Investor psychology in crypto: probabilistic thinking and common pitfalls

Transcript

GM good morning welcome to the milk Road show The Daily crypto show that's as smooth as a freshly paved Road I'm your host Jay Hamilton and today we're talking about the psychology of investing fear greed and regret why because these are the things that will change the way you invest and here to guide us is one of the best at talking about mental health in the space which not enough people talk about zenica now before we jump in over 70% of you watching our show frequently are not subscribed we want to get that to 50% by the end of the year so please subscribe today zenica let's start out by why do

you think now is such an important time to talk about psychology and investing so I mean to be honest I think there is no bad time to be talking about I think it's always an important time to be talking about it uh but perhaps especially now because the market has been so choppy for so long I think I'm just seeing left and right people around me are getting exhausted burned out fed up uh making like overly emotional decisions and it's really wearing down on some people and so maybe it's just a good time to go through some some points as a reminder um but really to me this is the most important part of investing uh because I I generally believe it's very very very difficult to like time the market most people can't really time the market and so your best approach is

to work on the things that you can and control um which are having a good strategy in place and good you know diversification and that kind of element which we've spoken about before but also the psychological stuff and having the right head space and and being able to make good decisions at the right times okay one of the best uh visuals that is I'm sure most of our listeners have seen if you haven't seen it uh you might want to flip over to YouTube so you can see this visual this is the Wall Street cheat sheet psychology of a market cycle which basically shows how price and time fluctuate and the phases of Psychology from you know hope to belief to Euphoria to anxiety to denial all the phases that

we go through I only mentioned a few there that we go through in a market typical Market cycle Zen where do you think we are right now can you place us on this chart or maybe walk us through how you use this chart to think about investing on your end yeah it's uncanny how accurate this chart is Time and Time and Time and Time and Time Again like the very first time I saw it I was like oh it's just another chart that you know the people have come up with that the retrofit to the past and it's not going to really apply but the longer I stay in various financial markets I just see this play out over and over and over and over again even within crypto like the whole of crypto but then you have the nft Market within crypto that followed

it and meme coins will follow it and it's very difficult to pick where you are on it otherwise we'd all be genius billionaire is um but to me I think uh you can kind of guess at a couple of places and so I would say either where in like the Hope optimism place where it's like we've had a leg up we're trending choppy sideways is um but the big leg up is still to come um or we're in the complacency place which if I had to guess it kind of feels a little more like that right now to me but I I I don't know it's like maybe this cycle doesn't really fit to this chart exactly but like we've had we've had optimism belief through a line Euphoria I've I've spoken to friends I've had friends reach

out to me earlier this year when Bitcoin hit all-time highs again they're like should I be getting in and you know oh have I missed out and and you know everyone around me was euphoric and we were like oh my god well look at all these ETF inflows the bull market is back yeah let's go and now we've just been sideways for so long it kind of feels like the complacency section um those are probably the two I guess the the other alternative is that we've already done a full cycle and now we're like starting again because m you know people went through a bit of anxiety denial panic I I don't think we've had a proper crash we we just haven't this bull market yet like we went from 70k to 40 something I think at one point uh but it hasn't been a full crash um but yeah

I feel like we're either in the complacency stage or in the Hope optimism a new leg up is coming um based on this chart and when you think about psychology in investing why why does psychology have such a large impact on your investing and why do you think it is one of the most important factors in a strong Investor's ability to do well in a market cycle in sort of like simple terms if you think about it from the perspective of if you're trading for a race if you're trading for a boxing match a UFC fight if you're training for uh any sort of sport you're in the gym you're working at your physical body um if you're training like for any sort of

competitive competition that involves physical strength you TR your body Financial trading is all mind based like yes having a a better you know working out is is good because it improves your mental health and Clarity and stuff like that but ultimately what you want is to be able to think well make good decisions at the right times um not uh feel forced into bad spots where you have to act out of emotion rather than logic and that all falls under the umbrella to me of the psychology of of of money of investing of trading the mental health the mental game um to all of this and so that's why it's so important to me it's like it's the thing you can train it's the thing you have control over it's the thing that you can improve your results moving

forward if you get better at it um because there's so much out of our control in this space in this market in this world that uh the best thing we can do is is focus on what's in our control and that is having a uh stable mind having a good plan a strategy uh making sure that we're we're making rational sensible decisions that fall in line with our strategy and and not uh falling whim to our emotional states because we have a bad day in real life or because we get scared on by by a tweet we see or anything like that uh or we get excited by a tweet we see I I I think that the the biggest edges will come from those who have a strong understanding of the psychology of of all of this when we think about uh investing as you said at

