Investors are not ordinary people who go into business without a set of strategies. These individuals understand the market dynamics and work their way around to achieve substantial returns. But like others, they are not perfect beings, too. It’s not uncommon to commit errors; after all, they are humans.
But costly mistakes such as following the crowd without logical reason are uncharacteristic of the veteran ones. As data shows, most of those investors who follow the herd instinct are the new players. They tend to depend on the large majority when it comes to decision-making, and news outlets are primarily the source.
Whenever there’s some negative news about the cryptocurrency market, investors would run away. While when the market is making progress, they rush in and put in more investments. The interesting question then is whether this habit would do any good for investment security and the likelihood of success.
There are several factors to consider when judging herd instinct in relation to cryptocurrency investments. Some sources encourage you to follow the updates in order to predict the price movement. But there’s always a fine line between following the herd to achieve financial targets and just doing so passively without specific ends in mind. Traders on Bitcoin Circuit can rely on 24/7 support by specialists to guide them on their trading journey. Learn more about this subject in the following facts to become a wiser crypto investor.
How Herd Instinct Affects Crypto Investors
Herd instinct is characterised by behaviours of joining groups and following the actions of others, believing that other people have already done their research on the subject. This is common in all aspects of society and can be observed in the financial industry as well. There are investors who follow what they perceive other investors are doing rather than trusting their own analysis. Although for some reason, this can be a good strategy, there are instances where this practice becomes counter-intuitive.
In fact, herd instinct can cause asset bubbles or market crashes when panic buying or selling happens. This behaviour shows the lack of introspection or individual decision-making on the part of investors. They simply act according to how everyone else is doing around them. New investors may likely fall into the same mentality due to the fear of missing out, except those who have studied the aspects surrounding the industry.
Since herd mentality is primarily instinctual, those who would follow the crowd may feel distressed or fearful as they have no disposition of their own. When the majority is going in one direction, the investor may feel they’re wrong by going the opposite way. They may also feel anxious about being singled out for not jumping on the bandwagon.
Herd Instinct and Investment Bubbles
Market crashes in the crypto industry may occur when there is an exuberant behaviour that causes a rapid escalation in the price of an asset above its intrinsic value. This bubble may continue to inflate until the asset price reaches a level beyond the fundamental and economic rationality. At this stage, further increases in the cost of the asset are contingent on investors who may continue to buy at the highest price. When this interest stops, the bubble will start to collapse and may have far-reaching consequences.
There are market bubbles that are naturally driven by investors who have strong optimism about their investment performance. Some speculators who are drawn to crypto-assets may also cause the security price and trading volume to climb even higher. However, there were past incidents where investors were anxious to pursue the initial public offerings while overlooking the traditional investing fundamentals. As a result, investment capital had dried up, causing the burst of a market bubble and investment losses.
Avoiding Herd Instinct as a Crypto Investor
Herding is generally considered instinctual, but it does not mean you cannot control your tendency to follow the crowd passively. Once you’re aware of the right things to do, you can rationally decide to take your own way. This would require some discipline and considerations in the process. The following are some of the best practices to avoid falling under the spell of herd instinct:
- Do your own research and study the facts yourself
- Observe due diligence and make your own decision
- Analyse why many people are taking a certain direction
- Delay your judgment when you are distracted
- Make your own stand, even if that means standing alone
There are now millions of crypto investors and traders worldwide. Many of these people are using social media platforms to know the recent updates and trends in the industry. This is one strategy to predict the prices of cryptocurrencies and come up with better approaches to achieve their financial goals. If you join this industry in hopes of making profits, following the crowd does not always mean having herd instinct. It would always be a judgment call as to when is the right time to follow others and when it’s not.