Article contributed by Tin Money. Follow them on Medium here.
If you want to really increase your odds of success in crypto, start with a million dollars and buy presale tokens. It almost doesn’t matter what they are.
As long as there is a decent narrative and a legitimate team of developers you’ll probably do really well. You buy tokens for pennies and then dump on retail investors. Rinse and repeat.
It’s literally the easiest money on Earth.
Making money as a retail investor or trader in crypto takes work. A tiny handful of people get lucky early on. They’re the ones that get all the attention though. And they get that attention because it’s rare.
If you think it’s going to be you that gets lucky, you’re gambling, pure and simple. Even if you do get lucky, you’ll probably end up suffering from something called survivorship bias.
The psychology of being a winning loser
When it comes to crypto investing, survivorship bias is a tendency to focus on investors who made lots of money while ignoring all the people who lost money.
It’s not interesting to hear about thousands (or millions) of people piling into a crypto project and then slowly losing money until they sold for a loss. But that’s the reality for most investors.
The biggest trouble with early success as a crypto investor is not just survivorship bias. The other big problem is false attribution or correspondence bias.
What happens is those investors tend to relate their success to some innate skill or ability, when in reality they just got lucky. The thing is, in a bull market, some of those people get lucky quite often.
But once things turn around and a bear market shows up, all of a sudden they start bleeding money like everyone else. This leads to the “expert problem” that Nassim Nicolas Taleb talks about.
The expert problem for crypto investors is they can’t accept they were wrong about an investment. So instead they blame some unpredictable event, or some unforeseeable circumstance for their loss.
This allows them to “save face” and continue believing they have some special ability. They are basically telling themselves, “I was right to invest, but something unusual happened.”
Terra Luna is a great example. To this day people that lost money during the Luna collapse will say it was some sort of coordinated attack, or they blame the founders for committing fraud, or any number of things.
The truth is there were people all along that knew Terra Luna couldn’t work. By the time Terra collapsed, other protocols that worked on the exact same model had already collapsed.
And Terra Luna is a perfect example of how to get rekt in crypto through survivorship bias, correspondence bias, and the expert problem. I would guess most investors that got hurt by Luna were experiencing all three at the time of collapse.
Please don’t feel bad if that’s you. We’ve all fallen victim to those cognitive biases and distortions. It’s normal. I realise knowing that doesn’t make losing money easier. And I know if you can overcome those biases, that loss will probably be one of your greatest teachers ever.
How to avoid getting rekt in crypto
As I mentioned at the top of the article, the real way to make money in crypto is to invest in projects long before retail gets to the party. That’s how the venture capitalists do it and it’s an amazing (if not predatory) business model.
If you’re reading this, chances are good you are a retail investor. Meaning, the venture capital business model won’t work for you. That doesn’t mean you can’t make money in crypto though.
But it does mean you might need to adjust a couple things if you want to survive, or even thrive in the crypto markets. And there’s a high likelihood the biggest thing you need to adjust is looking at you in the mirror.
As Benjamin Graham said:
“The investor’s chief problem — and even his worst enemy — is likely to be himself.”
There are a few questions you should probably have a good answer for before you start (or keep) investing in crypto. They are:
What is your personality type?
What are your goals?
What is your plan?
The idea being, if you don’t know who you are, what you want, or how to get there, it will be hard to achieve anything. Thus, having that information squared away is an important first step.
Of all the psychology research and literature, one of the most well-validated concepts are the “Big 5” personality types. They are: openness, conscientiousness, extroversion, agreeableness, and neuroticism.
In terms of crypto investing, the three most important traits are: openness, conscientiousness, and neuroticism. Each touches on the cognitive biases above.
We all have different levels of each. And when it comes to investing, there are advantages and disadvantages to all of them. The trick is to tailor your crypto investing to your personality strengths and weaknesses.
One major theory on openness says the trait may be related to how the brain “networks” information. People high in openness are better able to “connect the dots” between disparate concepts.
Chances are if you are high in openness, you will tend to be more creative, and appreciate things like art and music. What’s that got to do with crypto?
Depending on some of your other traits, you may be more attuned to investing in things like gaming and NFTs (non-fungible tokens). This may give you an edge, where someone with low openness may just see a waste of time, or a bunch of pixelated noise.
Contrast with someone low in openness. Those people tend to be more “single-track” in their thinking. For those investors, if they start chasing gaming tokens or NFTs, they’ll be shooting blind.
But they might also excel at finding high yield opportunities in DeFi, or be better at identifying arbitrage opportunities. This doesn’t mean someone high in openness can’t do arbitrage. Likewise, it doesn’t mean someone low in openness can’t invest in gaming or NFTs.
It just means there may be competitive advantages based on your relative openness that might be worth exploring.
Conscientiousness deals with how well someone can delay gratification. People high in conscientiousness are generally good at making plans and sticking to them.
