The Psychology of Cryptocurrency Investing: Why Do People Buy Crypto?

In recent years, the dramatic rise of cryptocurrencies has surprised everyone. Some investors are confused about why people buy crypto while it can’t be used physically. But they don’t understand that the crypto industry has become quite popular over the years. Even bigger institutes are now planning to use cryptocurrencies for certain purposes.

Spot Bitcoin ETF applications are proof that institutions are eagerly willing to take advantage of cryptocurrencies. There are a number of reasons why retail investors and large-scale institutions are investing in cryptocurrencies.

The Fear of Missing Out (FOMO)

FOMO is the most common reason why retail investors buy crypto. Over the years, investors have observed that Bitcoin offers massive returns when its price starts moving upward. So, the retail investors are always in a race to catching similar moves. Some investors are bold enough that they risk their life savings while jumping on the crypto bandwagon.

FOMO is a major factor that contributes to the breathtaking volatility of the crypto market. The rise of social media has played a vital role in amplifying the impact of FOMO. Similarly, the news channels also cover the stories of investors who became millionaires overnight. The investors are inspired by these stories and they also want to take advantage of these dramatic moves in the crypto industry.

The harsh reality is that most of these investors get stuck in the market for years and some even end up losing their life savings due to this mistake. Social media investors barely ever talk about these investors because it goes against their interests.

Decentralization and Freedom

The crypto market isn’t just surrounded by speculators but there are many serious investors who want to take advantage of the true nature of the crypto market. Cryptocurrencies were introduced to provide financial freedom to average users. With peer-to-peer transactions, the users can transfer funds to each other without having to report to a centralized authority.

The cryptocurrencies are dedicated to providing complete control to the average users so they don’t have to rely on the policies of traditional financial institutions. These currencies are associated with blockchain networks that ensure the user’s privacy while keeping a record of the transactions. Thus, cryptocurrencies appeal to users who aren’t happy with the traditional banking system.

Traditionally, the users need to deal with a number of centralized authorities while transferring funds globally. Cryptocurrencies simplify the process while reducing transaction fees because they eliminate a number of centralized actors. Furthermore, cryptocurrencies are available 24/7 and they aren’t bound by geographical borders as well.

The best thing about cryptocurrencies is that the users don’t have to trust someone with their wealth. They have complete control of their funds which can only be operated through private keys.

However, these digital assets also pose some challenges. Regulatory uncertainty, volatility, and security risks are the leading problems that investors may have to face while using cryptocurrencies.

Hedge Against Inflation

Cryptocurrencies, especially Bitcoin, are also considered a strong hedge against inflation and geopolitical tensions. Traditional currencies and assets suffer a lot during geopolitical issues. For centuries, gold has been used as a hedge against inflation. But in recent years, Bitcoin has also established its reputation in this category.

In 2023, many traditional assets experienced a significant price decline and some of them struggled badly. Bitcoin, on the other hand, offered amazing returns throughout the year. In Venezuela, many investors moved their funds to cryptocurrencies to handle the effects of inflation. Some Russian businesses also took advantage of cryptocurrencies to continue running their businesses while trying to retain the value of their assets.

The interest rate hikes in the United States have also pushed some investors to move their funds to cryptocurrencies.

Technological Advancements

Cryptocurrencies have become widely popular among tech enthusiasts. They’ve resolved a number of problems that couldn’t be addressed with traditional resources. The introduction of smart contracts is a landmark achievement that has automated a number of processes. The NFTs (Non-fungible Tokens) have also offered a lot of opportunities for artists and organizations alike.

Moreover, a number of DeFi products have been introduced over the years that offer a number of earning opportunities for average investors. For example, investors can add their crypto tokens to liquidity pools to generate extra income. Similarly, they can lend their crypto tokens through crypto lending platforms to earn interest.

The addition of metaverse and Web 3.0 has also attracted a number of investors to the crypto market.

Cognitive Biases in the Cryptocurrency Investment

Some investors make their decisions following cognitive biases. Some of them use confirmation bias to cherry-pick information that goes in the favor of their investment decisions. Some investors rely on recency bias where they base their decisions on short-term price movements. It ultimately leads to impulsive and emotional decisions.

High-frequency traders use overconfidence bias to trade in the crypto market because they think that they have the ability to predict the market’s next move.

Conclusion

The psychology of cryptocurrency investing is a complex interplay of factors. The Fear of Missing Out (FOMO) drives retail investors, often leading to volatile market swings, while the promise of decentralization and financial freedom attracts serious users seeking alternatives to traditional banking systems. Cryptocurrencies also serve as a hedge against inflation and geopolitical tensions, offering stability in uncertain times.

Technological advancements, such as smart contracts and NFTs, have expanded investment opportunities. If you need more information about why people buy crypto, feel free to get in touch with us. We also invite you to subscribe to our weekly newsletter if you need regular updates about Bitcoin and the crypto market.