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Optimism Bias: Investor’s Worst Enemy

You’ve probably heard of “rose-tinted glasses,” an expression describing an overly optimistic attitude toward the world.


It’s great to be an optimist in the real world, but it’s vital not to fall into the hands of fake hope when it comes to financial markets. In fact, being skeptical is good and highly recommended when you invest.


That way, you will be more rational about your decisions and won’t rush with judgment. Otherwise, you risk becoming a victim of optimism bias, an investor’s worst enemy.


What Is Optimism Bias?

Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event.


That’s a trap that many of us fall into from time to time.


Daniel Kahneman, a Nobel Prize winner and co-author of “Noise” alongside Olivier Sibony, Libertify Advisor, once famously said:


“We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events…One of the major biases in risky decision-making is optimism. Optimism is a source of high-risk thinking.”


Indeed, we know very little yet often feel like the keepers of the sacred knowledge not accessible by most.


Unfortunately, such wishful thinking is widely present in the crypto industry.


But we must remember that the crypto market is a wild west: you see Rambos trying their best to ride volatility and consequently failing and losing most of their cash, opportunists buying the dip – basically, all sorts of crazy, wrong behavior based on optimistic bias.

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Optimism Bias and Risk

Summing up all factors, optimism bias sets the rules of the game in the crypto market, and a potential reward seems worth it: you can turn $10,000 into a fortune in a matter of weeks or months.


Yet, many tend to forget the cost of failure – financial ruin, broken family, and psychological trauma.


Here’s an ugly truth – the higher the risk, the higher the loss rate. Here’s an example from crypto – when the market is up and reaching new highs, it creates FOMO.


People rush and buy in desperation hoping to ride what seems to be an endless upward trend, forgetting that sooner or later, it will be over. This groundless optimism makes them feel almighty until the game reaches its end.


That’s the outcome of optimism bias. 


In crypto, we’ve seen this scenario 5 times already, and this is just for Bitcoin:

  1. 2011: Bitcoin crashes from $32 to $0.01
  2. 2015: Bitcoin tanks from $1,000 to below $200 
  3. 2017: Bitcoin plunges below $3,200 after hitting $20,000 
  4. 2021: Bitcoin slumps from $63,000 to $29,000
  5. 2022: Bitcoin plummets from $68,000 to below $20,000

Notice the jumps both ways – they are huge! All because people were way overconfident or, in other words, overly optimistic.


For example, from $68,000, many predicted the price would reach $100,000 in a matter of months. Now it rests at ~$20,000 at the time of writing this. 


Neither of us wants wants to fall a victim to optimism bias But too many don’t learn from the past and repeatedly make the same mistakes. Perhaps you, too.


Optimism bias is your worst enemy, and rightly so. It can cloud your judgment to the point you forget about volatility, discipline, and dangers of unprotected long-term hodling.

The smart way to Buy &
Hold Cryptocurrency

Optimism Bias and Volatility

Crypto market suffers from uncertainty and rising volatility. Both are the result of the rising number of new users arriving on the scene.


These new users are not only newbies but big banks who saw an opportunity in crypto. Unlike retail investors, they have a lot of money and plan ahead, choosing low gains over high returns.


Consequently, their behavior remains similar to the stock market – once they see signs of a possible downfall, they sell and wait for the next entry point. 


As a result, you face a combination of power imbalance – while bankers are knowledgeable, emotionless thinkers, many retail investors are optimists that focus on multipliers, the big returns.


For you, that means optimism bias can hurt your funds big time. Optimists patiently wait until they go nuts and sell, making your money evaporate quicker than water in the desert. 


A great way to cut the volatility is to establish risk-adjustment mechanisms.


For example, Libertify’s Conservative risk profile decreased risks from 66% to 39%.

Optimism Bias & Discipline

The key to success in investment is discipline. You must know when to start and when to stop. Just like with drinks – a few make you feel good and relaxed, while too much intake leads to a blackout.


However, discipline is something that is trained over the years. Those who mastered self-control are at the top. 


But often, thanks to optimism bias, we act erratically. The erratic behavior blinds us.


Here’s an example: Andre Lewis, better known online as Dre or Dreesus, created a coin he called Simple Cool Automatic Money, short for SCAM.


The coin was designed to be worthless, but despite its name, it found buyers and reached a $70 mln market cap.


You might have thought that people would be turned off by the name, but no, they bought new and unknown assets despite all the red flags.


This happened because they were fooled by their own optimism and opportunism. Now the coin is down -34% and will continue its downfall. 


How disciplined are you to not become a victim of optimism bias? Learn here

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Optimism Bias & Long-Term Hodling

That one is specifically true for Buy and Hold investors.


Think about it this way – you plan to keep your assets for an extended period of time.


You’ve done your homework, and the analysis shows a long-term upward trend. You feel optimistic about your endeavor and fall into the hands of optimism bias. So you decide to keep the assets untouched and avoid control altogether. 


Can you withstand volatility, big banks, whales, and uncertainty? Of course, you can say that you don’t care, that price will rise.


But how about the media, family, and friends bombarding you with negativity? Can you withstand the pressure?


And that’s where optimism bias comes into play.


You were so optimistic about your portfolio performance that you got blinded by the potential gains.


You were so optimistic that you forgot about the potential losses. Eventually, optimism gets replaced by regret, and potential gains turn into real losses. 


Improving Performance with Disciplined Risk Adjustment

At Libertify, we offer a strategy that can eliminate optimism bias with a well-known, disciplined approach to risk management.


Forget whales, Rambos, and Lambos – just stick to facts. The market is crazy, and so are most players. So you either get crazy or look for something better, like a disciplined Risk-Adjustment strategy. 


Essentially disciplined risk adjustment aims to deliver superior performance through a loss-cutting discipline. 


It means that our mechanics work like a clock, without interruption, or emotion, and never experience interruptions or delays. It takes discipline to achieve great highs, and that’s what Libertify delivers. 


Disciplined risk adjustments made at the right time create a myriad of benefits, including better protection against volatility and potential losses. 


The disciplined risk adjustment strategy improves performance by tackling the volatility created by the whales, banks, uncertainty, and more. Imagine a state-of-the-art electric car that can reach the speed of 200 km/h in no time. To make the journey safe and sound, it tracks the unforeseen dangers, e.g., imminent road bumps and cars blocking the highway, and limits the speed according to the situation.


So, for instance, by driving over an obstacle at 200 km/h, you’ll damage your vehicle, but by adjusting your speed or your risk to 16 km/h, it’s safe Afterwards, you can continue your journey at 200 km/h. However, to make such a precise decision, your car must be disciplined and be able to track the dangers 24/7. Libertify does exactly the same thing, and you won’t have to go to a repair shop every time.


Instead, drive fast yet safely or, in our case, invest in potentially high-risk assets but with protection through a disciplined risk-adjustment strategy. 

Crypto performance at a
risk you can afford