Market Psychology: The Problem with Crypto Hype Beasts — The Rewired Soul
As you can see, there’s a common thread amongst crypto hype beasts. The majority of the time, any crypto project they’re talking about has the possibility of making you rich. Fortunately, I’ve spent years studying psychology before I started my investment journey, but that’s not the case for everyone. Making decisions based on emotion can get you into a lot of trouble. My primary concern is that many people are losing a lot of money because of the emotional hype these influencers can induce. If you’re not careful, your biases will take control, and you’re going to make a lot of terrible decisions based on hype.
The Motivated Reasoning of Influencers
In the fall of 2020, during election season, aka the peak time for QAnon conspiracies, I made a video essay explaining the motivational reasoning behind QAnon influencers while debunking COVID conspiracy theories. Motivational reasoning is a type of bias when we have some sort of skin in the game. For example, at some point, these QAnon influencers may realize that the conspiracies they endorse are completely ridiculous, but fueling these conspiracies is how they make their money.
The reality is that all of us can fall victim to motivated reasoning. You may defend your terrible job because it’s paying your bills. Your may defend why you’re staying in a toxic relationship because your partner is supporting you. Our brains are extremely good at deceiving us, so when we have some sort of skin in the game, it’s very difficult to think objectively and form rational opinions on subjects.
Now that you know about motivated reasoning, it’s important to remember it while reading crypto articles, watching crypto YouTubers, and scrolling through Twitter. How many crypto YouTubers have built a massive following by hyping up coins like ETH, or ADA, or even the infamous meme coin DOGE? I’m not saying any or all of these coins are bad, but we must realize some of the motivated reasoning behind the content.
I’ve been a content creator for years, and I can tell you first-hand that people are prone to make the content that gets the most traffic. Whether it’s website content, YouTube videos, or Tweets, people are working for the engagement. The easiest way to do this is to play into peoples’ confirmation bias, which we’ll cover more in-depth pretty soon.
At the height of my YouTube career, I was making more from YouTube videos than any full-time job I ever had. Surprisingly, I was making that much money while only getting a fraction of the views as some of the crypto hype beasts out there. With that being said, how much money do you think they’re making from their content? It’s important to consider this when you stumble across the titles and thumbnails telling you that your favorite coin could possibly 25x.
After a ton of research, it doesn’t look like anyone is keeping track of the accuracy of crypto hype beast predictions, so keep in mind some potentially motivated reasoning.
Optimism Bias Can Get You Hurt
I’ve had a General Anxiety Disorder since I was a teenager, and after getting sober in 2012, I started working at a dual diagnosis treatment center and have been a mental health advocate. While in this bubble, I’ve written mental health books, created YouTube content, and have been a featured speaker at various mental health events. According to the statistics, more people today struggle with anxiety and other forms of mental illness than ever before. But as someone always analyzing human behavior, it seems like way more people struggle with optimism bias.
When you have an anxiety disorder, your mind immediately goes to worst-case scenarios. From an evolutionary psychology standpoint, it’s actually a great feature to have because it keeps us safe. Our ancestors with anxiety were the ones who lived long enough to pass along their genes. Those who were too optimistic thought they could pet a sabertooth tiger and became lunch.
Professor of cognitive neuroscience at the University College London, Tali Sharot, has an amazing book The Optimism Bias: A Tour of the Irrationally Positive Brain. In the book, Sharot explains how optimism can get us in trouble and put us in danger while backing it up with the latest psychological research. People always say to keep optimists and positive thinkers around you, but if you don’t have anyone curbing your optimism, bad things can happen.
I’ve come to realize that there’s a ton of optimism bias from crypto hype beasts. I’m not 100% sure if it’s a result of motivated reasoning or if they are really that optimistic. If you pay attention, the optimism is kind of scary.
When the crypto market or their hype coin is up, it’s nothing but, “I told you this was going to the moon!” or “Now that we hit $X, we’re going to hit $X”. When the market or their hype coin is down, it’s always, “Buy the dip!” or silence. This happens in the traditional stock investment world as well, but not to the same extent. If you’re a crypto hype beast, the perception is that there is never a bad time to buy.
Self-deception is something that we all need, and if we didn’t have it, we’d never take risks. You’d never ask that guy or girl out due to your lack of confidence. Inventors wouldn’t try to experiment if they didn’t think they could make it work. Hell, I wouldn’t be writing this blog post if something in my psyche didn’t tell me that it was a good piece to write. But there comes a point where self-deception can have you making terrible investment decisions.
So ask yourself some questions when you see yourself being influenced by crypto hype beasts such as:
- Why is this person so hyped about this coin?
- What evidence do they have that backs this up?
- Have any similar crypto projects failed? If so, why?
- What’s the “moat” for this crypto project that gives it a margin of safety?
- Does the person who is sharing this information have any motivated reasoning?
- Have I properly done my own research into this project and looked for the best arguments against it?
Another great trick is to do a pre-mortem, which I learned from Annie Duke in her book Thinking in Bets. Typically, sports teams and companies do a post-mortem where they look back at a loss or failure and try to analyze what happens. An excellent tool for your decision-making tool kit is the pre-mortem. This is when you imagine that your decision went terribly wrong and try to think of all of the reasons it could have happened. When you do this, you’re fighting the force of your optimism bias and hopefully seeing some things that you didn’t see before, which helps you make a better risk analysis.
The Ever-Present Confirmation Bias
Yes, I know. You’re probably already aware of the confirmation bias, so I’ll keep this short and sweet. Never forget that the confirmation bias is always lurking and trying to find information that confirms your beliefs. If you think a crypto investment is a great idea, without even trying, you can find a crypto hype beast to take advantage of your confirmation bias.
Recently, I had a friend come into a large inheritance and dumped about 80–90% of their money into a single stock. Now, all they do is watch YouTubers who hype this particular stock just to play into their confirmation bias.
As I mentioned in my recent blog about Dogecoin, Daniel Kahneman is one of the fathers of behavioral economics and won a Nobel Prize. When asked how he navigates his own biases, he always laughs because you’d think that if anyone could do it, it’d be him. The reality is that no matter how aware you are about your decision-making biases and other cognitive errors, you’re still going to make mistakes. So, not only do we have to become educated about the tricks our brain plays on us, but we also need to slow down, be skeptical, and ask the right questions. If we don’t, we may make awful investment decisions based on the views of a crypto hype beast with motivated reasoning.
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