Damian Sendler: Investing in highly volatile digital assets based primarily on blockchain technology is the hallmark of cryptocurrency trading, a practice that is rapidly gaining popularity. Overspending and compulsive checking are just a couple of the potentially harmful behaviors that can result from this type of activity, which we examine in this paper. Online sports betting and day trading have some similarities, but they also have some important differences. Social media, peer pressure, and other non-financial factors all play a role in determining price changes because they are available 24 hours a day, seven days a week, and all around the world.
Damian Jacob Sendler: Trading in cryptocurrencies appears to be one of the world’s most rapidly expanding markets. There are hundreds of thousands of people signing up for exchange platforms each month based on surveys carried out by major exchanges (such as Crypto.com, 2021; Independent Reserve, 2020). More than 106 million people around the world now use and trade crypto-currencies, according to the most recent estimates (Crypto.com, 2021). Growing at such a rapid rate, figures from just three months ago are already significantly understated. The cryptocurrency market is expanding at the same rate as retail investors (people in the general public). Since December 2020 and June 2020, the total market capitalization (total coins x market price) has risen from $550 billion to 1.75 trillion $US. BTC has risen in price from $9500 in June 2020 to $58,000 in February 2021, with similar exponential growth in the price of Ethereum (ETH) and numerous other “altcoins” (coins other than Bitcoin). In light of the rise in cryptocurrency value and interest from investors, some media commentators question whether the public is aware of the potential risks and harms of this activity. A small group of early investors who have made money due to historical factors (e.g., buying Bitcoin in 2013) or holding coins well before the onset of periodic bull cycles are particularly vulnerable to this kind of media attention.
Dr. Sendler: Cryptocurrencies are digital “coins” or assets that are based on the block-chain technology, which is commonly referred to as blockchain. Using a peer-to-peer network, blockchains are distributed ledger systems where each node is connected to the rest of the network. Each node in the network verifies each transaction in turn. Initial coin offerings (ICOs) are a great way to get started, but you can also earn your way into the system by participating in various activities (such as gaming or transaction activity). Cryptographic algorithms generate complex random numbers of hashes that must be deciphered using the power of a computer. This is known as “proof of work” mining. A portion of the block is given to each of the parties involved in this project (or in mining the blocks) (e.g., part of a Bitcoin). Proof of stake1 methods based on value-added contributions to the generation of the coins are also used in these systems, as well. In private wallets, the “key” or identifier is used to access the coins, which are traded on exchanges and stored privately. 2 A growing number of tokenized economies are utilizing them to pay for games and gambling, commodities, the production of work (e.g., Anytask and Electroneum), contract security (e.g., Chainlink), and supply chain coordination (e.g., VeChain) (Gainsbury & Blaszczynki, 2017; Scholten, Zendle, & Walker, 2020).
Trading cryptocurrencies shares many similarities with today’s stock market trading (Granero et al., 2012; Kim, Hong, Hwang, Kim, & Han, 2020). As a result, it attracts both experienced and novice investors; large institutional investors and small retail investors; it is subject to market fluctuations; and, trading is heavily automated, with buy/sell orders set by digital system trading. A few key distinctions do exist, however. First and foremost, trading can take place at any time of the day or night, seven days a week. Second, it is more difficult to value crypto coins. Cryptocurrencies share many similarities with stocks traded on venture exchanges, making it more difficult to state potential earnings (e.g., based on gold deposits or barrels of oil). With such a stock, it’s common to only have project ideas and little in the way of tangible assets or business models that have been realized. The lack of profit margins in crypto projects makes it difficult to predict future dividend returns. 3 Future value is based on whether investors believe that the coin will gain attention because of its good reputation and profile,4 or whether it has a genuine ‘use case’ for which it can be used (i.e., utility beyond trading). In order to predict future growth, investors can only look at simple ratios such as the maximum number of coins available vs the current supply, or the current total market capitalization. 5 That’s because coins with finite supply (like the DOGE coin) are deflationary because more of them are created, whereas coins with an infinite supply (like Bitcoin) have a higher probability of price growth. Changes in sentiment, endorsements by well-known people, and the popularity of individual comments on social media sites like Reddit can all have a dramatic impact on stock prices, which can move dramatically in one day. The price rises in crypto stocks have been shown to be related to Twitter activity and to be somewhat predictable (see Kraaijeveld & De Smedt, 2020), but many other factors are unpredictable and thus have a strong element of randomness or chance (like an unexpected run by a horse).
