For the past couple of weeks, bitcoin's value has been dropping steadily from a high of $130 to below $100. (It was back up to $105.51 as of early morning Tuesday, EST.) For a fairly young commodity that's still finding its way into the marketplace, that's not necessarily surprising.
However, the fact that bitcoin's value had for some time held so steadily to a range between $115 and $125 caused a lot of people to get a bit panicky. Adding to the jitters have been concerns over the Liberty Reserve shutdown, speculation about possible government restrictions on bitcoin exchanges and other rumors du jour.
Things really hit the fan on Sunday, June 9, when Bitcoin experienced a flash crash. The price of BTC plummeted from $110 to around $93. The internet was alive with chatter about possible causes – everything from unfounded scare emails about the Mt. Gox exchange to government conspiracy theories. In the end, of course, it turned out to be much ado about nothing.
No market is immune to this type of rapid fluctuation ... because the markets might change, but people don't. Human behavior tends to fall within a few particular categories, as we can see from these eight most common personality types found in trading.
- The Bandwagoner -- This is a person tends to go with the flow ... and not just in the marketplace. (You can see this type of behavior in many other settings.) Bandwagoners are individuals who make decisions due to the expectations of the people surrounding them. (And, admit it, most of us have done this at one time or another.) When the majority of people are acting a certain way, this individual will follow despite any personal beliefs he or she might have. These are the folks who buy something not because they need it, but simply because it's trendy. In a market like Bitcoin, these people's actions can have a lot of consequences. When they follow the majority based on unconfirmed information, prices can yo-yo sharply up or down.
- The Herd Member -- Picture a herd of cattle just standing around, chilling in the middle of a field, when all of a sudden one cow hears something off in the distance and freaks out. By worrying and snorting and bellowing and kicking the dirt, that cow freaks out two or three others nearby. Before you know it, the entire herd is out of control and stampeding toward ... who knows? This response is similar to the bandwagon effect. However, in this case, individuals end up acting as a group without any plans or direction. You'll see this behavior a lot during market crashes and market bubbles.
- Mr./Ms. Loss Aversion -- This is the kind of trader who would rather cut his or her losses and get out while the getting is good. These types of investors often sell their assets even when the price has increased, and will hold onto something that has decreased in value.
- John/Jill One-Note -- Sometimes, when there isn't a lot of information available, people will latch onto whatever small bit of intelligence they can find and use that as their guide, even if the information is of small significance. For example, if the value of Bitcoin is going down, this kind of investor might hear one piece of positive information – however ephemeral – and base all of his or her decisions on that, believing the price will eventually change direction and allow them to profit.
- The Biased Optimist -- This kind of investor tends to think everything is awesome all the time: the glass is always half full. These folks often overestimate the likelihood of positive events. The problem is, they're so optimistic, they tend to underestimate the possibility of any negative consequences.
- The Ostrich -- The Ostrich believes that, if you bury your head in the sand, no one can see you, right? Basically, this behavior is just plain denial. Investors with very little experience often fall into this kind of behavior, denying negative situations. They can become so focused on their goals of making money that they do not accept the very real existence of current or future downsides.
- Mr./Ms. Overconfident -- When everything is up, then it will just plain continue to go up no matter what. This is the thinking of the overconfident. Confidence isn't necessarily a bad thing -- we all need it in the right circumstances. However, the overconfident investor tends to believes that his or her judgment is flawless ... even if the record doesn't back that up. Of course, whenever these kinds of people reap a windfall, they tend to completely forget all of their past misjudgments.
- The Regretful Trader -- Regret can haunt you, in hindsight of an investment you could have made (but didn't) that would have netted you a ton of money. These investors make a mistake in judgment -- maybe by not selling a large volume of bitcoins when the price is high, thinking the price will go even higher ... only to see prices plummet in a few short hours. Selling too soon, just before market values soar, is another path to regret.
None of us are 100-percent immune to any of these behaviors. However, simply by knowing and making an effort to recognize these archetypes, you can boost the odds of making wiser decisions and understanding the trading community as a whole.
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