There is a particular type of investor who confuses me more than any other. Not the beginner who buys a meme coin on a friend’s tip. Not the speculator chasing a 10x with money they can afford to lose. The one who puzzles me is the experienced, educated investor who understands risk, reads balance sheets for fun, and still manages to make decisions in crypto that would horrify them in any other context.
I have been thinking about this for a while. And the more I look at it, the more I think the problem is not intelligence. Smart people make bad crypto decisions not despite their intelligence, but sometimes because of it.
The FOMO trap is more sophisticated than it looks
Most people think of FOMO (fear of missing out) as something that affects beginners. Someone sees Bitcoin on the news, panics that they are late, and buys at the top. That does happen. But experienced investors are not immune. They just experience a more refined version of it.
A seasoned investor watching a new layer-1 protocol run 400% in three months does not feel simple panic. They feel something more dangerous: a constructed narrative. They read the whitepaper. They understand the technology. They find five credible people who believe in the project. And then they convince themselves that their entry, even at elevated prices, is informed rather than reactive.
The intelligence does not prevent the bias. It provides better materials to build the rationalisation.
Anchoring to numbers that no longer mean anything
Anchoring is one of the most documented cognitive biases in behavioural finance. It refers to the human tendency to latch onto a reference number and use it as a baseline for all future judgments, even when that number is no longer relevant.
In crypto, this shows up constantly. An investor buys ETH at $4,800 in late 2021. It drops to $1,200. They hold, waiting for it to return to $4,800 before considering selling. That $4,800 figure has no special meaning now. The market does not know or care what price a particular investor paid. But the number is psychologically sticky, and it distorts every subsequent decision.
The same anchoring applies in reverse. Investors who got into BTC at $3,000 sometimes resist selling at $60,000 because they anchor to even higher historical prices, believing recovery to those levels is inevitable rather than possible.
Confirmation bias and the algorithm problem
If you spend any time in crypto communities, whether on Twitter, Reddit, or Telegram, you will notice something. Each coin has its own ecosystem of content, and that ecosystem is overwhelmingly positive about that coin. Critics are dismissed as FUD. Bearish analysis is rarely shared. Bullish takes get amplified.
Part of this is community dynamics. But part of it is how we consume information. Once someone holds a position, they naturally gravitate toward content that validates it. They follow analysts who are bullish on their holdings. They engage with arguments that reinforce their thesis. And over time, their information diet becomes a mirror rather than a window.
Confirmation bias is not unique to crypto. But the speed and volume of crypto content, combined with financial skin in the game, makes it particularly acute here.
The sunk cost problem
“I can’t sell now. I’ve already lost 60% and selling would make it real.”
This is one of the most common things I hear from investors in extended bear markets. The logic has some emotional appeal. Selling feels like admitting defeat. Holding feels like preserving optionality. But from a financial standpoint, the 60% already lost is gone regardless of what happens next. The only question that matters is whether holding or selling gives the better expected outcome from this point forward.
The sunk cost fallacy convinces us that past losses are an argument for future commitment. They are not. Each investment decision should be evaluated on its current merits, not on the history of how you got there. That is easy to understand and genuinely difficult to practise.
Overconfidence after early wins
The bull market of 2020 to 2021 created an enormous number of people who believed they had figured something out. Returns of 300%, 500%, even 1000% in 12 months will do that to a person. The problem is that in a rising market, almost every strategy works. Buying and holding works. Rotating works. Leverage works (until it doesn’t). Trading momentum works. And when every approach produces gains, it is nearly impossible to distinguish genuine skill from the tailwind of a bull cycle.
The investors who struggled most in the 2022 bear market were often those with the most dramatic 2021 gains. The overconfidence built in the good years led to larger positions, more leverage, and less willingness to consider downside scenarios. By the time the market made the downside clear, the damage was already done.
Narrative seduction
Crypto is a storytelling industry in a way that most asset classes are not. The price of a stock is linked, however imperfectly, to earnings, revenue, cash flow. The price of most crypto assets is linked almost entirely to belief. Belief about what the technology will one day do. Belief about adoption curves. Belief about network effects.
This means that narrative quality matters enormously. A compelling story, told by credible people, with just enough technical detail to feel grounded, can move prices substantially. The issue is that a good story is not the same as a good investment. Some of the most beautifully constructed narratives in crypto history have ended at zero.
Smart investors, particularly those who enjoy ideas, are often more susceptible to narrative seduction than others. They can follow the logic. They appreciate the elegance of the argument. They engage with the thesis at a high level. And all of that engagement can feel, from the inside, like rigorous due diligence. Sometimes it is. Sometimes it is just an intellectually stimulating story that has not been tested by reality.
What to do with all of this
Knowing about cognitive biases does not make you immune to them. That is one of the more frustrating findings in behavioural economics: awareness helps, but only somewhat.
What does help is process. Writing down your investment thesis before buying, and the conditions under which you would sell, removes some of the post-purchase rationalisation. Having a position limit policy that you set when you are calm, not when you are excited, limits overexposure. Actively seeking out the best bearish arguments against your holdings, rather than dismissing them, is uncomfortable but genuinely useful.
The goal is not to become a perfectly rational actor, which is not possible. The goal is to create enough friction between the bias and the action that you occasionally catch yourself before the decision becomes a regret.