The cryptocurrency sector is a difficult place to learn, but it offers many timeless investment lessons.
President Trump signs the Genius Act, the first major cryptocurrency law in the US
President Donald Trump signed the Genius Act, creating the United States’ first virtual currency law regulating stablecoins.
Cryptocurrencies can rise by thousands of percent in a few months and then fall by more than 70% in the same period of time. As such, the crypto sector has become a cruel teacher of quite a few basic investment truths.
In that vein, if you own Bitcoin, (Cryptocurrency: BTC)Ethereum (Crypto: ETH)Solana (Code: SOL) Or even dogecoin (Code:Doge) Today, you are a student sitting in the most unforgiving classroom in the financial world. Here are three lessons this market repeatedly teaches us. These relate to investing in blue-chip stocks and index funds as well as digital coins, so be very careful.
1. Markets change, but people don’t.
Ten years ago, few people outside of niche communities had heard of Bitcoin. Ethereum had just launched, and few people had a rough idea of what a smart contract was. Solana didn’t exist at all, and Dogecoin, the first meme coin, dropped significantly and looked like it would never recover. These four coins are now well known, and new stories are emerging that suggest a better future for each. It’s hard to imagine how they will become completely extinct at the end of 2035, 10 years from now.
But beneath the shifting buzzwords and market narratives, investor behavior with these coins stretches back long before cryptocurrencies existed and is eerily similar to behavior in any market situation to date. People hear about assets going up 5x or 10x in value and quietly convince themselves that getting in now is somehow less risky than it seems. They feel like they’re falling behind, so they try to catch up quickly to satisfy their fear of missing out (FOMO). It’s a get-rich-quick instinct that never leaves the human brain.
The lesson here is that while technology and narratives change, investor behavior tends to remain the same. Explosive upswings eventually lead to intense optimism, hype, media attention, and friends bragging about their gains. In these circumstances, it’s hard to resist a last-minute rush to get rich, even though history shows that the tail end of a parabolic move is usually the riskiest time to enter.
2. Investor sentiment is path dependent
Two investors can own the same coin at the same price, feel completely different about it, and take different actions as a result.
For example, let’s say an investor buys Bitcoin for $20,000 and watches it rise to $100,000. They’re probably pretty happy with their choice and may be viewing Bitcoin’s current drop below $100,000 as a buying opportunity rather than a sign that it’s time to cash out.
But consider another investor who bought near the peak of $69,000 at the end of 2021 and held onto it through a 70% drop. The investor then waited years for the price to return to breakeven. Now they are seeing the same price as the original investors, but it is very likely that they have been underwater for so long that it has become psychologically very difficult for them to buy more Bitcoin. In the long term, such a trend could mean not enough capital is allocated to a compelling investment thesis that is still being developed.
Behavioral finance researchers refer to the discrepancy between these two sets of behaviors as “path dependence” or, in some cases, “dispositional effects.” The amount you paid, the deepest drawdown you experienced, and the last peak you remember all quietly become anchors for your mind, even if those anchors ultimately prevent you from taking the best action for your portfolio.
Pay attention to the path your investments have taken to get to where they are today. This will definitely affect your investment psychology, but not necessarily in a positive direction.
3. Don’t get too attached to your investments.
The last lesson is the most difficult to practice.
There’s a cheeky saying in the crypto industry that investors shouldn’t “marry their bag.” This slang speaks an eternal truth. Becoming too emotional about the outcome of your investments or decision-making process can expose you to serious downside risks. And the more we become obsessed or convinced about the value of an investment, the more blind we become to the problems it has or may have in the future.
So don’t get too attached to coins, stocks, or other assets.
In my experience, it’s often a losing battle in the long run. One good solution is to schedule a quarterly “cold water” session to re-evaluate various elements of your investment thesis for the property with a pessimistic or highly critical view. When you can admit that one of your most confident assets is no longer the same thing you were excited to buy in the first place, and no longer feel internal resistance when you think about selling it, you’ve mastered the practice.
Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.
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