The Toll of Mental Biases in Crypto Investing

Investing in cryptocurrencies like bitcoin often evokes strong emotional responses and mental biases. The volatility and rapid price swings can lead to impulsive decisions driven by fear and greed, rather than rational analysis. These biases can significantly impact investment outcomes, often leading to suboptimal returns and heightened risk. This is where a systematic momentum strategy, such as the AMINA CoinDesk BTC Momentum Strategy, may play a crucial role in mitigating these biases and enhancing investment performance.

Mental Biases in Crypto Investing

Mental biases are psychological factors that influence decision-making. Common biases that have been extensively documented in academics include:

• Overconfidence Bias: Investors often overestimate their knowledge and ability to predict market movements, leading to excessive trading and increased risk exposure.
• Herd Mentality: The tendency to follow the crowd can lead to buying during market peaks and selling during troughs, often resulting in significant losses.
• Loss Aversion: The fear of losses can cause investors to hold onto losing positions for too long, hoping for a rebound, while being quick to sell winning positions to lock in gains.
• Anchoring: Relying too heavily on initial information or the purchase price can prevent investors from adjusting their positions based on new market realities.

These biases can lead to erratic investment behaviour, increased volatility, and extreme drawdowns per Almeida & Goncalves (2023). For instance, during market downturns, the impulse to sell assets can lock in losses, while the fear of missing out (FOMO) during rallies can lead to buying at inflated prices. These effects tend to be more extreme in more speculative asset classes and cryptocurrencies are certainly one of the most speculative asset classes.

Benefits of a Systematic Momentum Strategy

A systematic momentum strategy, like the AMINA CoinDesk BTC Momentum Strategy, addresses these mental biases by relying on quantitative signals rather than emotional decision-making.

This approach offers several key benefits:

1. Reduced Volatility and Drawdowns: By dynamically allocating between Bitcoin and cash based on momentum indicators, the strategy aims to minimize exposure during periods of high volatility and downturns. This may result in lower drawdowns compared to a pure buy-and-hold strategy.

According to the AMINA CoinDesk BTC Momentum Strategy performance data, which includes backfilled historical data, the strategy achieved an annualized return of 36.2% with an annualized volatility of 42.8%, compared to Bitcoin's 26.0% return with 66.6% volatility. The maximum drawdown for the momentum strategy was -53.5%, significantly lower than Bitcoin's -79.8%.

2. Improved Risk-Adjusted Returns: The strategy generated higher risk-adjusted returns, as indicated by its Sharpe Ratio of 0.85, compared to Bitcoin's 0.39 over the same period. This suggests that the momentum strategy provides better returns for the level of risk taken.

3. Systematic Decision-Making: By using transparent and predefined rules for trading, the strategy mitigates the influence of emotions and biases. This systematic approach helps ensure that investment decisions are based on objective data rather than subjective judgment.

4. Diversification and Flexibility: The strategy's ability to switch between bitcoin and cash provides a level of diversification and flexibility that can protect against extreme market conditions. This adaptability is crucial in managing the unique risks associated with the highly volatile crypto market.

Figure 1: Performance Comparison between AMINA CoinDesk BTC Momentum Strategy (BTIAMINA) and the CoinDesk Bitcoin Price Index (XBX).

In conclusion, mental biases are a significant challenge in crypto investing, often leading to poor decision-making and increased risk in the form of volatility and drawdowns. A systematic momentum strategy, such as the AMINA CoinDesk BTC Momentum Strategy, offers a robust solution by aiming to reduce volatility, improve risk-adjusted returns, and mitigate the effects of emotional decision-making. By adhering to a disciplined investment approach, investors can better achieve more stable and favorable outcomes in the dynamic world of cryptocurrencies.

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Authors' views and opinions are their own and not associated with CoinDesk Indices, neither AMINA Bank AG or any of its related group entities.

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