What you can learn from Behavioral Investing, and how to apply it to your crypto strategy
A while back I read 'The Little Book of Behavioral Investing' by James Montier, and really enjoyed the content and how it applies to the cryptocurrency market. Thought I'd share a few learnings with this community in these trying times.
A short note on Behavioral Economics: this is the science of taking into account human behavior (both rational and irrational) in an economic environment where decisions have to be taken. These decisions processes can be modelled (see also Game Theory) in order to predict how people will be have in certain situations. The most famous example of this is the Prisoner's Dilemma, look it up if you're interested!
Before making any decisions to buy or sell, keep in mind that in many situations you are most likely your own worst enemy. In crypto, this means that sometimes the best thing one can do is HODL and do nothing, no matter the FUD or red or green candles that you're seeing. The investors with the best returns very often turn out to be the ones that died. Don't underestimate the value of doing nothing.
The difficulty in keeping yourself from acting against your best interests is that while rationally you may know why you should or shouldn't act a certain way, emotions take over and bias us, usually in the wrong direction. The solution is to keep learning and being aware of one's weaknesses.
Some pointers to help you avoid falling into bias traps:
- Set a strategy and commit to it, so the heat of the moment does not affect your actions. Unless the reason for your initial investment is no longer valid, why change your mind? This is particularly important in a market as volatile as crypto.
- The best time to reinvest is when everyone else is afraid to buy more: this cannot be said often enough, and I've experienced the positive results myself. Often a crypto is down because the market is down, if the fundamentals are solid and haven't changed, a downturn should not discourage you from buying more.
- Don't assume you know more than the next guy: we like to tell ourselves this lie but we rarely have inside information, so act accordingly and don't be over-optimistic. In connection to this, don't only base your decisions on what 'experts' are telling you, as many of them are NOT out there to help you, but only themselves.
In the end, the most important thing is to learn from your mistakes, understand why you made them and try not to repeat the pattern.
May the whales ever buy in your favor!