In this trading strategy post, we are going to look into the topic of crypto market psychology.
We will approach it from two points of view. First one will be the bird’s eye view (the aggregate market psychology) and then the individual view (the trading psychology).
Psychology of Market vs Psychology of Trader
Technically, these are two different things. The market psychology and a trader’s psychology are related, though.
As a trader, your mindset and your decision making is part of the market.
The way you think influences the what you decide to do. That in turn influences the market movements and helps form the aggregate market psychology.
Market is the aggregate of individuals
What traders and researchers alike call crypto market psychology is the prevailing group behaviour that results from actions of individual traders.
You are probably aware that not all traders on the same market act the same way. If they did, the market would not exist.
Market is made by exchange of value between buyers and sellers - two parties who act in opposition, or at least with different reasons and on different time scales.
Whatever the details, they are not in agreement.
Different goals and reasons, but also no reasons
It’s not quite right to say that trading is zero sum game in the way that for every profitable trade you made there was a loser on the other side.
The person on the other side could have been dollar cost averaging. If they were a long-term holder who is not planning to cash out until two years after the next halving, they don’t care if they are buying on a 4H-resistance. You perhaps do care, because you are speculating short term.
If we only take into account traders with same goal, such as only people who want to make some lunch money in the next few hours, zero sum game becomes a more accurate description.
In this perspective, your aim is to get your trading psychology slightly ahead of the market psychology. In other words, you do not want to stick with the prevailing opinion just because it exists and is prevailing.
Majority of your peers either don’t know what and why they should do, or they know it and fail to execute it due to their emotions.
Crypto Market Psychology: The Research
There has been quite a good amount of research done on the psychology of the cryptocurrency markets.
People have done sentiment analysis, price bias analysis, the influence of news, correlation with legacy finance and among crypto-assets as well.
A lot has been done in what would have to be called econometrics of cryptocurrencies. This kind of research works with statistics and mathematical modeling to find relationships between the cryptocurrency price and its network activity, Google search volume, trading volume, the number of active addresses in a day and so on.
These papers are not bad, especially you are setting up your own market monitoring or analysis.
The situation with market psychology papers is quite different.
One thing you will notice when you skim through them is that some authors apparently don’t know anything about cryptocurrency markets and probably never lurked in a crypto trading community in their life.
The result are legacy ideas applied on crypto markets, producing bizarre conclusions.
How the Market Psychology Gets Mis-Read
One example to demonstrate why you should not base your decisions on reputable sources of finance news: Nobody in the traditional finance research world seems to be aware of the “alt season”.
Meanwhile, every crypto trader or investors knows that “alt season” is something that exists and influences most of all the day-traders and other short term speculators in crypto.
If there is an expectation that “alt season” is about to start, traders come pour money into the alt innovation hype of the week, which will make all new alts with even remotely related focus correlated.
In the world of traditional finance this does not exist.
There are penny stocks and small cap assets that may be all very much worthless, but each is worthless in its own special way. They do get more volatile than large cap assets but they do not get correlated to one another.
Which is not unreasonable at all once you realize what are the barriers to creating a company and taking it public, versus the barriers to … launching a token.
Nevertheless, researchers will attribute the different behaviour of altcoin markets to cognitive biases of crypto traders.
By now you probably can imagine how the crypto market psychology must look like in the eyes of a legacy market analyst, and what that means to you.
The hive and echo-chamber that is the crypto market psychology is not a bad thing. It shows that innovating and pushing new ideas happens with much lower barriers in crypto - at least for now.
Sure, most of it will come to waste and maybe the only real consequence for the next few years will be the brand new PR industry springing up around DeFi and initial whatever offerings (someone has to consult, promote and sell all that stuff). But there is still the chance something with real impact will come out of this trash. If nothing else, maybe crypto PR folks could start charging their fees in crypto, just like yours truly AltcoinTrading.NET does it.
If this description of current and near-future altcoin markets is accurate, it also means they are quite close to the idea of zero sum game: The altcoin environment is better suited for short term speculation, the big cryptos for the mid to long game.
Your Trading Psychology
Here is where your individual psychology comes into play.
Trading psychology is another word for your mindset, the way you seek out information and how you make decisions when you are trading.
Information Gathering: Use the right sources
We have gone through the reasons why mainstream finance news cannot be a good source when it comes to crypto markets.
Do not think that less mainstream sources will automatically do it though. Just go to TradingView’s market ideas section and look what is top by user votes under Trading Psychology, or anywhere else for that matter.
Your own research, your own insight and your own look into fundamental tech data will top any reputable mainstream resource in the long run.
Your Mindset: Speaking of TradingView…
TradingView is a great charting platform and all that. There used to be a saying that its built-in chat is great too, after you’ve blocked 98% of the people there.
There are popular posts on TradingView that recommend to revenge trade, for instance. Don’t go play there, keep your mind clear.
