Crypto coins rank among the most popular investment options today, but they’ve also emerged as a controversial asset class. The hysteria and cynicism surrounding them, and the impact of both, is a study in how investor behaviour manifests in the markets. Crypto has a low risk–reward ratio as of now, enables secure transactions, has potential for value unlocking in the future, and is a 24×7 market, which offers good scope for managing risks. But it is also unregulated, volatile, subject to scrutiny regarding its legitimacy, and unreliable during times of uncertainty or instability, as seen with the sharp market downturn in early 2022.
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And yet, the exponential rise in crypto prices within a short period of time continues to attract investors — and for many, it has proved rewarding. Having an appetite or capacity for risk that is compatible with investing in crypto may not guarantee that you will benefit from it, but if you have the patience to observe your investments grow in spurts and the ability to withstand extended drawdown periods, you’re more likely to gain satisfaction from the results. On the other hand, if you’re a first- or second-generation investor with a shorter runway for seeing your investments yield results or a person who cannot handle large drawdowns, a less volatile investment would prove more emotionally and economically fruitful.
That said, even if your financial interests and aptitude are fundamentally aligned with crypto, problems can arise when psychological or cognitive biases come into play, especially among investors who would traditionally be termed as ‘aggressive’. As Manit Ankhad, Vice President, Crypto Research at 1 Finance, explains, “Often, these are risk-takers who succumb to herd mentality and are likely to be driven by extreme emotions of greed or FOMO before entering the crypto market. When the investment goes against them, they exhibit the gambler’s fallacy, or a tendency to ‘marry’ their investments.” (The gambler’s fallacy is a belief that past events have no bearing on what might transpire in the future.)
There are valid fears and apprehensions about crypto — that it is speculative, that there are too many crypto coins to choose from, that there is a risk of exchange, and so on. However, these do not mean that it is to be entirely dismissed from every investor’s portfolio. Crypto is not a get-rich-quick scheme and should not be understood as such. As long as you have sufficient and accurate knowledge, invest only what you can afford to lose, diversify your risk, prepare for higher-than-usual drawdowns, and avoid hearsay. It is a secure and reliable option that is worth exploring.
A crucial factor that keeps people from understanding whether or not to invest in crypto — and how to go about doing it — is the lack of qualified financial advice on the subject. More importantly, it is the lack of self-awareness — the ability and willingness to reflect on one’s own motivations and comfort levels to determine whether or not crypto is a good fit. This is where the MoneySign® assessment can help you understand your disposition when it comes to money matters. Akhil Rathi, Vice President, Financial Concierge at 1 Finance, elaborates on how the MoneySign® framework indicates which personality types ought to consider crypto, and which ones should refrain from it: “Those who are curious and seek high returns, like Opportunistic Lion, Tactical Tiger, and Far-sighted Eagle, are well-suited for it. Others, like Vigilant Turtle, Virtuous Elephant, or Persistent Horse, prefer more stable and consistent returns — and since their tolerance for anxiety is low, they are risk-averse.” Once you know your MoneySign®, a thorough evaluation of your risk capacity, based on a holistic view of your finances, follows. If your behaviour complements the asset class, you get personalised recommendations that help you venture into crypto with confidence and adequate precaution.
As with any other instrument, investors interact with crypto based on their knowledge of it but also on their inherent financial traits and behavioural patterns. With an asset of this nature, it is crucial to logically evaluate its performance, gauge your tolerance for its relative unpredictability, foresee your response to potential outcomes — positive and negative — and take measured actions that will hold you in good stead, without causing distress.