the beginning a a lot of people think that this the best way to invest is to try to buy at the bottom and sell at the top but that's almost nobody actually does that and if you aim for that you're probably not going to be able to achieve that the other important thing with investing is obviously having good all-around investment strategies um but I think that the thing that everybody that's listening to this can impact in their investing is their psychology what are some of the pitfalls or challenges that you see investors having right now that you want to say to them hey here's

here's how you get through that or here's how how you would help them in that psychological issue yeah I mean so you mentioned strategy there and ultimately I think if you have a strategy and you can stick to it amazing like everything else kind of falls into place if you say hey I'm going to dollar cost average in I'm going to have 90% of my portfolio in the majors and like that's great if you can stick to that you're ahead of almost everyone in reality most people can't stick to that and um that's where the psychology of money comes in where they have a bit of capital that they they they're playing with they don't know what to do with maybe their gambling bag is a bit higher than it was they're trying to beat the market they're trading they're trading mcoins altcoins nfts they're trying to

pick an L2 um and generally what people do is they overtrade or they make one mistake or another and when they make these trades they're they're thinking that they're doing something smart or that they're thinking that they're getting an edge they might not necessarily be um you might be you might be able to find an edge and like this is the the area of people that I I generally talk to when we talk about the psychology of money is the people that are trying to beat the market people that are trying to trade and invest and outperform um you know just holding an index fund or just holding Bitcoin or whatever that is and that's where the psychology comes into play by being the most important thing you can focus on and so some mistakes I think some people make uh often

is uh not having your own conviction and by that I mean you you read an article you listen to a podcast you read some tweets from someone you respect and you make up your mind like you know what that sounds sensible to me that that project they're talking about I think that's legit you maybe do like half an hour an hour of research you might read the white paper even or or you go on their website and you're like yeah they're doing some cool stuff you look at the chart and you buy in um and then when price starts going down or even if it starts going up but especially when the price starts going down you start panicking and you go huh maybe what what if that person was wrong what if the article I read you know what if it was paid for by the team or what if there

were these other motives behind it you don't have your own personal conviction to stick to your holding so you panic and you sell and all of a sudden you're making decisions based on not your own personal conviction or belief but based on what other people are saying or doing in your emotional state which is what you really really want to avoid and it's very tough in this space because so much of the space runs on Twitter and so many the people in the space listen to podcasts and read tweets and and that kind of stuff that's how we get our information and there are a lot of loud voices a lot of confident loud voices where people feel um people say with conviction hey we the bull market is just beginning or the nft Bull Run is about to kick on or like even me a few

weeks ago I said you know it feels like something's brewing with nfts but like that doesn't mean go and buy nfts it means keep an eye on it keep a watch list pay attention to yourself and come up with your own conviction but people will say this all around you left right and Center oh this mem coin is is going to 1010 billion and if it just you know reaches the market cap of Pep or this that or the other there's all these comparisons that get made um it's very easy to fall into like the the belief that you know what they make a lot of sense I'm going to put in a little bit of money here I'm going to put maybe a little bit more money here more than I should or I I just have such strong belief and conviction and and this is

generally where people just detract from their overall original strategy like you might start out in crypto with a great strategy and then all this stuff happens and especially if you start making a bit of money like the thing you buy goes up at two x's three X's you get this fake false confidence where you're like hey I I I do know what's up I I can pick winners why am I holding this stupid Bitcoin or these stupid stable coins when I can just go and twox my money here or 3x my money here I'll just do it again and again and then I'll I'll sell back yeah in the future I'll I'll take it out I'll put it in index funds and I'll buy more Bitcoin and but then you get caught in this fog of fog of War really where you're just trading and

finding some success and then it all comes crashing down unfortunately for the vast majority of people and I think paying attention to this kind of stuff now uh perhaps before we've seen any sort of real significant crash in the markets um and keeping this front of mind in general going forward is is going to again put you ahead of 99% of people in the market because most people they might have thought about it once or twice and most people aren't regularly thinking about Market psychology and most people aren't applying this to their day-to-day trading and decision making yeah well I mean psychology is uh it's the soft skills that aren't exciting to talk about especially if you're an investor and you tend to be more of a a type like MTH like those things you don't enjoy vulnerability and

telling somebody that you're feeling weak or scared so you hide that down deep down and then it blows up in your face one of the skills that I know that you talk about is probabilistic thinking as being a very important skill for investors can you explain probabilistic thinking and how that can give investors a leg up yeah so I'm unfortunate my background before crypto invest was playing poker I was a professional poker player for 15 years and so this is that's where I learned how to think probabilistically and by that I mean uh you can look at let's say there's a coin that you're considering buying and you you you Dre some research and in your

