Decision-Making Biases in Crypto: Emotional and Behavioural Biases

Cognitive, emotional and behavioural biases are the results of mental blind spots, and can lead to sub-optimal decision-making when it comes to investing, whether in traditional stocks or in cryptocurrency. 

In our last article, we took a look at different cognitive and emotional biases which affect judgment, from confirmation to overconfidence bias. This time, we explore other decision-making biases that are more behavioural in nature—ones that don’t just distort how we interpret information, whether due to cognition or emotion, but also influence how we act (or fail to act) when managing our assets.

In Sum

• Investors often cling to losers or double down because of loss aversion and sunk costs.
  
  
• Gains are locked in too quickly while losses are left to linger, a pattern known as the disposition effect.
  
  
• Fear of regret or missing out drives poorly timed entries and exits.
  
  
• Chasing “perfect timing” often leads to paralysis, missed chances or buying and selling at the wrong moments.

Avoiding Losses at All Costs

Jean, an enthusiastic crypto investor, poured a large chunk of his savings into a meme coin named after his favorite political figure. At first, the coin’s price skyrocketed, boosting his confidence and encouraging him to buy even more. But soon, the hype faded and the price tumbled.

Instead of cutting his losses, Jean refused to sell. The thought of taking the loss felt unbearable—he kept telling himself the coin would bounce back. Worse, since he had already invested so much, he convinced himself that holding on until the meme coin recuperated was the only way not to “waste” what he had put in. 

Loss Aversion

Loss aversion is an emotional bias where here the pain of losing is felt more deeply than the pleasure of gaining even an equivalent amount.

In Jean’s example, he saw his investment increase significantly with the rapid rise in price of the meme coin, but the downfall in price— even if it hadn’t yet sunk below his original investment—felt disproportionately painful. The sharp decline triggered the sense of loss, overshadowing the pleasure the earlier gains he had made may have brought him.

This emotional response made him perceive the situation as a net negative, despite still being in profit on paper. Loss aversion often leads investors like Jean to fixate on avoiding further losses rather than recognizing the overall position objectively, which can drive reactive and often irrational decision-making.

Sunk Cost Fallacy

The sunk cost fallacy is a cognitive bias that causes us to continue an endeavor or hold onto an investment simply because we have already committed time, money or effort—even when rational analysis suggests cutting our losses.

In this case, Jean’s loss aversion has led him to irrationally hold on to his meme coin assets, even as their value is gradually and visibly diminishing. The sunk cost fallacy convinces him that selling now would “waste” the money he has already put in, when in reality, those past earnings are gone regardless of his future choices.

Instead of objectively evaluating the coin’s prospects, Jean makes his decisions based on what he has already lost, and the small chance to recuperate that amount. This bias traps many investors in a cycle of inaction, preventing them from reallocating their resources toward better opportunities and ultimately compounding financial setbacks.

Waiting for a Perfect Moment…

It is 2021. In March, Maria buys $30,000 worth of ETH when it is trading around $1,800, giving her just over 16 ETH. By May, ETH soars past $4,000, and her holdings swell to nearly $65,000. Convinced she has made a smart move, Maria cashes out to lock in her profit.

But ETH keeps climbing. By November, it reaches an all-time high near $4,800 — which would have made her stake worth almost $80,000. By selling too early, Maria lost the chance to pocket an additional $15,000—enough to meaningfully cut her student debt.

At the same time, Maria also owns DOGE, which she bought near its May peak of about $0.70. By summer, DOGE has already dropped below $0.30, but Maria refuses to sell at a loss, insisting it will bounce back. Months later, DOGE is still languishing under $0.30, cutting her position by more than half.

Disposition Effect

The disposition effect is the tendency to cash out early on winning investments, and on the other hand, holding onto losing investments for too long. This reflex is driven by emotions and a sense of urgency to act, predominant in the world of investing due to market volatility.

You may remember loss aversion from earlier, where the fear of a loss of investment overshadows the satisfaction gained from earning on our investment. Loss aversion plays a significant role in the disposition effect.

The fear of losing gains made on an investment ushered Maria into selling her earnings in order to avoid a sudden cryptocurrency market downturn—and indeed, later that year, prices would quickly tumble down across different cryptocurrencies.

