Almost exactly a year ago, we witnessed one the biggest asset bubbles in history. The 2017 run in the crypto markets attracted a ridiculous amount of interest from retail traders. So why did so many people buy at completely the wrong time and lose so much money? There are 2 key psychological reasons why the crypto bubble happened (you will see these happen again) and why so many people lost big:
“Everyone is doing it so it must be right”. It is a phenomenon quite prevalent in today’s society, especially with social media and news outlets amplifying the spread of ideas. November and December in 2017 in the crypto markets are a great example of how the herd mentality causes asset bubbles like we saw last year.
Everyone felt safe buying Bitcoin and other cryptocurrencies despite their astronomical increases in value during this period because everyone else was doing it. Mainstream news outlets like CNBC were doing segments about “how to buy Ripple” when it was trading over $3.
To be a successful crypto trader you have to be able to make rational decisions on your own. When it comes to trading and investing, you cannot blindly follow others’ ideas and expect to make money. The only way to make a winning investment that makes you a lot of money is to buy when the masses are selling and to sell when the masses are buying.
The crypto markets are a zero-sum game. Everyone cannot win, so you have to do what everyone else is afraid to do. Going against consensus opinions takes balls. If investing was easy, everyone would be a millionaire.
Remember when the founder of Litecoin announced he was selling all of his coins almost exactly a year ago?
He understood the herd mentality, and did exactly the opposite of what the masses were doing. Everyone thought he was foolish for selling his coins at the time. But now everyone realizes he understood the market trend better than them. As a result, he became a billionaire from the crypto craze, while most people lost 90% or more of their investment.
All of the insane price targets from the news outlets and supposed “analysts” created the FOMO in all the retail investors. “Bitcoin is going to $1 million by the end of 2018”. Everyone felt like they were missing out by not buying.
Fear of missing out is powerful emotion. For some people, it’s worse to be on the sidelines of a big move then to be buying too high. Most people were not taking into consideration the timing of their investment either.
“It’s trading at $15,000. There is still another 10,000% of upside!!”. As a result, everyone scrambled to open a Coinbase account to buy crypto before it was too late and went to a million per coin. No one wanted to miss out on the big move, so every novice trader piled in.
FOMO is the reason why Coinbase had so many technical issues during the end of 2017. They couldn’t handle the volume of all the retail traders trying to open trading accounts. They warned investors there could be execution issues. But no one listened, and bought as much as they could, and then panic sold.
Understanding these two psychological phenomena is essential for capitalizing on opportunities like the 2017 crypto market run up. This will not be the last major run in the crypto space, so it pays to study now to be prepared once the markets start to heat up again.