• This article discusses how behavioral economics applies to the world of cryptocurrency, and specifically Bitcoin.
• Common psychological “traps” such as fear of missing out (FOMO), loss aversion, groupthink (“the bandwagon” effect) and the sunk-cost fallacy are discussed in relation to investing in Bitcoin.
• Cognitive journeys related to Bitcoin are explored and recency bias is identified as a potential source of volatility within the cryptocurrency marketplace.
Behavioral Economics & Bitcoin
The influence of emotions, biases and heuristics on our preferences, beliefs and behaviors when it comes to crypto can be profound and fascinating. This article looks at how concepts from behavioral finance can be related to Bitcoin trading.
Common Psychological Traps
Investing in anything can be prone to certain traps such as FOMO or fear of missing out, loss aversion, groupthink (the bandwagon effect) and the sunk-cost fallacy which all shape our decisions around investments.
Credit Suisse has created a chart which illustrates various cognitive journeys that investors take when making decisions about their investments – including with Bitcoin.
Recency bias is described as assuming that recent events will likely repeat themselves – creating potential volatility in the cryptocurrency marketplace due to its 24 hour market access.
In conclusion, behavioral economics plays an important role in shaping investment decisions when it comes to cryptocurrencies such as Bitcoin. It is important for investors to understand common psychological traps they may fall into, recognize cognitive journeys they make while investing, and become aware of recency bias which can lead to heightened volatility within the industry.