mind you come up with the idea that you know what I think 90% of the time this coin is going to go to literal zero but 10% of the time it's going to do a 50x um that's a great buy because if you do the math on average you're going to make a bunch of money if you can buy that coin a thousand times you're going to make you're going to be a billionaire the problem is that most people look at a coin and if if they determine you know what 90% of the time I'm going to lose all my money they're not going to buy it because they can't um and they haven't trained their brain to think about the reality and and World in terms of probabilities and and you know that's an extreme example but there's all sorts of you know different percentages across

the place and to me it's it's the most important skill in investing and and perhaps even in life is training yourself to think in probabilities and outcomes and do it with everything do it over and over and and the only way to do it and get good at it is by assigning a percentage chance to everything you buy every decision you make and think about what the outcome is likely to be and then track it and see like how often was I right how often was I wrong was I close you know o over time and um just keep training yourself to think that way because that is how you find an edge that is how you can beat these markets if if you buying into a coin thinking you know what I I feel 90 80% of the time it's going to go up and then it

doesn't that that's when you start panicking and maybe you missed the next great opportunity like that which is a coin that has a very high chance of going to zero but a small chance of going up um but when it does go up it goes up a lot uh you miss out on that because you got burned once before and so I recommend you know Googling it um there's a great article by Kobe on probabilistic thinking I believe I think I even wrote an article about it on my my newsletter a while back uh perhaps we link to to both of those below uh it's it it's just a great way of thinking about uh Investments of crypto of financial markets and and in my opinion of the world and I think that um it takes a bit of time to wrap your head around but once you do you'll you'll

kind of be amazed and think about how it kind of like opens your eyes to the world in a whole different way in my opinion yeah well definitely link to both those articles in the show notes we'll also link to the milk Road investing courp which has a full lesson all on psychology of investing because it is one of the most important skills as we have said today now just to double click on probabilistic thinking for those out there who are like well I'm not a stats background I've never done this before H is this something that you think you need to have that type of background to do so I went to I dropped out a university three times the very first time I was you know uh just out of

high school school I went to to University College I was doing a Commerce degree which was you know accounting statistics law um economics and I was I failed my statistics class like I I was not good at it I didn't like it I didn't enjoy it it was all sorts of complex formulas and the complex in my mind it was all basic it was first year uh statistics at College it can't have been that complex but it just it didn't click for me I didn't get it I didn't like it that's not what I'm talking about I think everyone can wrap their head around the the basic fundamentals or probabilistic things which is if something has a 50% chance of happening it's going to happen half the time if something has a 75% chance of happening it's going to happen three out of four times like that kind of

that's basically all you need to know really and then just there's a tiny bit of math maybe you can think about to figure out your expected value based on that but again anyone that's passed you know grade five math can can work this like honestly anyone can do it um you don't need to have a background in statistics or even like statistics it's it's very very simple stuff um it just takes a little bit of looking into a few hours of work and research and then some just repetitions and thinking that way so these probabilities because somebody sitting here like can understand the um the way these probabilities play out the way you say but how do how does somebody decide the probability of a token going

up or going down and is that that's the hardest thing in the world to do it it really is and you'll never uh you'll never be able to accurately guess it you you'll you'll never be able to say with certainty that this has a 90% chance of going down and 10% chance of doing a 50x again otherwise you'd have a crystal ball the the the goal is to get as roughly close as you possibly can and then just keep getting just keep making decisions based on that you just you just like you're kind of like edging yourself towards the truth or the the reality or the real chances um you'll never get there you'll never even get super duper close but over time especially if you make a lot of Trades and Investments your average will get closer to a point that makes it

profitable in the long run that that's the whole thesis you'll never be able to know for sure um but you're just trying to get like a rough range of you know maybe it's not 90% of the time it's going to go to zero and 10% of time is a 50x uh the real reality is probably like 80 75% of the time it goes to zero 5% of the time it goes down 80% % 5% of the time it goes down 90% 5% of the time it does a 2X and then goes down 2% of the time it does a 10x and then it crashes 1% of the time it does a 25x and then crashes 0.1% of the time it does a th000 x and does something czy like and then when you add them all together it roughly equals this you know 9010

distribution I mentioned in the beginning but yeah you you'll never act actually ever know exactly what it's going to be it's just about um trying to think along this way and then whenever you're going to make a decision you just in your brain roughly try and assign a like a gut check probability uh and you do it over and over and over and over and over again and if you're in the space for days weeks months years decades even at a certain point um you just sort of train that part of your brain it's a skill it's it's a it's a it's a it's a skill that you can train uh and you get better at it over and over and over it's almost like training your gut instinct in a way let's talk for a sec about um the struggles that some people are definitely happening

you're having trouble sleeping you're incessantly checking uh the price like I'm talking like you know hundreds of times a day way more than than you should be uh you're drowning in regret uh when when when these struggles are happening what is what is your advice yeah so I'm uh I'm generally big believer in the the Sleep litmus test in that if you're struggling to sleep if you're losing sleep over your investment if you're waking up in the middle of the night checking your phone prices are down 4% or 10% or 15% on on an altcoin and it's agonizing and you have a pit fall in your stomach and you can't get back to sleep easily that's a just a

clear as day sign that you're Overexposed to the market you're over invested and the best thing you can do is sell like just sell some of your assets um it sucks if you know markets have crashed a lot and you're feeling this at the time like maybe you can kind of wait to go back up but like I generally think just if you feel that sell because you're never going going to be able to time the market like I I always start from the position of you can't time the bottom uh so if you think if you're feeling that way and you sell yes it might go back up but it could crash another 90% how would you feel then and so the the best exercise I've ever come across for determining what to sell at a time like this uh was a tweet by

