Crypto trading is a rapidly growing activity that is likely to receive increasing mainstream acceptance over the next few years. We believe that the topic is important in behavioural addiction research because we think that the general community must be aware of the risks or harms that might be associated with this activity.
This is particularly when media activity may focus primarily on a small minority of investors who have achieved financial gains, largely due to historical factors or holding coins well before the onset of periodic bull cycles.
As a clinical psychologist studying this market and the behaviours related to it, is very interesting for two reasons. The first is because it brings together elements of risks inherent in gambling, but also in excessive social media use.
As result, it is estimated that most of the coin and day traders do not make returns higher than the market, and many lose money (Melker, 2019). Few day-traders of shares last for very long in the market, with only 7 percent estimated to last five years in the business.
The actual research in psychology is showing that crypto trading may be appealing to people who enjoy gambling and may attract similar demographic group or people with similar personality or temperaments (Kim et al et al., 2020). These include greater impulsivity and novelty seeking.
We will outline some of the most important psychological principles that we believe to be central to understanding the potentially addictive elements of this new behaviour and discuss some potential protective factors that could mitigate against the primary risk factors.
The illusion of control
Crypto trading, as day trading is, of course, not entirely based on chance. However, all of these activities offer many opportunities for people to overestimate the role that applying specific types of knowledge or skill might play in outcomes and, conversely, the significant role that luck and chance are likely to play.
The illusion of control, defined as a subjective over estimation of the objective ability to exert control is known to be a common feature of gambling.
This illusion is likely to be a strong feature of crypto trading and the effects is likely to be bolstered by some well-known biases as biased or self-serving attributions (outcomes due to personal action rather than external factors), hindsight bias (the outcome is seen as being hypnotised all along) and the hot-hand fallacy (perceptions of predictable momentum shifts or winning periods).
As a result, traders may gain a sense of invincibility or perception that they cannot lose, and this may contribute to greater risk strategies.
Social learning and reinforcement
Crypto trading has also emerged during the era of social media. This has led to the emergence of a strong social media culture of crypto advisors, influencers on platforms such as YouTube or Instagram. Some of these people appear to be more experienced and well-informed sources but there are many others that are entirely speculative, ill-informed, and potentially misleading. Those people serve to create a sense of reinforcement in which followers of channels seek to promote their successes, while also reading about the gains scored by others.
Preoccupation
Preoccupation is recognised feature of most major conceptual models of addiction. Those who engage excessively in a particular activity often find it difficult to disengage from the activity. They may continuously think about the activity and prioritise the activity ahead of other important responsibilities. And Crypto trading would appear to be an activity that has the potential to be highly absorbing.
Fear of missing out (FOMO)
One of the strongest psychological factors that appears to influence crypto trading is the fear of missing out (FOMO). This term is often shown as a style of thinking to avoid. FOMO is when traders are confronted with displays of hundreds of coins.
Some of them, they already own, other they do not. If one which they have purchased is going up rapidly, they may regret having not made a larger investment. If another unpurchased coin is going up which they had previously considered, they feel annoyed for having missed out on the opportunity. The particularity with social media is that it increases this effect because individual traders experience a FOMO in relation to their own actions but are also exposed to testimonials from other traders on social media.
Anticipated regret
Cognitive psychology has recognised for some time that many decisions are based on the desire to anticipate regret. One of the central findings in this area is that acts of commission usually let to stronger feelings of regret than acts of omission. Both acts are likely to cause significant regret in trading and that this may potentially be a risk factor that is more strongly observed in this activity than in most form of gambling.
A reason for this is that the games are usually of a short duration, and decisions made in one game have no bearing on outcomes of future games. By contrast, crypto trading allows traders to observe the folly of their decisions over a long period of time: what they missed out on, and what coins they sold too early. For this reason, the act of commission and omission effects are both likely to be very strong.
As the popularity of crypto trading rapidly increases, it is important to identify what psychological and other strategies might be used to mitigate against the risks inherent in this new activity. General strategies for avoiding harm associated with excessive trading share some similarities with gambling: sticking to a budget, not spending more than can be afforded, and not chasing losses.
Protection against social influences is also important. Many YouTube channels and Instagram accounts involves preaching to a converted audience. Evidence is posted in support of certain coin purchases, but often without any fundamental analysis, critical evaluation of downsides, or consideration of opportunity cost. Community education around the need to seek out reputable and multiple information sources, including the appropriate magnitude of investment, may therefore be important in the near future.
The aim is to encourage protective strategies: buy before things are too high, buy the dips or corrections to minimise downside risks and stay focused on the positive outcomes rather than the outcomes that were missed.
To conclude this short introduction to a psychological analysis of the crypto trading market, I would like to warn all young investors about the sunk cost fallacy concept. This behaviour is most dangerous when we have invested a lot of time, money, energy or desire in something. This investment becomes a reason to carry on, even if we are dealing with a lost cause. The more we invest, the greater the sunk cost are, and the greater the urge to continue becomes.
To adjust this unconscious behaviour, it can be interested to work with a clinical psychologist specialised in this specific area. The psychologist by his knowledge of all of the risks factors discussed above will help you understanding your reactions and will help you managing them to achieve your goals in an healthier way.
Eleonore Brocq, clinical psychologist at MedCare-Camali Clinic.
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