Cryptocurrency markets are more volatile than traditional markets. A single coin’s price can rise by over 100% in a matter of hours before falling back to its previous level shortly thereafter (Meng & Fu, 2020). Even the most widely used cryptocurrency, Bitcoin, is subject to large price swings (it lost 20% of its value in just two days in February 2021). (Dahham & Ibrahim, 2020). Markets also undergo more severe and frequent boom-and-bust cycles than those typically observed in the stock market. There have been multiple corrections of between 30 and 40 percent even in well-documented ‘bull runs’ (e.g., in 2017). In contrast, altcoins are known for exhibiting even more dramatic price fluctuations. Trading opportunities arise, but the risk is greater. A year ago, during the so-called “crypto-bubble,” some well-known cryptocurrencies, like the privacy coin Verge, rose by over 100,000 percent, making a $100 investment worth over $1 million in less than a year if made at the right time. For those who didn’t sell their altcoins at the peak, this coin and many others fell by more than 80% during the bust cycle of 2017–2018.
A fourth distinction is that traditional stock trading rarely introduces the kind of additional uncertainty that can be found in crypto trading. Hundreds of thousands of coins have been created, many of which are frauds in which the value of the coins has been artificially inflated by disseminating false information, only for the founders to abandon the market after a short time (Kamps & Kleinberg, 2018). Additionally, crypto can be used for criminal activities, be the basis of operations with bogus business propositions, and be subject to inconsistent or “knee-jerk” regulations (e.g., countries might decide to delist certain coins or ban crypto completely such as currently been suggested in India and Nigeria). Hard wallets, hard drives, exchange hacks, and the incorrect use of the technology can also result in the loss of crypto assets (the keys to their coins)..
Last but not least, it is extremely difficult to protect against downside risk in crypto trading by balancing one’s portfolio. “Blue chip” stocks, which are more stable and tend to retain their value over time, can also be purchased by investors in speculative or high-risk stocks. Unlike Bitcoin, the value of altcoins fluctuates only in response to changes in the price of BTC (Balakrishnan, 2020). Because of this, they function more like BTC’s derivatives6 than as standalone stocks. 7 Since altcoin value losses will be greater if BTC undergoes a significant correction, holders will have fewer options for building a “balanced portfolio” in which there is some hope that some coins will move against the market trend.
Commentators have compared crypto trading to online gambling because of the many similarities between the two activities (Gainsbury & Blaszczynski, 2017; Millar, 2018; Mills & Nower, 2019). Similar arguments have been made against day trading stocks, which appears to involve a significant amount of luck or chance, inconsistent returns, and a likelihood of poor returns for the majority of investors. In fact (e.g., Arthur & Delfabbro, 2016; Arthur, Delfabbro, & Williams, 2015; Arthur, Williams, & Delfabbro, 2016; Barber, Lee, Liu, & Odean, 2009; Dorn, Dorn, & Sengmueller, 2014; Gao & Lin, 2015; Jordan & Diltz, 2003). Day-trading is distinct from long-term share investing in that the event frequency (the time between purchase and sale) is often very short, according to Arthur et al. (2015). The stock may be bought and sold more on the basis of “technical analysis” than on the intrinsic or long-term value of the stock. Day traders study “candles,” patterns, ratios, and support levels in the same way that race and sports bettors study form guides or sporting statistics. It is true that these indicators can provide useful information about the direction of the market, but they are not capable of foreseeing sudden market shifts. The majority of coin and day traders are estimated to make returns lower than the market, and many end up losing money as a result (Melker, 2019). In the stock market, only 7% of day traders make it to year five without losing their money.
