Most cryptocurrencies have pulled back sharply from their recent highs, meaning investors in those tokens are likely experiencing some negative emotions related to the balances in their crypto wallets.
In this video from Motley Fool Backstage Pass, recorded on Dec. 8, Fool analyst Bernd Schmid talks with contributor Jon Quast about how it could be some time before cryptocurrencies rebound back to their previous highs. And because of this, it's important to understand how these painful financial events can affect your emotions and -- if you're not careful -- lead you to make poor investing decisions.
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Bernd Schmid: You have to get used to these swings. It's also a great way to learn your emotions ... because your emotions are, in the end, what kill your returns. As long as you have the mindset, and you control your emotions, don't make the wrong decision at the wrong time, you'll be good.
The one thing dangerous here is, you're getting used to it, and we're still, I think, in a bull market in crypto. So these corrections last very shortly, and typically you reach all-time highs within a few months or so. The times might change. Maybe we're there. I don't know. We might not reach a new all-time high. There will be the next crash to [$40,000 for Bitcoin], then you go a little bit up, and then you crash to [$30,000], and so on. Who knows where we're going from here. So I want to actually stress this: You're getting used to that in the short term, but you get the relief very fast because usually, you're up again. ... Well, the real danger is when you don't get the fast recovery that we're seeing right now, and you're down again and then you might lose your emotions. So that's something -- and it's difficult to communicate this and to prepare for it also mentally -- but it's something I tried to reiterate and remind people of, to just prepare for the situation, even though not knowing if, and if yes, when it will come.
Jon Quast: Yeah. I'll jump in here real quick and say that I just finished an article that is going to be published here, I think later this week. And in it, I did some research from a study done by a couple of psychologists at some universities, and they talked about how when you lose money, this actually invokes an emotion of fear and pain. ... and that those emotions can actually motivate us to take on more risk. The study found that people were more inclined to take unnecessary risks when financial incentive was on the line, when they were feeling that pain from financial losses. So just as extra cautionary here, as cryptos have pulled back from their all-time highs -- if you're having a paper loss right now, if your investment is down, you're probably feeling some of these negative emotions.
Psychologically, they will motivate you to make poor choices. So just be on guard, be extra aware of yourself and what you're feeling, and stick to the tried and true: long-term holding periods, looking for the cryptocurrencies that are best-positioned for the future, things like that. That's all I had to add there.
Schmid: This is really great. I didn't know of the study, I'd like to just quickly comment on this because this is such an important point. In the whole last 10 years, we always had this point, and we get this question all the time: Should I buy the dip?
In the last 10 years, everybody was rewarded who bought the dips. Jon and I just mentioned in the beginning how our biggest positions came about. I'm not sure if that played a role in the study, but I noticed it in the mentality also in myself. It goes down 20% -- hey, should I buy it? Makes sense. It makes sense, yes -- if you believe in the long term. It's really important. Jon, what you mentioned. We as Fools only buy what we think will perform well in the long term, irrespective of these short-term fluctuations that we see. And now I lost my thread, but I think that's the most important point.