentage right now. So you snapped your finger in guilt of missing out. Most of the people at this stage are thinking, well 10% is a lot of growth! I'm too late anyway. I'm not going to spend my money on such high price. I believe it will come down soon! With that thought in mind, you stayed away from the deal and let your conservative nature kicks in. This is what we call INACTION INERTIA

4th stage : What? It's still going up??? FOMO (Fear of Missing Out)

The coin that you first time heard had a great run up of 90% since yesterday, then you check again today it's at 120%! Day after tomorrow it's at 250%!!! The percentage raised is ridiculous! It would be nuts if I don't invest now! This thing is so gonna keep on growing. This is the stage of FOMO You've seen it on the news, you heard it from your peers. However ridiculous the price, I'm so going to buy in. We are all FOMO-sapiens, this is undeniable. BUTTT! People don't realise the price rocket is already at its verge of running out of steam.

5th stage : Confirmation bias

Market declining in price just after several days you invested in. Traders at this stage still believe they're on a uptrend, a small dip means a discount for the stocks to buy! I might as well accumulate some cheaper coin right here. That's why you see there's a small retracement after each peak. People are trying to convince themselves they did the right investment. They heard from <B?AUTHORITY that they're investing in it too, everyone is investing in too SOCIAL PROOF, and it has been rising for hours. I'm not gonna missed out like I did before (FOMO). There's positive and bad news circulating this particular coin, those who bought on FOMO tend to listen to the positive ones. This is termed as Confirmation bias. Quoting from Raymond S. Nickerson on his publication on general psychology :

Confirmation bias connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand

This is why you can see there's whole lots of technical analysis in steemit or on any other cryptonews, most trying to validate what they invested in.

6th stage : FUD (Fear Uncertainty Doubt)

I'm losing almost half the money I invested in!!! What should I do???? This is the time where collective pessimism sets in. Everyone were so worried with their losses. News about China is banning ICOs and bitcoin exchanges become louder than ever to the crowd. But no one is paying attention to how low the price they could get right now for a big profit in future. They're all too concerned if they're going to make their money back. For those newcomers into crypto can't stand the SOCIAL PRESSURE. If everyone is panicking, I should be too! Some might go at length to sell their cryptos at tremendous lost. But later just to find out the price pump back up the day after they sold it.

Psychology behind this stands firm with "LOSS AVERSION" We humans tend to put more weight on the loss side than equal gains. The emotion associated with gaining 10$ is not as strong as losing 10$, even though the net earn is zero. We tend to find losses unbearable. We will do anything just to avoid the losses but couldn't see it's a big opportunity to buy in. That's why Warren Buffet can be so successful in trading, cause he exploited the market psychology :

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