People who gamble are more likely to day trade, according to a study by Arthur and Delfabbro (2016). Mills and Nower (2019), using a sample of gamblers, found that those who engaged in high-risk stock trading as well as sports betting were more likely to report engaging in crypto trading. People who engage in any of these activities are more likely to develop problem gambling, even after controlling for other associated factors, according to a new study. People who enjoy gambling and people with similar demographics (often younger men with higher levels of income and education) may find crypto-trading appealing, according to the authors (Conlin et al., 2015; Dixon, Giroux, Jacques, & Gregoire, 2018; Kim et al., 2020; Kumar, 2009). These include a more impulsive nature and a desire for new experiences.
To put it another way: these new findings and their structural characteristics raise questions about the inherent dangers of crypto-trading. The specific structural characteristics of the new activity are examined in this paper in order to better understand how the topic should be approached from a psychological perspective. As a specific example, we look at how the lessons learned from online sports betting and day trading can be applied to the cryptocurrency market. A particular focus is on whether this activity could potentially lead to excessive behavior and harm in some individuals, as well as what specific structural characteristics are likely to be involved in this activity. For a better understanding of how this new behavior might become addictive, we’ll go over a few key psychological principles. In the final section of the paper, we discuss some potential safeguards against the primary dangers.
Damian Sendler
When it comes to the world of cryptocurrency, it’s not all about luck. Skill and strategy can have a significant impact on results.” Betting on Sheffield United to win the English Premier League in 2021–22 or purchasing a cheap altcoin after a daily price surge of +30 percent during a flat period of the crypto market are two examples of potentially bad decisions that one might make. In contrast, it appears that betting on Manchester City and purchasing alternative cryptocurrencies at a lower price point are better decisions. As a result, it is possible for people to overestimate the importance of knowledge and skill in a given situation and underestimate the importance of luck in a given situation. One of the most common features of gambling is the illusion of control, defined as a subjective overestimation of the objective capacity to exert control (Langer, 1975). (Wohl & Enzle, 2002; Wood & Clapham, 2005). For many, winning a game is more likely if they employ a strategy, skill, or ritual. In both chance and skill games, these beliefs appear to be more prevalent, and appear to be more pronounced in people with gambling problems (Jefferson & Nicki, 2003; Joukhador & Blaszczynski, 2004; Lambos & Delfabbro, 2007).
Damian Jacob Markiewicz Sendler: Crypto trading, like sports betting and day trading, is likely to be characterized by a strong sense of control. Heuristics and biases, such as biased or self-serving attributions, hindsight biases, and the hot hand fallacy, all have a role to play in this effect (Lambos & Delfabbro, 2007; Toneatto & Ladouceur, 2003). Market conditions that are favorable are likely to have an impact on many of these effects. If the price of BTC continues to rise, nearly all cryptocurrencies will rise in value over time. As a result, traders will rarely make bad decisions, and the vast majority of their actions will be rewarded. traders often mistakenly believe that their actions are followed by successful outcomes, a phenomenon that is amplified when the likelihood of reinforcement is high (Blanco, Matute, & Vadillo, 2011; Matute, 1996). This may lead to greater risk taking, for example, speculating large amounts in just one speculative coin; not planning for strategies to exit the market at the right time; or, moving money from a more balanced portfolio toward purchasing riskier altcoins.
During the era of social media, crypto trading also emerged. On platforms such as YouTube, we’ve seen the rise of an advisor and spruiker/influencer culture for cryptocurrencies. Searching the internet quickly reveals that at least one major coin has received a positive review. The Coin Bureau, Michael van der Poppe, and others have provided some of these, but there are many others that are completely speculative, ill-informed, and potentially misleading because they do not include all of the relevant information (a coin might have a low market cap which suggests growth potential, but only 10 percent of the total supply of coins has been produced). Traditional shares have had promotional information in the past, but this information is much more extensive and has a more esoteric feel (i.e., the sense that one is the first to know or that one has access to exclusive information). A coin’s proponents can show proof of their profits from purchasing at a low price and use graphics effectively to show the expected growth. As a result, it can create a sense of urgency and urgency for immediate action. Even more importantly, it fosters a community where followers of channels actively promote their own successes, while also reading about the achievements of their peers.
