Crypto Investing and Herd Mentality
In the animal kingdom the prevalence of herding suggests that this behavior may promote survival. Wildebeest on the great plains of Africa form large herds numbering several thousand to one hundred thousand.
This same behavior is seen is fish that school in large numbers and swim in a synchronized matter as one unit which is meant to confuse predators and reduce risk.
Interestingly enough we as crypto investors may not be that far removed from these herding tendencies exhibited in nature and find a false sense of security from being a part of the herd.
Herding is observed when investors imitate other market participants instead of using our own judgement. Many times this logic is irrational with individuals thinking they have less information than the group of investors as a whole.
Many people who know very little about investing rely on the herd to provide them with information about investment opportunities.
One of the first manias where investors piled in by the droves was the Tulip mania in 1634 in the Dutch Netherlands. Using contract margins , buying on credit and leveraging assets investors did whatever they could to get their hands on tulip bulbs. In 1637 the prices began to fall and the market quickly collapsed.
WallStreetBets is an interesting community you can find on Reddit. Most posts will contain emojis and memes along with bits and pieces of information pertaining to a stock or crypto . It’s no secret that many in this community will openly admit that they know very little about what they are investing in and are simply following the herd and throwing money at what is being discussed the most.
How you can avoid the herd mentality.
Do Your Own Research. Take time making decisions , question your assumptions and comprehend the effects of your decision. Stay focused on your long term goals as fear and greed will tempt you to join the herd.
Follow successful investors. Successful investors market views are formed by experiencing market cycles over a long period of time. If they are successful it is because of the lessons that they have learned from their mistakes.
Exercise Patience. Chasing a crypto pump is never a good idea. To be clear I am not referring to a trend but to a meteoric rise like that experienced with SQUID token. A cryptocurrency inspired by the Netflix series Squid Game became the most hyped digital token when it’s valuation shot up to $ 2,861 per coin before plummeting to a fraction of a cent when the creators cashed out draining the liquidity pool.
Diversify your crypto portfolio. Diversification is a way to reduce your risk. You can buy cryptocurrencies with different use cases or in different industries. Spread your risk and buy established coins like Bitcoin or Ethereum before considering mid or low cap coins or tokens.
Make a conscious effort to form your opinion. Forcing yourself to justify your decisions will bring a level of scrutiny that would hopefully avoid the herd mentality.
Be a bull or a bear just don’t be a sheep !