Crypto is a volatile market, and investing in decentralized markets is often a bumpy ride. With that often comes emotion. This guide covers the coping and preparatory strategies you’ll need to master risks and crypto trading emotions.
KEY TAKEAWAYS
• Emotionally detach from your investments by considering funds spent as already lost to avoid panic selling.
• Always research and understand the value of an asset to make informed decisions and avoid FUD.
• Diversify your investments across different crypto assets to minimize potential losses.
• Constantly analyze both your successful and failed trades to improve your strategies.
How to subdue crypto trading emotions
What is the primary reason crypto traders lose their heads? Simply put, their monetary stake is equal to their emotional stake. They don’t perceive their assets as funds but as what they could be — a car, house, or a future without debt.
This is a fundamentally wrong mindset with which to approach crypto trading. Here are some steps to avoid crypto trading emotions that will sabotage you.
1. Prepare for loss
While there are degrees of safety in investing, funds in crypto shouldn’t be a last-ditch effort toward financial freedom. Instead, the funds should already be viewed as lost.
Imagine the money you spent to buy crypto and consider it evaporated, flushed down the toilet, and so on. This leaves your emotional state detached from your investment.
Any positives that happen then are happy coincidences, while losses are completely expected and accepted. Consequently, crypto trading emotions never enter the equation when it comes to timing and exiting the market.
In practice, start small to build confidence, only putting in as much as you can lose.
2. Validate FUD information
When it comes to mastering trading emotions, another thing you must do is fact-check or validate FUD (Fear, Uncertainty, Doubt) information. The lesson here is three-fold:
- Emotionally detach yourself from your investment by already considering it a loss.
- Research peer-reviewed and credible data debunking or confirming the FUD.
- Understand the underlying value of an asset you are investing in before selling.
Let’s take Elon Musk’s tweet as an example of FUD around Bitcoin’s energy consumption. Long-term BTC holders prior to 2021 were not very worried about it because they understood Bitcoin’s fundamentals. They know that 74% of its mining network comes from renewables, as seen in a 2019 report.
Accordingly, while panic-sellers hurled toward the door busted open by Elon Musk, HODLers welcomed the dip to buy more BTC at a discount. In summary, when FUD happens, give yourself time to think about it and do more research before selling.
3. Distribute your potential loss
In the stock market, investing in the blue-chip S&P 500 ETF index is already considered diversified enough. After all, it covers the most stable companies, from manufacturing and tech to hospitality, service, and banking. Indeed, over time, the S&P 500 went upwards, always able to count on the Federal Reserve for extra monetary injections.
The decentralized crypto space has no such luxury, so each crypto asset should be viewed based on its own merit. For instance:
- Bitcoin is a widely adopted, hard, deflationary cryptocurrency
- Ethereum is both a cryptocurrency and a DeFi infrastructure to host DeFi protocols that recreate traditional financial infrastructure
- Chainlink is the provider of off-chain world data to on-chain smart contracts
- Axie Infinity is a blockchain game with its own NFT and farm-yielding ecosystem
With so many assets, your evaluation must consider the unique proposition, team, history, and competitors. Then, you select about five that show the most promise across different categories and put them into a diversified investment basket. Correspondingly, their price fluctuations spread out to minimize potential losses.
4. Practice makes confidence
Most investors settle for holding crypto assets and diversifying, applying the adage “don’t invest more than you can lose.” However, if you’re willing to adopt the active approach of high-frequency (margin) crypto trading, you’ll need to know technical analysis. Many exchanges have demo accounts filled with virtual funds to apply your knowledge before using real money.
By understanding the technical indicators across different charts, you’ll be able to interpret certain patterns correctly. Sometimes, those trading patterns can lead astray, but more often than not, they provide a lucrative opportunity.
Nonetheless, even if you grasp technical analysis entirely, you must know that you’ll never be able to predict the future. They are called indicators for a reason, not fortune-tellers. It is better than gambling but still rife with risk. Just like the stock market, most traders become successful by using one strategy and spamming it repeatedly.
5. Learn from both losses and wins
When a trade loss inevitably happens, write down how it transpired step-by-step. Did you misread a technical indicator? Did you apply the wrong one for the situation? Did you veer off the plan and get too greedy?
If you did everything correctly, maybe your assumptions about your trading strategy were wrong. Furthermore, when you lay it all down for wins as well, you will sometimes notice that you won because you got lucky.
Basing your strategy on flukes is then a sure recipe for greater losses down the line. This is why it is even more important to analyze your trading logic for successful trades.
First, to improve on the recipe, and second, to discard flukes as a building block for your trading strategy. By doing this daily, you will become habituated to handle things analytically instead of emotionally.
The dangers of crypto investing
It is a well-known fact that penny stocks pose an investment risk. This is due to a few key reasons: low liquidity, lack of information, and small market capitalization. The same applies to crypto trading as well.
Even the top cryptocurrencies are volatile
Outside of major assets, cryptocurrencies often have small market caps, and often, the developers themselves are either anonymous or pseudonymous. This can lead to price volatility on top of the crypto market’s general volatility. After all, code can be copied, tweaked, and launched under a new name.
This is how dogecoin emerged onto the scene, according to its creators Palmer and Markus. Crypto forks are also quite common, Ethereum Classic from Ethereum and Bitcoin Cash from Bitcoin, to name a few. On top of the volatility, we also have external factors that affect even top assets like Bitcoin.
We’ve seen single tweets in the past drastically affect the market. The quick nature of events in the crypto space coincides with the viral nature of social media. Millions of people can sell BTC if someone significantly expresses negative sentiment.
This happened when the price of BTC dropped in 2021, leaving Bitcoin to struggle at a $30k resistance level for over a month. Meanwhile, the cooler heads — the strong hands — were taking advantage of this and kept buying the dip. After all was said and done, crypto traders expressed deep regrets, as shown in a survey conducted by Crypto Vantage.
Clearly, misunderstanding the market, FUD, and putting hopes into a single asset are rookie mistakes. The latter is especially egregious since diversifying one’s portfolio has been the staple of stock trading since its invention.
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Margin and options crypto trading
Sitting on an asset with great expectations is one thing, but betting on its specific price move is another altogether. Such an active trading strategy can lead to overnight riches but also to the crippling of emotions.
For instance, depending on the exchange of your choice, you can leverage your market entry by up to 300x. Therefore, if you margin trade $50 times 300, you enter the market at $15k. If the crypto goes up, you can set up an automated Take Profit (TP) order at a certain percentage.
However, if the price goes down since your entry, you would have to continually top the funds in order to avoid margin calls and in the hopes the price will go up.
This could be exceedingly addictive and leave you with depleted funds far beyond the measly $50 you leveraged. Likewise, crypto options trading — betting the price will be long or short can place you in a bind as well.
In the image above, most of the liquidated positions were long positions. The traders misunderstood the market and placed a bet that prices would go up. We could discuss these cases of wins and losses all day long.
The question that necessarily arises is, how can you minimize your loss risk so that crypto trading emotions don’t even enter the equation?
It’s about finding the right balance
Mastering your crypto trading emotions is just as important as understanding the market. By preparing for losses, validating information, diversifying, and continually learning from your wins and losses, you can maintain a rational approach to the risks of crypto investing.
Frequently asked questions
How do emotions affect investing decisions?
How do you manage emotions when investing?
What are the consequences of emotional investing?
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