Most major addiction conceptual models include preoccupation or salience as an important feature (e.g., Browne & Rockloff, 2019; Griffiths, 2005). Excessive involvement in a particular activity can make it difficult to stop. They may obsessively focus on the activity and put it ahead of other more important responsibilities (preoccupation). Cryptocurrency trading appears to have the potential to be a highly addictive pastime. If you’re interested in day trading, you’ll need to keep an eye on price movements, news and other online media about coin developments (e.g., coin “burns”), as well as the need to make buy and sell decisions on a regular basis (Dixon et al., 2018). Crypto markets, on the other hand, are open 24/7, making it possible for anyone to participate. Sports bettors, on the other hand, are often forced to wait for matches to take place. Only during daylight hours can day-traders be actively engaged in the activity of buying and selling. As a result, cryptocurrency trading has the potential to consume a significant amount of time, putting sleep and other daily obligations at greater risk.
The fear of missing out is one of the most powerful psychological factors that appear to influence crypto-trading (FOMO). Some experienced traders use this term, and it’s a way of thinking to avoid (Przybylski, Murayama, DeHaan, & Gladwell, 2013). Crypto-trading, despite the fact that FOMO is likely to feature in online sports betting (e.g., the belief that one could be missing out on a good bet), appears to offer the most opportunities for FOMO. There are hundreds of coins on display for traders. They already own some of them, but not all of them. They may regret not making a larger investment if one they have purchased is rapidly rising in value. If they had previously considered purchasing a coin that is now on the rise, they feel remorseful for missing out on the opportunity. The situation where they see a “green screen of numbers” is perhaps the most troubling. They are compelled to participate because the market is rising. They buy a coin when its value has reached a temporary high, only to see its value plummet shortly thereafter. Selling decisions are also affected by the fear of missing out. There is always the possibility that the price of altcoins (e.g., 10X) will rise even further. Instead of cashing in on their gains, they daydream about what they could buy if the price rose 40 or 50 times; however, they are caught off guard when the bull run comes to an end and the price drops 30 to 40 percent in a single day.
Damien Sendler: Research on social media has led to the development of FOMO, which is reflected in its measurement (Przybylski et al., 2013). Cryptocurrency trading is a perfect example of this because of its strong presence on social media. Not only do traders and investors experience FOMO as a result of their own trading or investing decisions, but they are also encouraged by other traders on social media to buy certain coins or hold on for even greater gains. Due to social media discussions about even greater potential profits, many traders were discouraged from selling during Verge’s infamous 100,000X ascent in the 2017–18 bull run. Even when the coin’s value was rapidly declining, some people felt compelled to hold on to their investments, even though this would have been in their own best interest to do so.
Damian Jacob Sendler
Although many decisions are made with this motivation in mind, cognitive psychology has long acknowledged this (Miller & Taylor, 1995; Schwartz et al., 2002). Acts of commission (doing something) often lead to greater feelings of regret than omission, according to a key finding in this area (not doing something). According to Miller and Taylor (1995), this asymmetry explains why people are reluctant to sell shares they’ve held for a long time, why they avoid hitting on 16 when they’re playing blackjack, and why they value long-term lottery tickets higher than short-term ones (Bar-Hillel & Neter, 1995; van den Ven & Zeelenberg, 2011). Remorseful acts of commission in trading include decisions where a stock or coin holding is sold and then rapidly increases in value after the decision is made. Omissions are when a successful stock or coin is not purchased because other investment decisions were made in its place.