They tend to be highly organised and methodical in everything from their morning routine, to their work habits, to their leisure time. In fact, there is research that shows people high in conscientiousness actually have higher levels of brain activity in the parts of the brain that control impulsive behaviour.
People low in conscientiousness tend to be more easy-going. They are often more fun-loving than hard-working. They tend get distracted easily and will often bounce from one shiny thing to the next.
They also seem to get addicted to things more often, not least of which is gambling. If you are low in conscientiousness, you need to be really careful when it comes to crypto investing.
With crypto, there is always a shiny new thing. And with massive swings in prices, it can be very easy to make impulsive decisions in the spur of the moment.
On the flip-side, if you are high in conscientiousness and investing in crypto, you may play it too safe. Crypto projects move fast and break things.
The opportunity for exponential growth is based on everything being disruptive, explosive, and high-risk. As the saying goes, “scared money don’t make money.”
That said, both high and low conscientiousness crypto investors would probably do best with the kind of investing they least want to do. Things like leveraged futures for the high conscientiousness folks, and long hodling for the low conscientiousness types.
But the opposite tends to happen. Which means the LCs get rekt chasing and the HCs underperform while sitting on their hands. The idea here is to understand where you are and create a plan that ensures you do neither.
Neuroticism is about how you handle stress. People that are high in neuroticism tend to be more susceptible to anger, fear, anxiety and sadness.
On the flip side, people that are low in neuroticism tend to be more resilient and don’t dwell on negative things as much. They tend to bounce back quicker and are more stable.
Depending on what your other personality traits are, both high and low neuroticism can be very beneficial to a crypto investor. People with high neuroticism tend to be more vigilant, which means they are less likely to fall for scam projects, like the Squid Game Token.
They’ll be more careful when selecting investments, they’ll look past all the shiny hype, and they’ll be more careful when it comes to investing in general.
The low neuroticism people might be more inclined to fall for the latest trend, or just assume that things will work out fine, even if their crypto investment is tanking.
But, when the low neuroticism investor loses, they’ll be far less likely to begin second guessing themselves, they’ll be less likely to get depressed after a bad loss, and they’ll probably stick around if they’ve done their homework.
Whereas the high neuroticism investor might get really down on themselves after a loss, or become angry or depressed. These are not helpful emotional states when investing, and can lead to things like revenge trading, or going all-in on something out of sadness or spite.
Putting your personality traits to work
Fortunately, there is a convenient website to get an idea of where you land on the Big 5 trait spectrum. It’s called Truity and they have a bunch of personality tests you can take, including the Big 5.
Just FYI, I’ll receive a small commission if you use the links above to buy a test from Truity. I’m also linking it because I think it’s a great resource that I actually use, as you’ll see in a second.
You can take a free version that won’t give you a personality break down. But I found it really helpful to see what my overall personality profile looked like.
Probably the most important is your “core” personality type. This is what mine looks like:
What’s interesting about it is, if you read my work, you’ll see how the projects I like and the way I approach investing is almost perfectly predicted by my two biggest core roles of empathetic idealist and analytical thinker.
But as you can see from my emotional pattern, there are some areas I really need to be careful with when it comes to investing:
As you can see, I’m an emotional person! Even keel is probably the best trait you can have as an investor. But in my case, it’s only my third highest emotional pattern.
So I have to set some pretty strong rules around how I invest, when I take trades, when I take profit, etc. I have to be aware of my emotions while I’m investing, because if I don’t, I know those emotions can lead to bad decisions.
And I have made bad decisions from emotional states. I’ve taken bad trades because I was afraid of missing something, I’ve chased pumps, I’ve held on to tokens too long, you name it.
That’s why I journal my trades. I also take an emotional inventory of what I’m feeling and why before I push the “buy” or “sell” button. And I build in delays to keep from acting rashly.
Those are some of the things I’m doing for myself as an investor. What or how you might do will be different. It’s important to consider this stuff, because your personality traits can easily make the difference between winning and losing in crypto.
In other words, knowing where you score higher than average, or below average can help you to set up processes to protect your investment plans. It can be something as simple as not making any more trades for a set period of time after a big win or loss, or waiting a full day before opening a position on a new token.
The process you come up with to deal with your particular issues can be almost anything really. The point is to actually have a process, so you don’t get derailed by your personality traits, especially ones that are misaligned with your goals and your plan.
Setting realistic goals
Trying to get rich quick using crypto is not a realistic goal. Yes, it does happen to a handful of people. But remember that old bugaboo survivorship bias.
Meaning, it probably won’t happen to you. Does that mean you can’t make a lot of money with crypto? Of course not. But chances are good if you want to make money, it’s going to take some time.
And right now, your time should be spent learning everything you can about the crypto industry. Reading this column is a good start 😉
Time = money
Learning the ins and outs of this industry is key for a couple of reasons. First, we are still super early in the game. Think of this time like 1996 was for the internet.
Most people don’t know how to buy, sell, trade, or use crypto for anything. Never mind how these projects work, what sort of coding they’re doing, what problems they’re trying to solve, or what hurdles they’re facing.
