Psychology of Investing in Cryptocurrency and Stocks

Psychology of Investing in Cryptocurrency and Stocks

Do you know that psychology plays a major role when it comes to investing?

Even though we humans are rational beings, when it comes to investing, psychology, emotions, and irrationality all play an important role. Despite the vast amount of information, people remain fearful. They’re concerned about their financial investments. According to market psychology, it is best to purchase when people are terrified.

What is the psychology underlying this, though? How can you be certain of your investment choices?

Well, in this video-article, we will look at the art and science behind the idea of market psychology.

Summary

1. Psychology of Investing in Crypto
2. Fundamental Analysis
3. Technical Analysis
4. Bull Market
5. Bear Market
6. Economic cycles and their role
7. When and how to invest
8. Conclusion + Warren Buffet pearls of wisdom

Psychology of Investing in Crypto

Market psychology refers to the general behavior of a market based on emotional and cognitive variables on the internet, as opposed to trader psychology, which refers to the same characteristics but only affects a single person. In short, it refers to the prevalent behavior and aggregate attitude of market participants at any given time.

Greed, anxiety, anticipation, and euphoria are among the characteristics that play a role in market psychology. The potential of these states of mind triggers periodic risk-on and risk-off cycles in financial markets, which have been widely established.

One such example is the outbreak of the Covid-19 pandemic. After WHO’s declaration of Covid-19 as a public health emergency, the market demonstrated a negative trend which was a result of investors’ psychological pressure and response. Shanghai (1.6%), Dow and Jones (9.5%), and Nikkei (10.6%) all experienced a sharp drop.
In general, professional stock pickers adopt one of two strategies, and only one of them pays to heed to market psychology. One is the fundamental analysis, and the other is the technical analysis.

Fundamental Analysis

Fundamental analysis (FA) is a way of determining the fundamental value of a security by looking at linked economic and financial elements.

The major work of fundamental analysts is to investigate anything that might impact the security’s value, from macroeconomic issues such as the state of the economy and industry circumstances to microeconomic elements like the efficacy of the company’s management. The ultimate aim is to arrive at a figure that can be compared to the present price of an asset to determine whether it is undervalued or overpriced.

Technical Analysis

In contrast to fundamental analysis, technical analysis focuses more on the analysis of price and volume. It is more of a trading discipline that analyses statistical trends acquired from trading activity, such as price movement and volume, to evaluate investments and uncover trading opportunities.

Fundamental analysis aims to estimate a security’s worth based on business performance such as sales and earnings, but technical analysis methods are used to examine how variations in price, volume, and implied volatility are affected by supply and demand for securities.

When it comes to stocks and investments, there are two types of markets. One is the bull market, and the other is the bear market. The bear market got its name from the way a bear attacks its prey by swiping its paws downward. For this reason, markets with declining stock prices are referred to as bear markets. The bull market, like the bear market, maybe called from the bull’s assault style of throwing its horns into the air.

Now, let’s get into the details of what is a bull market and a bear market?

Bull Market

A bull market is a market situation in which prices are increasing or are projected to rise in a financial market. The word “bull market” is most commonly associated with the stock market, although it may also refer to any tradable asset, including real estate, currencies, and commodities.

During a bull run, there is a sense of optimism, confidence, and greed. These are the basic emotions that motivate people to buy things. As prices climb, so does the mood of the buyers, which has a knock-on effect, propelling the market further higher. Investors may become irrational as a result of their high feelings of greed, buying more assets because they believe the market will continue to climb. They are enthralled by the prospect of making a profit, but the market grows overheated and the price becomes overextended, putting them in danger.

This is what happened in 2017 when the Bitcoin bull market was in full swing as the price of Bitcoin surged from $900 to an all-time high of $20,000 between January and December. During this period, sentiment grew and millions of investors jumped on board, swept up in the euphoria, and late joiners struggled to find success.
Because security prices increase and fall almost continually throughout trading, the phrase “bull market” is usually reserved for lengthy periods during which a significant share of security prices is rising. Even though bull markets are difficult to foresee, experts usually only notice them after they have occurred.

The period from 2003 and 2007 was a major bull market which resulted in substantial growth of the S&P 500 after a preceding dip. However, as the 2008 financial crisis developed, major falls returned after the bull market run.

Bear Market

A bear market is the polar opposite of a bull market, marked by declining prices and generally clouded with pessimism. In general, stock prices represent future expectations of cash flows and earnings from businesses. Stock prices might fall if growth prospects diminish and hopes are shattered.

When the market enters a bear market, the mood of traders can quickly shift to complacency as they refuse to realize the bull market is finished. Prices and market sentiment both begin to drop, resulting in anxiety, denial, and panic among traders.
As prices fall, the selling frenzy intensifies, perhaps leading to market surrender when the holders give up and sell their assets close to the bottom as a way to avoid loss. This slump will eventually come to an end, and the market will settle.
In the aftermath of the worldwide coronavirus pandemic, global markets entered a dramatic bear market in February 2020, driving the DJIA down 38 percent in a little over a month, from an all-time high on February 12 (29,568.77) to a low on March 23 (18,213.65). This is a perfect example of a bear market.

Economic cycles and their role

Generally, the economic cycle includes four phases, which include growth, peak, contraction, and trough, typically overlapping with bull and bear markets.

The start of a bull market is frequently a precursor to economic expansion. Because stock values are driven by public perceptions of future economic circumstances, the market typically increases before broader economic indicators, such as GDP growth, begin to climb. Similarly, bear markets frequently emerge before economic declines.

When and how to invest

Well, in order to find success in investing, you should recognize the market psychology emotions like fear or greed, which lead to oversold or overbought positions. Then you may execute contrary trades, buying when others are selling and selling when others are buying. Research may also help you catch trends early on, rather than chasing them after they’ve gone beyond their basics. It’s always difficult to predict the market and to find out what will happen in the future.

To predict where the market will go, we can only rely on facts and information from past records in order to draw a conclusion. The best way is to look for patterns and investigate the possibilities by looking into past information.

If you want to invest and have healthy gains, knowledge about market psychology plays a crucial role. It offers investors a leg up on the competition by allowing them to predict when it is the best moment to buy and sell. Investors should benefit from the data and be able to purchase when there is panic, i.e., a fall in price, and sell when there is greed, resulting in higher prices. When most people are pessimistic and the market is low, a buyer has the best financial opportunity.

We will conclude the video with the pearls of wisdom from the legendary investor, Warren Buffet who once said:

“Buy when others are fearful, and sell when others are greedy.”

Recommended Books

Psychology of Investing in Cryptocurrency
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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