Bitcoin, Ethereum record highs bring greed into investment mix

The idea was to explore how high an excited global herd of crypto-buyers would push the digital currency, or what would happen if their exuberance turned to panic and caused another crypto-winter, which is the industry term a long period of weak cryptocurrency prices.

I was also testing my own fear and greed. At the time Bitcoin had been booming, but would I freak out when it plunged, as it often does? Or would my initial plan to wait for modest crypto portfolio to double in value, sell half of it then ride the remainder long-term, be overtaken by my greed?

I passed the fear test by holding on through the recent long crypto winter from 2021 to 2024, partly because the amount of money I injected was not huge and losing it all was an acceptable risk. Crypto then plunged in value, and after shooting above $5000 my portfolio headed south, sinking below $2000. I avoided checking it for months at a time because of this.

It has since scaled new highs – with Bitcoin surging above $US120,000 this month and some forecasters tipping it could eclipse $US200,000 this year.

Now, sadly, I’m struggling with the greed, watching crypto surge and stubbornly holding onto it. It’s now close to double the initial $3500 outlay, and it’d be worth even more if I had just backed Bitcoin rather than diversify among eight cryptocurrencies.

Finance specialists say cryptocurrency is one of the most volatile investments you can make, and some question even calling it an investment, but it has become more mainstream in recent years as global funds and analysts focus more on Bitcoin, number two crypto Ethereum and other digital currencies.

New exchange traded funds that focus on Bitcoin were among the best-performing ETFs last financial year, but when crypto next heads south for the winter again they will quickly become the worst performers.

My Bitcoin and Ethereum investments are both up about 150 per cent, well above the threshold where half was supposed to be sold. But I’ve been telling myself not to sell because the overall crypto portfolio has not yet doubled, thanks to the Elon Musk-spruiked Dogecoin being 25 per cent down on my purchase price and other smaller holdings down more than 90 per cent.

Unsure if this was me being logical or greedy, I asked a couple of experts to try and decipher this investing strategy.

Behavioural economist Phil Slade says there’s a “very powerful bias” for people to hold out when it comes to investments. This often occurs when investors have suffered heavy losses but refuse to admit they bought into a dud.

“People are often playing for pride,” Slade says.

There’s a technical term for investor stubbornness, he says. It’s called the sunk cost fallacy, where people tend to follow through with something they have heavily invested into – whether money, time or effort – even when it makes more sense to stop.

Slade says investors also think about their reputation.

“With cryptocurrency they have often told their friends about it and said ‘you have got to get into this’,” Slade says.

“Just because an investment does well, it doesn’t mean it was a sound choice to invest.”

Financial markets run on fear and greed, and Slade says “fear is more powerful than greed hands-down”, and that extends to the fear of missing out (FOMO). We may be happy that an investment has doubled in valued, but fear selling too soon just in case it triples, quadruples or more – as cryptocurrency is well-known for doing.

Financial strategist Theo Marinis says FOMO is a powerful force. “If they sell and it goes higher, then they beat themselves up,” he says.

Self-discipline is important, Marinis says, adding that professional advisers help guide investors because they think logically rather than emotionally.

“Fear and greed are the two big motivators, but we can’t help it, we’re human,” he says.

“Most of us don’t have the capacity to control our emotions, whether it’s fear or greed.”

Marinis says investors should set personal rules and stick to them, and when it comes to speculating, “only play with money you can afford to lose”.

My personal crypto experiment will continue. Maybe I’ll sell if Bitcoin triples in value and the overall portfolio doubles. Maybe I won’t.

If it tanks, I’ll only have myself to blame.

This article first appeared in The Australian as Bitcoin, Ethereum record highs bring greed into investment mix