Working with emotions
As for decisions, trading is pretty much shopping and the catches there are similar.
Trading on emotions is usually making good money for someone who isn’t you, especially when the emotion is fear.
This is far from specific to crypto or even trading. Fear is the chief marketing tool in many industries. Healthy food, fitness services and subscriptions, the vast majority of beauty products - all this gets sold on fear.
Anyone who ever witnessed correction of a cryptocurrency market will know that a lot of coin changes hands during those periods, and that it is quite understandable given how shit the market usually looks then.
You are never going to get rid of your emotions. Good news is that not acting on them is enough. More good news? The only thing it takes is practice.
Be aware of your risks. Calculate them, even if with just ballpark figures. Decide for yourself if the trade has value for you at all.
Don’t want to do that? You can always DCA.
Dollar cost averaging works both ways, into crypto and out of it as well. You’ll get through plenty fear-practice on DCA too if you’re new, but the plan will be easier to stick to because it’s just so damn simple. Over time it might become a good habit.
If you made a mistake, acknowledge it and try to salvage as much as possible. On the market this will translate into cutting your losses short.
Remember the bigger picture
In crypto markets, traders often marry the idea that the chart is all there is to crypto. Trading is the only thing that keeps cryptocurrencies around, day trading is what does the price discovery, blockchain technology is empty buzzword that has no consequence.
This is not true.
It was years after Google became the most used search engine when the search result page first started being used for business. To the OGs, web search was a tool for liberation of knowledge and enhancement of personal freedom.
It sounds almost funny nowadays: We hit Google the minute we are stuck on the simplest problem because that way we don’t have to think.
There was a lot of revolt among the OGs when the “evil” business people started littering the search results with things that make money:
It is obvious to see which party was on the right side of the history, and how quickly that happened. Within only a few years, a whole industry sprung up around search engine marketing, online publishing and advertising.
Online ads remained hugely underpriced compared to traditional street adverts long after it became the norm to get people bumping into each other outdoors, due to them staring exclusively into their phones.
The secondary industry is a part of the crypto market that is not a piece of the zero sum game, and passes mostly disregarded in analyses.
You need to keep your mind clear and your emotions at bay to see these things.
Couple of Book Recommendations
(Also to be found in ATNET Glossary on Trading Psychology)
- Jared Tendler — The Mental Game of Poker
Different industry, but applies very well to crypto trading.
One of the key lessons of Tendler’s book is called unconscious competence: You can learn a new skill well, but until it is settled in your mind so well that you aren’t even aware that you were not born with it, then you will not remember to use it in the critical moment when you are under pressure.
- Daniel Kahneman — Thinking Fast and Slow
This is a famous one.
You will learn an awful lot about cognitive biases, quick judgements and all kind of stuff that you would probably want to avoid knowing about because it will make you feel quite dumb.
- Michael Mauboussin — More Than You Know
This is another one that became a popular read among poker players.
It goes through a lot of interesting ideas on what influences your trading and definitely influences the trading of a substantial portion of the crowd.
Take for instance emotions:
Most people will tell you to disregard your emotions when you trade. Sadly, research shows that it’s impossible.
What you can do instead is to accept that your emotions will trigger during abrupt price action. Then you can try to anticipate how they could influence your trading in different situations.
With this worked out, you can then do your best to not act on the emotion when it triggers and instead capitalize on the rest of the crowd where the majority will be acting on the same emotion.
The wild swings of crypto markets make for huge psychological pressure in professional traders. Among people who are not used to that, the pressure can become over the top and wreck your judgement.
The crypto market is not as crazy and biased as the legacy finance sees that. The crypto market psychology is what it is for a reason. If that triggers your emotions, work on your trading psychology.
 “What can explain the price, volatility and trading volume of Bitcoin?”, Finance Research Letters, ISSN: 1544-6123, Vol: 29, Page: 255-265 (2019)
Abstract: We study which variables can explain and predict the return, volatility and trading volume of Bitcoin. The considered variables are return, volatility, trading volume, transaction volume, change in the number of unique Bitcoin addresses, the VIX index and Google searches for “Bitcoin”. We use realized volatility calculated from high-frequency data and find that the heterogeneous autoregressive model is suitable for Bitcoin volatility. Trading volume further improves this volatility model. The trading volume of Bitcoin can be predicted from Google searches for “Bitcoin”. However, none of the considered variables can predict Bitcoin returns.
 “The psychology of cryptocurrency prices”, Finance Research Letters, ISSN: 1544-6123, Vol: 33, Page: 101192 (2020)
Posted in: Beyond TA
Written by KarlVonBahnhof
KarlVonBahnhof also on Reddit, Chris belongs to the crypto trader class of 2013. Located in the Americas most of the time, you're most likely to meet at r/BitcoinMarkets though.