5 Ways to Overcome Loss Aversion When Buying Crypto

July 03, 2024, 9:02 AM | The content is supplied by a Guest author

A lot of people struggle with loss aversion. This is a condition where they fear losing money on trades so much that they refuse ever to make an investment that has even the slightest amount of risk involved. Sure, every trade carries some risk, but in the minds of these people, the prospect of winning is not appealing enough to overcome the effect of a potential loss.

The problem is that this psychological phenomenon may actively affect your decision-making and even cause you to miss out on some of the best potential investments.

To make matters worse, this is not the only psychological phenomenon affecting your decision-making process. If you miss out on a few good trades, your FOMO will be amplified dramatically. This will make your trading mindset even worse.

Still, in order to avoid digressing too much, we have to treat one of these conditions as a time. With that in mind, here are several methods to help you overcome loss aversion when buying crypto.

1. Get credible sources of information

One of the biggest fears is that the information you’re getting is not right. This is completely valid, especially when you take into consideration that any investment advice always comes down to speculation. After all, no one can tell the future, and who knows what direction your investment will take.

The thing is that some estimates are more accurate than others, and some sources are more credible than others.

So, when looking up information on new cryptocurrencies, going for a list by Techopedia’s Technology Expert Michael Graw here is more likely to provide you with credible and verified information than a random list you encounter online. Most importantly, since we are talking about a psychological phenomenon, knowing that the information you’re getting is credible will put your mind at ease. After all, this is what we’re talking about: overcoming your aversion, not about how to choose the fail-proof investment (if such a thing ever existed, in the first place).

Knowing that you did all you can to keep your investments secure is the best you can hope for, and doing your research is the simplest way.

2. Take an intentional risk

Some people try to overcome fear by exposing themselves to small doses of what they fear. For instance, if they had a fear of snakes, they would start by looking at still images of snakes, then move on to videos before finally seeing them in person (in a reptilian zoo).

With investments and loss aversion, you can attempt to do, more or less, the same thing.

You can start by making small investments that likely won’t amount to much. In other words, you can try taking small risks or losing on purpose just so that you can overcome your fear.

Just remember one thing - investment isn’t gambling (or, at least, it shouldn’t be). So, other than coping better with risks, there are not a lot of behaviors that you’ll pick up here that you should implement into your future investment decision-making.

3. Try out copy trading

Some people hate having to make decisions. For them, a loss is fine as long as they’re not the ones responsible for it. This particular source of loss aversion has the simplest solution of them all - you just go with copy trading.

There are platforms/exchanges that allow you to connect your own money to other traders and mimic their trades. You pay a certain fee, but you don’t have to have agency in these trades. It’s your money and someone else’s decisions.

This concept originates from stock trading but has found its place on crypto exchanges, as well.

The downside is that this is not a great learning experience. Originally, copy trading was intended for newer traders. This way, they would choose copy trading and observe how their money is being invested. It’s a way of learning by example. The problem is that a lot of people just set up copy trading and completely ignore all the actions of these traders (everything except profit).

4. Invest only what you can afford to lose

More often than not, what people fear is the actual loss. They believe that their finances are barely keeping together as is and that spending more might be catastrophic for their budget.

The general rule is that you should invest at least 15% of your income. The problem is that some people can’t afford even these 15%. In that case, you should start with less and increase your investments every year until you get there.

No, this is not being a pessimist either; it’s just about damage control. You should never invest your rent money or get money out of your 401k account in order to invest (no matter how promising an investment looks).

This is not what loss aversion is about. Loss aversion and caution are not one and the same. Loss aversion is irrational and disproportionate. Unfortunately, this will be amplified in a field as volatile as crypto. Still, minimizing your investments will take away some of the edge.

5. Accept that crypto will always be volatile

Sure, crypto is volatile, but is this necessarily a bad thing? If it weren’t as volatile you probably wouldn’t even know of its existence. The chance of losing money wouldn’t be as high, but neither would the likelihood of making a profit.

Did you know about cryptocurrencies prior to 2017? Yeah! How much?

The fact that this asset type is volatile is neither a good thing nor a bad thing. It’s just a state of the market. The sooner you accept this the better.

If you’re so uncomfortable with buying a volatile asset, just go ahead and get your hands on some S&P 500 investments or buy some gold.

Every asset has its value and its niche. The niche of cryptocurrency is to be this new and exciting asset that you can use to amass considerable wealth with a relatively small initial investment. It’s for tech-savvy people who can use the fact that those with larger capital are still cautious of this new asset.

Without knowing what crypto is, you’ll always feel like you’ve been cheated out of a better deal.

You see, there’s just one thing that leads to disappointment - high expectations. When you enter a trade knowing you can end up on the receiving end, even a major loss won’t feel as personal.

Understanding your loss aversion is the first step in overcoming it

Different people develop loss aversion for different reasons. For instance, you may hate risk-taking because of your very nature or temperament, so you might want to micro-dose it a bit in order to develop resilience to its financial impacts. You may believe that your finances just can’t take this loss, in which case you should set the investment fund lower than you normally would. On the other hand, you could have a fear of making the wrong decision, in which case copy trading could be the solution.

Either way, you have to understand why you fear loss so much in order to be able to do something about it.

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This author could be anybody, but he/she is not a member of TradingBeasts.com staff and the opinions in the article are solely of the guest writer and do not reflect the views of the TradingBeasts.com operator. Readers should do their own research if they want to take any action based on the information in this article.
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