Author: Route 2 FI Source: @route2fi, substack Translation: Shan Ouba, Golden Finance
Does anyone else find human psychology interesting?
When the crypto market was falling, we spent a lot of time analyzing, trying to predict the exact bottom, and were generally very cautious. But when the market was rising, we felt confident and simply bought in, doing little to no analysis.
We keep clicking the green buy button like there is no tomorrow.
Why are we like this? Fear and greed — these two emotions seem to drive most of our actions in the cryptocurrency market.
When fear takes over, everything looks doomsday. The Twitter/X feed is filled with warnings of further collapse and calls for capitulation.
"This is the end, goodbye everyone, it was nice meeting you."
But when greed is in the driving seat, euphoria takes over. Suddenly, everyone becomes an expert, confidently predicting new highs are just around the corner.
“If this coin goes up another 10,000%, I can retire. Go!”
So, why is this happening?
Why are we so cautious at the bottom, but throw caution to the wind at the top?
A big part of the reason is loss aversion—the fact that we feel the pain of losses far more than we feel the pleasure of gains.
Humans are social animals, and the fear of missing out (FOMO) is very strong. It’s hard to stay out when everyone around you is getting rich quickly. Herd mentality takes over, and we follow the herd into the market, often just when the market is at its peak. It’s hard to stay calm when you hear stories every day about random people getting rich overnight.
Conversely, when prices fall and everyone flees, our instinct is to follow them. Holding on feels like fighting a losing battle. The prospect of future losses in our minds outweighs the potential gains.
When crypto hits bottom, you can feel it, it's a very unique feeling, especially on the day of the bottom, it's very obvious. Guessing the top is much harder, usually people start calling the top long before the actual top, and at the top people become extremely bullish, you hardly see any bearish voices, none of your tweets are bearish, all ecstasy.
Sure, this time may be different, but price action on the high time frames is forming a parabola with very high tops (like in 2017) that most people call too early and completely lose faith until the true top arrives.
Yes, predicting bottoms and tops is a foolish thing for most people.
When sentiment reaches extremes, opportunities are usually gone. By the time your Twitter/X is full of bullish or bearish news, it may be too late.
Ironically, the best opportunities often lie in swimming against the current.
Buy when others are overwhelmed by fear, sell when greed and euphoria set in. Yes, I know, it’s easier said than done – it takes a strong mentality to swim against the current.
But as one of the best investors said, be fearful when others are greedy and be greedy when others are fearful.
So if sentiment-based top and bottom predictions are often a losing strategy, what is a better approach?
It is not the job of a trader to predict market bottoms and tops. That luxury is left to experts and ordinary investors who have no actual investment. Think in terms of accumulation and distribution.
One way is to focus on your own analysis and develop a plan.
Rather than trying to figure out the perfect entry or exit, think about accumulating gradually on dips and profiting on rallies.
Have a strategy and stick to it, no matter what the herd is doing. Develop a theory based on fundamentals, technicals, or your assessment of the market cycle and let that guide your decisions.
You don’t know what other people’s “predictions” are based on. Maybe the bull on X saying $100,000 in a week is a 16-year-old who doesn’t even know the funding rate?
FOMO is a powerful force, and the temptation to abandon your plans to chase gains is strong. This is why discipline is so important.
A big mistake I find myself making over and over is how I justify the losing coins in my portfolio.
Holding on to them in the hope of getting my money back, even though I knew the smartest thing to do would be to cut my losses and invest the money in something else.
The best embodiment of human psychology.
No one can seize every opportunity. I repeat: No one can seize every opportunity. There will always be coins that you didn't buy that go up 100 times, or coins that you sold too early.
That's the nature of the market. The key is to not let FOMO dictate your actions. Be disciplined, stick to your strategy, and believe that there will always be new opportunities.
By developing a plan, staying disciplined, focusing on your own analysis rather than the actions of the herd, and keeping a long-term perspective, you can buy low and sell high, rather than the other way around.
It’s not easy, but this is the mentality that will make a few profit and many fail in the crazy world of crypto.
Ultimately, the goal is to keep emotion out of the equation as much as possible. Fear and greed may be inevitable human reactions, but we don't have to let them control our every move in the market.
Let’s break this down:
Professionalism means having a plan and sticking to it, even when emotions run high.
Consistency is about applying your strategy every day, not just when it’s easy.
Discipline is about resisting the urge to deviate from your plan when FOMO (Fear of Missing Out) strikes or the market is gripped by fear.
Repetition is about spending time working in front of a screen, even when it feels tedious.
Perhaps most importantly, the ability to overcome repeated failures and disappointments is essential, as no strategy is perfect and losses are part of the game.
So why do most traders struggle with this? Why are they bearish at bottoms and bullish at tops even when they know better?
A large part of the reason is that it is difficult to truly internalize these basic but necessary principles. It is one thing to understand these concepts, but it is another to apply them consistently when it counts.
Warren Buffett's famous saying "Be greedy when others are fearful" rings true again.
But in practice, it is very difficult to buy when the market crashes and your portfolio is down 50%. Likewise, we know to be cautious when the market is euphoric, but the temptation to make quick profits is very strong when everyone around us seems to be getting rich easily.
How can anyone stay calm after seeing headlines like “High School Student Makes $1 Million Overnight” several times a day?
That's why it's so important to have a plan and stick to it. If your plan is to accumulate on the dip, then you buy when prices fall and sentiment is low, no matter how you feel.
If your plan is to take profits when your target is reached, you will sell in stages along the way even if it feels like the rally could go on forever.
Catching the exact bottoms and tops may be ego-satisfying, but it's not a reliable way to build long-term wealth. A better approach is to focus on executing your plan over and over again, even if it means missing some of the best days.
A slow and steady approach often wins out in investing.
Remember, in extreme cases, the herd is usually wrong.
Remember your plan and the effort you put into making it.
Discipline is the key to long-term success, and every setback is an opportunity to learn and improve.
Stay rational and I wish you good luck in your investment!