As cryptocurrency exchange platforms become increasingly accessible, the entrance barrier, particularly for retail investors, is at an all-time low. People with little experience in investment are entering the crypto market in droves, causing exponential growth.
This new profile of novel investors is entering a market characterised by low regulation, information asymmetry, and complex technologies. The resulting conflict drives a substantial proportion of irrational behaviour in crypto investment.
Along with project fundamentals, factors such as social media and other online communities have a significant impact on the performance of community projects. Human capital factors such as the project or company’s team structure, marketing and PR activities can also play an important role in the crypto world.
But underlying all these factors is the psychology of the investor. An investor’s psychological profile determines how all information is processed, what is prioritised, and ultimately what has the greatest impact on their behaviour.
To better understand the intricate psychological factors at play, we need to answer two questions:
- Who exactly are these investors and what attracts them to a crypto project?
- What emotions drive their decision-making as an investor?
Answering these questions enables us to more accurately forecast project potential and credibility, and as a result, make more informed investment and trading decisions.
In this article, we summarise a body of existing research to understand the role of investor psychology in the crypto market. We’ll also look at other factors that correlate with the success of crypto projects, including human capital and project-related factors.
1.Characteristics of Crypto Investors
What personality profiles and psychological characteristics typify crypto investors?
In a recent survey of 1000 investors conducted by the UK’s Financial Conduct Authority, 76% of respondents said they felt competitiveness when placing an investment, while 68% likened it to gambling. This aligns with what studies have found regarding the psychological characteristics and phenomena that determine crypto investment decisions.
Social behaviours
Crypto investors tend to be extraverted, social, and outgoing. When tested on various personality traits they typically score low on agreeableness and cooperativeness, which may help explain competitive behaviours.
Overconfidence
Research focusing on the early adopters of crypto technology found that they were more overconfident. Overconfident investors have an unrealistic sense of control over the development of a coin and overestimate their knowledge and capabilities in handling investments.
Openness to new experiences
Overall, crypto investors tend to be more open to new experiences and seek novelty. This characteristic helps them proactively search for new information and develop their skills within the crypto world. Yet, a constant novelty-seeking attitude also brings along higher levels of mood instability and impulsivity.
Fear of missing out (FOMO)
More of a psychological phenomenon than a characteristic, fear of missing out is defined as a desire to stay connected with what others are doing. FOMO is common amongst crypto investors and affects their behaviours.
As investors enter crypto communities online they have constant access to discussions about projects on Twitter, Reddit, etc. This forms social pressure on investors anxious over losing buying and selling opportunities and losing control over their investments. FOMO is exacerbated by the high volatility of the crypto market and 24/7 access to trading platforms.
2. Investor Emotions and Biases
Studies have also found that investors’ decisions are influenced by their emotions and biases.
Emotions
A study quantifying the emotional factors in over 2 million posts on Bitcointalk.org found that emotional factors significantly correlate with Bitcoin’s trading volume and return volatility. It also found that “emotions affect the total return variation process of investors, and thus may influence the financial market by inducing extraordinary price movements.”
Biases
A study published in the Journal of Behavioral Addictions looked at psychological mechanisms and risk factors of excessive crypto trading. Some of the biases affecting investors in making decisions on how to invest include:
- The illusion of control (overestimation of abilities to control the events)
- Self-serving attributions (attributing outcomes to personal action rather than external factors)
- Hindsight bias (perceiving the outcome as being hypothesised all along)
- The “hot-hand” fallacy (perceptions of predictable momentum shifts or winning periods)
The Importance of Understanding Crypto Market Psychology
Traditional methods of predicting market behaviours don’t stand up to the immense challenge of grasping the volatile crypto market.
The project of measuring and understanding behaviours is made more difficult by the lack of any centralised system. Instead, crypto technology relies on multiple user-based models.
Behavioural finance and financial psychology research observe that investors tend to make decisions based on certain psychological constructs (e.g. cognitive bias, herd psychology). This leads to anomalies and ineffective trends in the market.
Therefore, in order to gain proper understanding into the structure and patterns of the crypto market, it is important to consider all available user-oriented information.
As crypto investors, it is crucial to understand the psycho-social dynamic behind each project in order to make better judgements regarding project potential and credibility.
Introducing Symanto
Given the number of intricate factors at play, and the speed at which the crypto market moves, AI plays a vital role in making sense of big data and providing timely, actionable insights.
Symanto Psychology AI uses innovative text analysis technology to provide diverse psychological profiles, conduct emotion analysis, and more based on anonymous text data.
Symanto’s state-of-the-art AI capabilities empower in-depth analysis of social conversations, profile investor personality, decode community emotions, analyse influencers, and more, transforming chaotic social conversations into vital investment signals.
Interested in Symanto Psychology AI? Get in touch or book your free personalised demonstration to see how it can empower your application in crypto, financial market and consumer analytics today.
References
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Ahmad, M. F., Kowalewski, O., & Pisany, P. (2021). What determines Initial Coin Offering success: A cross-country study. Economics of Innovation and New Technology, 1-24.
Ahn, Y., & Kim, D. (2021). Emotional trading in the cryptocurrency market. Finance Research Letters, 42, 101912.
Al Shehhi, A., Oudah, M., & Aung, Z. (2014, December). Investigating factors behind choosing a cryptocurrency. In 2014 IEEE international conference on industrial engineering and engineering management (pp. 1443-1447). IEEE.
Delfabbro, P., King, D. L., & Williams, J. (2021). The psychology of cryptocurrency trading: Risk and protective factors. Journal of Behavioral Addictions.
Hotar, N. (2020). Herd Behavior in Terms of Social Psychology: The Example of Crypto Asset Markets. International Journal of E-business and E-government Studies, 12(1), 79-90.
Kim, H. J., Hong, J. S., Hwang, H. C., Kim, S. M., & Han, D. H. (2020). Comparison of psychological status and investment style between bitcoin investors and share investors. Frontiers in Psychology, 11, 3230.
Sudzina, F., Dobes, M., & Pavlicek, A. (2021). Towards the psychological profile of cryptocurrency early adopters: Overconfidence and self-control as predictors of cryptocurrency use. Current Psychology, 1-5.
