The crypto world lacks objective information and this results in uncertainty. There are no annual reports available as is the case on the stock exchange. In the crypto world, the Bitcoin price for example is determined by supply and demand, potential, the development team, speculations, social media and news reports. Moreover, many projects are still in the start-up phase where ideas are fully developed.
Bad or good news can therefore do a lot to the value of a price, let alone the opinion of a very influential person involved in a tweet. This can make the price rise tens of percent but just as easily as dropping a brick. Early adopters, among others, are less impressed by this. But the unwitting investor develops fear which can result in a wave of sell orders. Below one can read more about the psychological effects of a Ripple price drop.
Cognitive dissonance is an unpleasant feeling that arises when making choices. Nobody likes to make the wrong choice. And certainly not when money is at stake. For example, when you purchase a cryptocurrency, you will convince yourself that this is the right choice. After all, you want to keep the good feeling and not regret your purchase. You adjust your attitude, behavior or your thoughts to avoid the bad feeling.
You look for messages and sounds to confirm the good feeling. To avoid the bad feeling after a purchase, investors tend to herd and look for confirmation. Because if everyone else does it, then it must be good, right?
If we look at the negative tweet from Elon Musk, we see this happening. One negative tweet from a person highly regarded in the investment world resulting in a whole bunch of people wanting to sell their crypto, which then resulted in a drop of the Ethereum price.
Social media is also a place where investors look for confirmation, especially with existing algorithms on social media, you will be linked to like-minded people. This is often referred to as social proof. A danger of this is that tunnel vision arises because you are only looking for confirmation. Ethereum price is community-driven and therefore can be largely altered due to its positive or negative reputation on social media.
The positives stand out but the negatives of the investment are ignored. The right and above all diverse sources of information help to prevent tunnel vision. This phenomenon is called confirmation bias.
Another psychological effect that arises is anchor heuristic. The investor attaches great value to the old price of a cryptocurrency but completely forgets to look at why the price has started a decline. The cryptocurrency can be bought with a ‘discount’ because this currency has recently had great days and the value is determined based on the old price.
In the event of a decline, it is very important to consider the economic causes. Another danger of social media is repetitive and simple information, which sticks in your memory better than complicated white papers. In addition, the search for confirmation is reinforced on certain forums, communities and Facebook groups.