We can conclude from this that trading is a riskier activity than most forms of gambling, with the possible exception of wagering, and that both acts are likely to result in significant regret. There are few things more heartbreaking than failing to purchase (or losing) a lottery ticket during a particular week when the winning numbers were drawn. Other forms of gambling, even those with a higher potential for loss (such as slot machines and card games), are less likely to lead to situations in which a player blames themselves for losing. As a result, decisions made in one game have no bearing on the outcomes of subsequent games. The games are usually short. Bitcoin and other cryptocurrencies offer a unique opportunity for traders to examine their own mistakes over a long period of time: what they missed out on, and what coins they sold too early. Both commission and omission are likely to have very strong effects. The question remains, however, whether the asymmetry between commission vs. omission based regret observed in other contexts is as strong in crypto trading, given the very strong FOMO effects often described as the downfall of less experienced investors (who buy into upwards trends).
The importance of social isolation cannot be overstated. Evangelizing to an already-converted audience is a common practice on many YouTube channels and social media platforms (such as Reddit). Coin purchases are often supported by evidence that lacks fundamental analysis, critical evaluation of downsides, or consideration of opportunity cost (are there better purchases that might be made). Bad actors may use bots or other means to amplify certain messages in order to encourage the purchase of coins in order to manipulate the market. Public awareness campaigns emphasizing the importance of finding reliable information sources as well as how much money to allocate in each case may be necessary in the near future. As a result, new investors may need to learn more about the market’s history or long-term trends. When Tesla CEO, Elon Musk, tweeted in May 2021 that he would no longer accept Bitcoin payments, many people panicked, despite the fact that this would have had no impact on the market.
If a person is a professional trader and needs to monitor price movements throughout the day, the issue of preoccupation or salience is difficult to address. For community or general retail investors, it is important to recognize that constant monitoring can be an easy habit to form even among casual investors. This can start out as a simple urge to check, but it can quickly develop into a habit of monitoring price movements throughout the day, whether at work, in social situations, in school, or even in the middle of the night. Taking part in this pastime can have a negative impact on one’s sleep, productivity, and concentration. As a result, crypto trading can be used to combine the speculative elements of gambling with the social media aspects of social media (e.g., Facebook update checking). Setting limits or rules on how often or when to check prices is one way to combat this temptation. As a form of reward for completing other tasks, price monitoring may be scheduled ahead of other activities.
FOMO and regret can cause people to put more money than they can afford into risky coins that have already seen a significant rise in value. It means that when a market correction is coming, they are more likely to buy in (historically this occurs when the BTC dominance or percent of total market cap is lower). This effect can be reduced by encouraging satisficing (Schwartz et al., 2002) in which people are encouraged to avoid overly high expectations of optimal or perfect decision making. No trader, no matter how experienced, will always buy or sell at the lowest possible price. They won’t be interested in every coin with a high rate of growth. Protective strategies, such as buying before things get too high; buying dips or corrections to minimize downside risk; and focusing on the positive outcomes rather than those that were missed, are encouraged. While diversifying one’s holdings can increase one’s chances of achieving some excellent results in a rising market, it cannot shield one’s holdings from a sudden drop in the BTC price.
In the coming years, the general public is likely to become more familiar with cryptocurrency trading as it continues to grow in popularity. For two reasons, we think this is an important topic in behavioral addiction research. To begin with, this is because it combines the inherent dangers of gambling with those of excessive social media use. This type of speculation is unique in that it is available 24 hours a day, seven days a week, and has extremely volatile results due to the strong influence of sentiment and social influence. In this regard, novice traders who have been influenced by media attention or FOMO sentiments may be more susceptible to risk. A second issue is that cryptocurrency trading offers numerous opportunities to examine the operation of numerous well-established principles of social and cognitive psychology. psychology.]] There are opportunities to profile the distinct risk factors that distinguish crypto trading from other similar activities (day trading and online sports wagering), but also to identify protective factors that can avoid the development of various harms that may arise when a large number of inexperienced investors enter the market in large numbers.. Studying these factors is likely to influence discussions of consumer protections and help shape possible regulatory measures for cryptocurrency trading platforms and related activities.
