To paper or to diamond hand?

A mini dive into cognitive biases in NFT trading and tips to overcome them.
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Have you ever fomo-ed into buying at the top?
Or sold a ‘blue-chip’ NFT in order to buy an NFT that went to 0?
Are you down 50% on an NFT, when you could have been up by 50% if you sold it last month?

Whether you decide to buy at the top or paperhand at a loss, cognitive biases are at work. All of our actions are influenced by psychology. Cognitive biases are "patterns of thinking that deviate from rationality in judgment" and can lead to mistakes that could have been avoided. 

It pays to know ourselves, our strengths and weaknesses. It is what gives great traders their edge. If you understand cognitive biases, you can use it to your advantage. It can act as signals to buy or sell. For example, following the ‘herd mentality’ bias, the more cultist a project, the greater the profit potential. You are as susceptible to trading biases as the next NFT trader. When floor prices are pumping, we all scream LFG (let's f---ing go). But down cycles are rough. Before the market slows down, take a step back to re-evaluate your NFT exposure and strategy.

🪄 Common trading biases & how to overcome them

(1) Overconfidence bias 

It’s been 3 months. You think you’ve gotten the hang of trading NFTs after a steady flow of decent flips. You forget that this is a relatively new concept to you. Time has proven that we tend to have an inflated view of our abilities and skills. Thinking that we are better than we actually are, is one of the reasons why a few traders make it past the learning curve. The NFT meta constantly changes, so it is foolish to think that NFTs will stay the same. 

Overcome: Check yourself before you wreck yourself. Have a longer investment time horizon (don’t rekt yourself by trying to “make it” in 3 weeks: you might end up taking on more risk than you should). Develop a ‘cognitive bias checklist’ with specific thinking flaws. Whenever faced with an investment decision, check it against this list. 

(2) Confirmation bias

Maybe you follow people that only say good things about your bags, or block anyone that spreads “FUD”, even when such “FUD” is warranted. If you’re long on a project, you’ll want to comfort yourself and your initial thesis, by looking at reasons that support your decision. Traders look for bullish signals to justify their positions. They use the same take to support their decision even when bearish possibilities present themselves. Confirmation bias means that we ignore or downplay key information that contradict our beliefs and place extra weight on information that reinforces our beliefs. Our brains enjoy certainty and order and it strives to avoid cognitive dissonance (two contradictory beliefs in our mind held at the same time). Under the confirmation bias, our mind makes us believe that our decision was the right one. 

Overcome: Analyze multiple data sources when researching, not just one. Invest time to research “FUD” to see if it’s valid. Acknowledge the uncertainty of trading jpegs and the market by thinking probabilistically. 

(3) Loss Aversion Bias

You’re holding a losing trade in hopes that the floor price will rise, and the trade will be profitable to avoid the pain that comes with loss. No one likes to lose, right? The next day, your investment is down by 50%. Instead of closing your position and cutting your losses, you wait it out because you’re afraid to “lose” by selling. Know when to cut your losses and minimize your exposure. If it’s down by 50%, what’s stopping it from going down another 45%?

Overcome: Invest what you can afford to lose and understand your risk tolerance. Create your own systems for investing. These are formulas that you use no matter what you’re feeling. For example, you decide to take profit when it’s over by 40% or you allocate 10% of your portfolio to riskier, degen plays. Have a solid entry process coupled with a defined stop loss and exit plan.

Remember, failing to recognise our cognitive biases… is a bias in itself. In bear markets, all you have to do is survive. Adapt, then thrive.

Thanks for reading,
 

Ann
 

P.S Don't forget to touch grass this week 💜


📣 We’ve updated our listings policy. Here’s what’s different.

In the past, listings on Magic Eden were withheld until mint completion. 

We have stayed true to this policy unless given permission from creators or if secondary sales begin on other platforms.

With mid-mint trading gaining popularity recently, it seems that this is becoming a new norm. Thus, we have decided to be the first to list all collections.

For collections concerned that immediate listings might damage their projects, we’ll provide several alternatives for Launchpad projects. Post-mint reveal is a common choice. Other ideas include raffles and a claims page. To further protect the decision-making abilities and control of creators over their collections, we’re also exploring the option to freeze token authorities in the near future.

We will be paving the way and taking a clear stance. We look forward to projects that continue to innovate and propel the space forward. For more info, click here


🪄 Congrats, this week's top performing collections on ME! (5/25-31)

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