As excitement and buzz around the world of cryptocurrency continues to grow, more and more individuals are jumping on board in hopes of making a quick profit. While trading in the crypto market can indeed be lucrative for some, it’s important to acknowledge the risks involved in this volatile market.
One major danger that traders must be aware of is the temptation to chase losses. This refers to the act of trying to make up for previous losses by taking larger and riskier trades. It’s a dangerous mindset that can lead to even bigger losses and potentially devastating consequences.
How Losing Money Presents The Illusion of False Potential…
If an underlying asset has intrinsic value supported by rational research, dips in the market can present buying opportunities. However, in the world of cryptocurrency, price movements are often driven by speculation and hype rather than tangible value. This can create a false sense of potential profits, making it easy for traders to get caught up in chasing losses.
Imagine you invested $10,000 on a cryptocurrency and it drops to $5000. You’ve lost $5000 but you may feel like you could potentially make up for that loss if the price goes back up to $10,000. However, what often happens is the price continues to drop and you find yourself with even bigger losses. The initial loss of $5000 can quickly spiral into a loss of $10,000 or more if it’s not managed properly.
Often, traders will only look at the upside of that next starting point rather than the massive gains needed to recoup their original loss. In the example above, the trader would need to make a 100% return just to reach their break even point. These gains certainly aren’t impossible in the world of cryptocurrency but flaw of thinking happens when people forget about their first original trade and only see that 100% gain as a profit when in reality, that massive win is just a way to break even.
Scarcity Present Irrational Thinking
One of the psychological influences that causes decision making is the principle of scarcity. Scarcity in itself isn’t a “bad” thing as that’s partly what gives certain cryptocurrencies their value such as Bitcoin. But when it comes to scarcity of time (such as a perceived rare and limited buying opportunities), it can lead to irrational thinking. This is especially true in a volatile market like cryptocurrency where the price can fluctuate drastically in a short amount of time.
Traders may feel pressured to make quick decisions and jump into trades based on FOMO (fear of missing out). They may also hold onto losing positions longer than they should because they fear missing out on potential gains. This scarcity mindset can lead to impulsive and emotional decisions, which are rarely a good idea when it comes to investing.
Final Thoughts
Web3 has a lot of potential to transfer wealth and revolutionize the way we think about money. However, it’s important to remember that with great potential comes great risk. Understanding and being aware of psychological biases can help traders make more informed decisions when it comes to investing in cryptocurrency.
With that being said, Moonrig is a crypto wallet portfolio tracker that is designed to help investors stay on top of their crypto investments and make more calculated decisions. Feel free to check it out and see how it can help you navigate the volatile world of cryptocurrency.
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