Crypto trading is not entirely based on chance. Sufficient knowledge of crypto and macro economics and a clear strategy is important. But knowing what factors are beyond our control may be vital.
Disclaimer: This is education only, and not financial advice. Please, do your own research and consider what is best for your financial situation. Be careful friends.
There are two basic ‘do’s and don’ts’ in investing. Buying a crypto coin after a 40% daily surge in price is likely to be a ill-advised decision. On the other hand, buying crypto when the price has recently dropped seems to be a better decision. That is straight forward enough. But investing can easily get far more complex in the balance between what we think we know and control and what we don’t know and can’t control. There’s a risk that we over-estimate our chance of winning just because we apply specific types of knowledge or skills.
We may think that we see patterns and correlations between things. In fact, the academic term ‘patterning instinct’ describe our instinct to see patterns to understand something. This ability is fantastic for making sound decisions based on our understanding and knowledge. However, there is also a risk that we think we see a pattern or a link between things that do not exist. For example, people do not grow longer because they play basketball. In crypto some influencers may claim they see correlation between the moon and the price of Bitcoin. Some put a great deal of emphasis on technical analysis without considering important macro-economic factors that impact the price of a coin. The tricky part is that there may be some factors that have a reciprocal relationship, but they are only very loosely connected. It’s a similar situation for conspiracy theories that may have some truth to them, but the overall message is incorrect.
Hindsight bias (the outcome is seen as being hypothesized all along) is also a common problem amongst influencers in crypto. We would very much like to be right… regardless of what happened. Self-serving attributions also seem to frequent the crypto space as it’s a nice feeling to attribute success to ourselves. In a bull run with favorable market conditions it can seem that any advice or correlation theory leads to profit, as the trend reinforces our actions.
In trading we also try to identify predictable momentum shifts before we buy or sell crypto assets. The bitcoin halving event is such a predictable factor. But the trend is only a friend until it’s broken.
Can we trust our instinct in trying to see patterns between things? Yes and no. At some point our instinct to try to understand and to control the outcome can lead to financially bad decisions.
Watch out! Research has shown that people who experience gambling problems tend to more strongly believe that knowledge and skills, and certain rituals can increase the likelihood of winning. It seems healthy to know how far our arms of control can reach. Our sense of control can be an illusion.
To reduce the risk of overestimated perceptions of control, we need to be aware that crypto value is highly correlated with Bitcoin. It is unlikely that any coin will rise unless Bitcoin is rising as well.
A friendly reminder. Strong fundamentals are not equal to price. A crypto project with a strong fundamental use case may not increase in price until Bitcoin is stable and there is confidence in the crypto market. Because crypto assets follow bitcoin it is difficult to limiting the risk of losses through diversifying the portfolio. To make matters worse, a bitcoin fall will usually mean a wipe-out for altcoins.
What to do?
To reduce the risk of overestimated our perception of control we can follow core rules:
1. Take profits when the coin increase in price.
2. Maintain some liquidity by converting some crypto assets into stable coins.
3. Focus on crypto projects that are most likely to be here for many years to come.
4. Be skeptical of influencers that claim they have found the ‘secret’ in trading.
Sure, the crypto market is still volatile since the market value is still low. Therefore, whales can influence the price of crypto currencies with their big pockets. But no one has complete control over Bitcoin. Furthermore, living with the sometimes-uncomfortable feeling of lack of control is part of life.