OSF two plus years ago now that's always stuck with me and it's an exercise I still do to this day which is list out all of your Holdings uh rank them by conviction level say you have high low medium conviction in um and then just start selling the things you have the least conviction in and that will get you some more mental sanity stability uh not necessarily it's not perfect because you could sell and then price goes up and then you feel shitty it's just like you're never going to I wrote this article called infinite regret read that as well because it talks about this whole Pro premise of you'll never be able to pick it right every single time but if you're losing sleep like just that's just a that's sign that's a clear as day sign that you're over exposed to

the market and sell now come up with a better strategy get to a point where you can sleep well um and then redeploy that Capital if you want if it makes sense if it's smart if you can do it without losing sleep over it but it's just to me it's such a good litmus test if you're losing sleep like if you're checking your phone throughout the day a lot that's not that big of a deal to me like it's not the most healthy thing to check you know coin market cap 100 times a day a thousand times a day but especially if it's like a bullish Market it's it's it's fun to do it's like oh numbers still going up it's up again it's up again and then when the market starts turning you never want to check your phone like that's just I think that's

just normal crypto Market behavior um but it's when it's like when's happening during the night and when when it goes down a little bit and your your stomach sinks that's when there's a problem so just sell as hard as it might be actually there's another Point here I I want to talk about because there's a a false way of thinking that people apply to all sorts of Investments not just crypto but it's basically oh the sunk cost fallacy maybe that's not exactly it but it is a fallacy where you invest in something let's say you buy salana at $180 and then it goes down and it's at like 140 150 you're like all right when it gets back to 180 I just need to get back to even and then I'll sell and that's just a terrible way of thinking and it I see it all the time everyone

especially new investors inexperienced Traders they're like all right this is my cost basis as soon as I get back to there I'll sell like I I don't I don't need to make money I'm not being greedy I just want to you know get get back to even and then the price drops and drops it goes up and they get hope and then it drops again and all of a sudden instead of selling at 140 150 locking in you know 20% loss uh which is bad but it's not the end of the world they they bag hold all the way down to you know 90% or 80% or 70% loss and so stop thinking about the price you paid for a thing and and just focus on what price it is at now how much conviction you have in it and your overall portfolio and make

decisions based on that yeah fantastic advice and uh for everybody listening I want to know how you're doing let us know are you feeling are you feeling good are you struggling one of the best ways to often deal with this is just to say it out loud as you said at the beginning just to admit to yourself how you're doing and then that allows you to take the next steps we're here to support you if you want to join a community join milro Pro or Zen Academy Zen's got a great Community as well any of these communities can really be helpful when you are struggling even if you're not struggling that's often the best time to think about this stuff right when things are going well is when you have the the mental space to think

this through everybody I wish you nothing but good mental health but you're gonna struggle everybody struggles and you're not alone you're gonna have you're gonna make bad trades you're gonna have bad moments you're GNA sell it a loss I think that is exactly one of the biggest things you need to accept is it will happen to you Zen how many times have you sold at a loss literally thousands like it's it's countless it just it just happens all the time um and the point about you mental everyone struggles like it's most people don't talk about it but I I try to more than than most and whenever I do the number of people that comment and reach out and say like I was feeling the exact same way I you know and but they hadn't mentioned it before it it just it always reminds me that this is is a

human condition that we're all going through even if it seems like everyone's winning on Twitter or or people are living their best life and confident is all hell the reality is most almost everyone goes goes through mental health struggles and it doesn't have to be like severe depression or anything like that it's just like oh you have a shitty day or you feel regret or you feel anxious um because of the market that that is very normal it happens to everyone and it should be normalized completely agree uh everybody listening to this episode uh I want to know do you want more episodes on psychology it's not our typical uh content but something that we think is really important so let us know if you'd like to hear more about this uh and while you're at it uh if you could smash the like button subscribe it'll

help out the show it'll get more people into the crypto space in a safe way which is just so important now remember none of this is financial advice investing in crypto is risky and you should only invest what you can afford to lose thanks so much for listening in everybody have a wicked awesome day hey everyone