We've all seen it: the dizzying climb, the overnight millionaires, the feeling that you're finally going to make it. The crypto bull market. But what’s behind the crazed hysteria in this episode of financial lunacy? Is it groundbreaking technology? Institutional adoption? Or something far more… primal?

I’m Ava, and I’ve spent my career studying the psychology of the market. Well, I’m here to burst that bubble and tell you the magic ingredient isn’t hiding inside a whitepaper. It's buried deep within our own minds.

Are We Truly Rational Investors?

Let's be honest: the narrative of rational, data-driven crypto investors is a myth. People like to believe that they’re taking all these things into account and making rational, calculated, objective decisions—the truth is a lot more complex. How else do you explain Dogecoin’s meteoric, absurd rise? Or the NFT craze? These weren't fueled by sophisticated financial models. They were fueled in part by rizz, memes, and the extremely sexy fear of missing out (FOMO).

I’ve seen experienced investors shoot their own due diligence advice on themselves. Or worse yet, they dive into the projects they don’t know anything about, simply because “everyone else is doing it.” Consider it a high tech stampede, perpetuated more by feelings than facts.

Just think about it – consider the last time you went to a sold out arena concert. The energy is palpable. The collective excitement is contagious. Crypto bull markets are the same. This is the new power of the crowd, turbocharged by social media and the new 24/7 news cycle.

Confirmation Bias and Echo Chambers

Social media is the flashpoint for the kindling of any bull market. Confirmation bias We’re all guilty of looking for content that reinforces our pre-conceived notions. In a bull market, that translates to immersing ourselves with news, influencers, and communities that reinforce our bullish outlook. This confirmation bias leads to echo chambers where the few remaining dissenting voices are drowned out and their hype grows unabated.

Consider this: how many times have you seen someone post "This is going to the moon!" versus someone saying, "Maybe we should be careful?" Supporting the entrenched status quo is the path of least resistance to score social media likes and retweets. Sadly, that story sometimes goes very far afield.

And it's not just social media. Even reputable news organizations can never seem to resist going along for the ride. They issue press releases that exaggerate the progress and understate the dangers. It’s a dangerous self-perpetuating echo chamber that serves to compound the bubble. This is how Availability heuristic works. Commonly known as the recency effect, humans tend to think previous price drops or increases will skew future events.

Loss Aversion and the Sunk Cost Fallacy

Loss aversion is the second powerful psychological force at play. Their research shows that the pain of losing money is generally experienced more acutely than the pleasure of gaining it.

This can cause investors to stay in an unprofitable position longer than they should, waiting in vain for it to bounce back. It’s the sunk cost fallacy in action – “I’ve already put so much into it, I can’t divest now! This can be financially ruinous, particularly in a high-risk, high-return market such as crypto.

We see this playing out every day.…people bagholding coins that were obviously doomed and hoping against hope that they’ll ever “make it back.” It’s a kind of denial, a denial not of climate change but of the market itself.

Learn From History, Adapt To The Future

We need to learn from the past. History is full of asset bubbles driven by speculative zeal. The tulip mania of the 17th century, South Sea Bubble in the 18th century, and dot-com bubble of the late 90s all have one thing in common. Yet they were all driven by the same psychological forces that undergird the crypto boom today.

I have a strong outlook that investor education is key to learning and breeding a more sustainable crypto market. We need to continue to equip Americans with the information and resources necessary to make smart decisions. That way when the hype hits, they don’t get washed out with the wave.

As a general rule, I’m skeptical of heavy-handed regulation. I’d argue that the opposite approach, using a light touch, is what’s really needed to protect vulnerable investors from scams and fraud. Even basic things such as requiring simple and clear disclosures warning about the risks of crypto investing would go a long way.

  • Develop a plan: Before investing, define your goals, risk tolerance, and exit strategy.
  • Do your own research: Don't rely solely on social media or the opinions of others.
  • Manage your emotions: Be aware of your biases and avoid making impulsive decisions.
  • Diversify your portfolio: Don't put all your eggs in one basket.
  • Take profits: Don't get greedy. It's okay to sell some of your holdings and lock in gains.

A Call For Investor Education

The good news is, the knowledge to safely and intelligently navigate this new crypto market is within our grasp. By appreciating the psychological juggernaut that is a bull market, we can think more clearly and act more logically and help ourselves from getting scalded. This isn't about killing the excitement. It's about channeling it wisely.

And while I'm generally skeptical of heavy-handed regulation, I do think that a light regulatory touch could help protect vulnerable investors from scams and fraud. Simple things like requiring clear and transparent disclosures about the risks of crypto investing could make a big difference.

Ultimately, the power to navigate the crypto market lies within each of us. By understanding the psychological forces that drive bull markets, we can make more rational decisions and avoid getting burned. This isn't about killing the excitement. It's about channeling it wisely.