Figuring that stuff out now is going to give you a huge advantage in the coming years when the masses are piling in. They’ll be trying to figure this stuff out when things are going gangbusters and it’s a huge learning curve.
You’ll already know.
Second, the more you understand now, the easier it will be to see where the industry might land in the future. Doesn’t mean you’ll get everything right, but it will be way easier to see trends developing if you understand why the trend might be developing based on the technical challenges you learn about today.
Thinking you can just jump in and succeed in this highly technical industry full of programmers, economists, quantitative traders, old school investors, enthusiasts, influencers and deep, deep pockets of venture capital money without doing a lot of homework is not realistic.
Part of setting realistic goals is setting realistic timelines. And if you want a hope of survival, the time to start learning is now. That way, a year or two from now, you’ll actually know what the hell you’re doing.
Money = money
If you’re starting with $100, the likelihood of you stumbling onto the next 10,000x project is close to zero. Mostly because there are very few projects out there that will 10,000x after retail sales begin.
But a 10,000x is what it would take for you to hit $1 million from $100, and that’s before taxes take $300,000 back. But if you’re starting with $100,000 dollars, then getting to a million isn’t as hard.
Like anything, whether stocks, real estate, money markets or any other speculative arena, the more money you start with, the easier it is to multiply. The less you start with, the harder the climb.
But that doesn’t mean having more money will guarantee you make money. Rich people take stupid bets all the time. They have the same cognitive biases and personality issues everyone else does.
And sometimes their biases are even worse than the average Joe.
Part of setting realistic goals is setting realistic expectations. If you’re starting with $100 and you turn that into $150 that is a HUGE win. I know it’s not the “get rich quick” dream so many have.
But if you find a way to make gains in this industry reliably, you’ll be ahead of 90% of the “investors” out there, including all the trust fund babies. A big part of that is being happy with smaller gains and having a plan in place to preserve and multiply those gains further.
This circles back to both knowing your personality traits and the need to learn as much as possible about the industry. That doesn’t mean you have to sit on the sidelines while you do all this homework.
It does mean you have to prioritise which learning is most important. And in the crypto game, the first, most important thing to learn is risk management.
One of the best teachers of risk management is losing money. So if, for example, you have $1000 to invest, maybe take $100 and only use that to start investing with.
Treat the $100 as if it were $100,000. If you place a $2 order, imagine you’re placing an order for $2000. If you place an order for $50, imagine it’s a $50,000 order.
Try to multiply that $100 into $1000. See if the information you’re gathering and the things you’re learning line up with the reality of the markets. Chances are good in the beginning they won’t, and you’ll probably lose most of that $100 in the process.
Point being, if you can’t turn $100 into $1000, then the amount of money you have to start with probably isn’t the problem. When you’re first starting out, you’re probably going to make a lot of mistakes. The trick is to keep the losses from those mistakes small.
This is like learning poker and then playing at the penny table, instead of trying to jump into the World Series of Poker. You’ll learn faster if you’re actually playing, but you don’t want real money on the line while you’re learning.
If you’re building your skillset and your knowledge right, the money is more likely to be building right behind it. And right now is the best possible time to be learning.
Why? Because we’re in an extremely volatile, and very weak-macro environment. If you get your ducks in a row in this bear market, it will make the next bull market seem like a cakewalk for making money.
Making a plan
Hopefully you’re starting to see what a plan might look like for you as a crypto investor. Everyone’s plan is going to be different.
A plan should be detailed enough to be credible, but flexible enough to adapt to the things you are learning. As you learn new things, don’t be afraid to alter your plan.
It could be something as simple as: Map out your personality traits. Learn how to buy and sell crypto. Then learn some technical analysis and start spot trading.
Use that time to both hone your trading skills and learn more about projects you are trading. Understand what problems they’re trying to solve. Understand what projects interest you and why.
At the same time, you’ll want to see how you’re reacting to buying, selling, and trading. Journal your investments and your emotional states. See what’s causing you to make bad decisions and start creating ways to avoid that in the future.
This will take time no doubt, but you have time. The markets aren’t going anywhere. You will miss out on some things, but you’ll also avoid huge losses on others.
It’s just like figuring out going to university. What classes do you like, what times are best for you to be in class, or to study. Which subjects do you struggle with, or what type of professor do you prefer. The first year will probably be a little wonky. But by the time you reach year four it’ll all be easy.
Same thing with crypto investing.
Crypto markets are evolving. More and more people, institutions, and big players are entering the market every day.
The further the markets evolve, the more important it will be to have an edge as a retail investor. There are going to be huge opportunities to make life changing wealth in the coming years.
How you invest your time and energy today may determine if you become successful or not in the next bull market. And understanding who you are as an investor might just give you the edge over the person that does not.
All the alpha in the world won’t overcome unchecked emotions and cognitive biases.
But knowing yourself just might.
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.