Cryptocurrency trading: Emotion and decision-making

Last week, I discussed how emotions and reason are interconnected by looking at some of the most catastrophic bubbles in past decades. I concluded that, most times, people use emotions in a negative way, by either buying when prices are too high (duo to FOMO) or by selling when prices are too low (due to FUD). Consider all the examples from last week and now look at how the cryptocurrency market is currently behaving.

Does it ring a bell?

It certainly looks like one of those bursting bubbles we analysed last week!

Following the all-time highs of 2017, more than 70% of the total market value was wiped out in just a few weeks. There is one really great aspect to come from all this, though. The market is still here, and most companies are still developing awesome products (with a few exceptions of course). My point is, the cryptocurrency market does not follow the same behaviour as other markets due to the fact anyone can easily participate (no KYC, no regulation, and so on) and, even though cryptocurrencies like Bitcoin take hits of -80%, it seems cryptos are resilient to huge network fluctuations.

If you had to guess, who were the most notorious sellers?

Dumb money!

The biggest sellers were small investors who bought at high prices and due to the crowd feeling scared, sold near the bottom.

Emotions in the decision-making process

All of these reasons are why predictive analytics and crowd sentiment analysis platforms exist to help investors make better, more informed decisions.

Besides data availability, transformation, and analysis, the most important and decisive factor for the success of your portfolio is the role emotions play. Have you ever heard anyone say:

“The best investors are emotionless towards an asset.”

I couldn’t disagree more. Even though logic seems to point to better decisions being made by those emotionally distant, this idea couldn’t be further from the actual truth.

As an example, let’s discuss the strange case of Phineas Gage.

This man was a factory worker who lived in the US during the 19th century, and I will use his case as an example to show that the best investors are not the ones who are emotionless, but rather the ones who can actually use emotions in a positive way during the decision-making process.

On one dreaded afternoon, Phineas suffered a tragic event that would forever change his life. One day, while he was at work, a metal bar pierced through his skull damaging his brain. Although Phineas recovered and was able to regain his motor skills, his pre-frontal cortex was destroyed, rendering him incapable of making decisions. His behaviour was heavily affected and his personality completely changed. Because his emotional connection to his past experiences was damaged by the accident, he became incapable of making decisions, even the most basic ones.

Antonio Damasio, a renowned Portuguese physiologist who studied Phineas’ case, published some interesting findings, one of which I find to be crucial for this article’s purpose. Damasio concluded that emotion and reason are so deeply connected, it’s impossible to separate one from the other.

Each decision we make is connected, not only to an emotion enclosed deep within our memories, but also to a physical feeling. That’s why we learn mostly from mistakes: the worse, the better.

What the study conducted by Antonio Damasio found was that if we lose the ability to feel, we become incapable of making decisions.

Leveraging emotions positively

How to use emotions wisely is, in fact, the million dollar question. Each one of us has a different response to different situations. Some prefer to go with gut feelings, others with extensive data analysis, and some with the wisdom of the crowds. Discarding the role emotion plays in any decision is, without a doubt, really dumb.

My advice is to leverage technology in order to make better decisions. If there are tools available that can help you better rationalise an event, allowing you to deal with it emotionally and make the best decision with the most positive outcome possible, you should definitely use them. For instance, we now have the power to analyse extensive emotion-driven data using cryptocurrencies like Stox, Santiment, and Agrello, or other tools like Google BigQuery and Google Trends.

Predictive analytics can be very useful to understand how your logic holds when compared to the markets.

Remember the dumb money vs smart money dilemma? This is the answer:

Don’t ignore your emotions. Use different data analytics and crowd sentiment tools to better comprehend how you can improve emotional responses to different events.

At the end of the day, for some investors to win, others need to lose. To be on the winning side, one must first lose a great deal of battles (and most likely a bunch of money) in order to learn how to better make decisions.

Don’t be afraid to use your experiences and emotions when making decisions. Whatever feeling you might have towards an asset or an event, listen to it.

Test your hypothesis and register the outcome. Repeat until perfected.