Yet, had she held on just a while longer, selling when the market was showing signs of impending price falls, she could have sold at a higher price, making significantly more profit. Instead, by locking in her gains too early on ETH and refusing to realize losses on DOGE, Maria fell squarely into the disposition effect—selling winners too soon and clinging to losers too long.

… That Doesn’t Exist

At the same time, it can be just as dangerous to hold on too long on an investment—take, for example, this scenario.

It is still 2021. Last year, Ethan bought bitcoin at $25,000. As it climbed past $60,000, he is thrilled but refuses to sell—he is convinced it will soar to $100,000, and he does not want to miss the opportunity to make such gains. When the market suddenly crashes back down to $35,000, Ethan freezes. Selling now would mean admitting he missed the peak, so he decides to “just wait it out.”

When prices settle around $40,000, Ethan tells himself he’d buy more if bitcoin dipped back to $30,000. But the dip never came. Instead, the price rebounds to $50,000 and keeps climbing. He stayed sidelined, waiting for a “perfect entry” that never arrived.

Regret Aversion

At the opposite end of loss aversion, regret aversion describes the tendency some of us have of making decisions in order to prevent future regret. In Ethan’s case, he refused to sell his bitcoins when they reached $60,000 in order to avoid regretting not having made more profits had the price of bitcoin reached new heights.

Closely related to this is the fear of missing out (FOMO), which drives people to follow market trends or crowd sentiment to avoid being left behind. While regret aversion is often internal—anchored in the worry of making a wrong personal choice—FOMO is external, fueled by comparison and the perceived success of others. Both biases can push investors into holding too long, selling too soon, or chasing hype cycles, ultimately undermining rational, long-term decision-making.

Perfect Timing Fallacy

Despite the crash, Ethan remains confident that bitcoin will ultimately prevail. Yet instead of taking advantage of the opportunities in front of him, he convinces himself to wait for a “perfect entry” that may never materialize.

This is the perfect timing fallacy—the belief that there is always an ideal moment to buy or sell, and that with enough patience and foresight, one can catch it. In reality, markets are unpredictable, and waiting for flawless timing often leads to missed chances and prolonged inaction. Investors who chase perfection typically end up paralyzed, either holding assets too long, sitting on the sidelines indefinitely, or jumping in at exactly the wrong time.

Mitigation Strategies

We can use different strategies to mitigate the decision-making biases that may affect us.

Maintain a Long-Term Perspective

Maintaining a long-term perspective is one of the most effective ways to counter emotional biases in crypto investing. Markets are inherently volatile in the short run, with prices swinging sharply due to news, sentiment and speculation—but over longer horizons, fundamentals such as innovation, adoption and economic growth tend to matter more.

By focusing on multi-year goals, or considering the longer horizon rather than daily fluctuations, we can reduce the impulse of reacting to short-term noise. This mindset encourages patience, resilience, and discipline, helping to avoid panic selling during downturns or overconfidence during rallies.

Create a System

Creating a system prior to committing money into an asset, and sticking to a pre-defined strategy is a good way to avoid making decisions based on the moment and the emotions associated with them.

For example, determining what percentage of loss we are willing to incur can help us make the choice of selling our assets based on sound reasoning and data rather than our emotions.

Similarly, setting profit targets and rebalancing intervals in advance ensures that gains are locked in systematically, rather than on impulse. By following a structured plan, we can reduce the temptation to chase short-term market swings, stay aligned with our long-term objectives, and make decisions that are consistent, disciplined and less vulnerable to emotional biases.

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‍Frequently Asked Questions

What are decision-making biases in crypto investing?

Decision-making biases are mental shortcuts or blind spots that cause investors to act irrationally. In crypto, these biases often amplify mistakes due to high volatility, emotional reactions, and hype-driven markets. They can make people hold onto bad investments, sell winners too soon or wait endlessly for a “perfect” trade.

What is the perfect timing fallacy, and why is it dangerous?

The perfect timing fallacy is the belief that there’s always an ideal moment to buy or sell, and that with patience, we can catch it. In reality, markets are unpredictable. Waiting for “the perfect entry” or exit often leads to paralysis, missed opportunities or buying at the wrong time.

 Why do people sell winning assets too early but hold onto losers?

This is called the disposition effect. Investors tend to sell winners quickly to secure gains while clinging to losers in the hope they will rebound. It is a mix of loss aversion and emotional decision-making, leading to suboptimal outcomes.