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Rachel Welch

11 November 2022 142 Read Crypto

Avoid Falling Victim to the Disposition Effect of Crypto

Cryptocurrency investors need to be aware of the Disposition effect when they are considering their investment decisions. It is a result of human behavior that makes investors sell winners too soon and ride losers too long. The best way to avoid falling victim to the Disposition effect is to automate your crypto investment decisions.

Disposition effect

The Disposition effect of crypto is a phenomenon that occurs during bearish and bullish periods. During times of high volatility, investors exhibit a herding behavior and trade in large volumes. This phenomenon can be traced back to the underlying behavioral bias of prospect theory. According to Kahneman and Tversky, humans are more likely to make decisions based on perceived gains and losses rather than on the current situation.

This phenomenon can negatively impact the performance of an investor's portfolio. It occurs when an investor is tempted to sell a winning asset too early and hold on to a losing one. Individual investors are willing to recognize gains, but less likely to acknowledge losses.

Herding behavior

Herding behavior is a phenomenon wherein investors imitate each other's investment decisions, increasing volatility and causing crushes and bubbles. In the cryptocurrency market, this phenomenon becomes even more important. The nature of this market is characterized by extreme volatility, extraordinary returns, and a weak legal framework. This combination suggests co-explosivity and explains the rise in cryptocurrency prices in recent years.

There are several different factors that can explain the herding effect. In fact, the herding effect can vary in different markets, boards, and times.

Price volatility

Price volatility in cryptocurrency markets is a well-known phenomenon. In fact, this volatility can affect the earnings of investors adversely. As the cryptocurrency industry continues to grow, there is an increased likelihood of volatility. Although the cryptocurrency market is not considered a traditional financial instrument, it has become a popular investment option among consumers.

Volatility in the price of cryptocurrencies is driven by several factors. First, demand is growing and new buyers are entering the market. Second, there is limited supply of crypto. This creates a high price for the coins.