emotional investing

Crypto can be turbulent territory for many investors. Few assets have experienced some of the massive price swings that can be nearly a daily occurrence within the world of digital assets. And unfortunately, as 2022 showed – coins and projects regarded as nearly a ‘sure thing’ can crash at just a moment’s notice. 

Countless investors were left shattered as the then-$18 billion terraUSD stablecoin plummeted from its $1 peg to 35 cents in two days. The sister LUNA token also imploded from $80 to just a few cents in a matter of days in early May 2022. 

 

Many investors were speechless as the $60 billion crypto ecosystem collapsed. 

Towards the end of the year, the massive implosion of the FTX crypto exchange also sent many investors (both large and small) spiraling. For example, top venture capital firm Sequoia Capital noted in November 2022 that its stake in FTX post-collapse dropped from $210 million to $0. 

 

Massive crypto platforms, firms, and projects can seemingly be just as unstable as a coin created yesterday. So how can the average investor buy, sell, and trade while managing risk with limited assets?

It’s pretty clear that crypto’s volatility will never go away, no matter how strong or weak the market is. As a result, mastering your emotions and devising a risk management plan is essential to avoid emotional investing that can see your portfolio wiped out in a blink of an eye. 

Understanding Where You Are
At As An Investor

In a crypto world filled with immense uncertainty, you, as an investor, need to focus on what you can control. Smart crypto traders take time to figure out their strengths and weaknesses and understand where they stand as a trader.

For example, you might realize that most of your trades merely break even. While this can be a good sign (especially in a bear market), it can also suggest that you might be too emotionally risk-averse to capitalize on a great opportunity. Your emotions could be getting the best of you to not pull the trigger on investments you’ve researched and studied – limiting your profits. 

Consequently, if you’re finding that your trades usually leave you in the red, it’s probably time to reevaluate your strategy. You might need to refine your research strategies, refresh your memory about market cycles and patterns, or even switch to a different type of digital asset. Building your investment persona helps you understand what habits and approaches are working and which are not. 

Building A Strategy To Mitigate Emotional Investing

Once you know your investing persona, it’s time to leverage battle-tested approaches to avoid emotional investing as much as possible. 

Here are a few strategies to consider. 

emotional investing, emotional investment dollar-cost average
  1. Dollar Cost Averaging: Here, you focus on investing regular amounts of funds into particular cryptocurrencies at predetermined times. This approach works during any market condition, but you should only really reevaluate this approach if there’s a significant market change. 
diversified portfolio, emotional investing

2.   Diversification: Diversification is a pretty simple concept – spreading out your investment across multiple coins and digital assets (like NFTs) to help prevent panic selling with a market collapse in a particular area. Generally, diversification helps investors by ensuring that gains in one place can balance losses in another area.

exit strategy, emotional investing

3.   Building An Exit Strategy: One of the best ways to avoid emotional investing is to have a clear plan about your end goal. Some take advantage of an exchange’s stop-loss functionality to automatically execute, buy and sell orders at a particular price. This helps take the emotional guesswork about deciding when to make a transaction. Others might sell enough of a coin during a run-up to recoup their initial investment and leave the rest as a ‘lottery ticket’ opportunity.

Overall, grappling with emotions is a reality every investor must face. Savvy crypto investors understand there’s a degree of risk with digital assets and work to build a strategy where they can have fun and take on adequate risk to profit within the market.