The Risks behind Cryptocurrency Trading

We are now undergoing one of the greatest transformations of wealth we have ever experienced. From dropshipping to the options market, the pandemic has fueled people to divulge their interests and explore worlds they have never had the chance to look at. At the center of it all lies cryptocurrencies, better known as crypto. The current global population of crypto buyers and sellers “is now estimated to be over 106 million” ( Delfabbro, 1 ). The 24-hour availability of trading, nature of the market, fear of missing out (FOMO), and highly volatile market are just a few of the many reasons behind the cryptocurrency’s current growth. While there are some compelling ideas behind the legitimacy of decentralized finance and investing in coins like Bitcoin and Ethereum, there still lies the need to understand the risks behind cryptocurrency trading and addiction. It is crucial to recognize that crypto has explicit implications on mental health.

The equity and crypto markets share many similarities, especially the wide range of strategies that can be employed when getting involved. However, the biggest difference between the two markets is that the crypto market trades 24 hours a day. Combined with massive volatility compared to equities, the crypto market can be a dangerous place for the inexperienced. Prices for a single coin can increase well over 100% in a matter of hours while simultaneously shedding 20% of their value over the following days. According to senior psychotherapist at the Castle Craig Recovery Center, Anthony Marini, the volatility of the crypto market can cause people “anxiety, irritability and constant restlessness.” This is no surprise as traders are often overexposed to movements in price but do not practice proper risk management when engaging in the markets. As a result of the nature of the crypto market, it makes it easy to get involved and addicted. Addictions can lead to social withdrawal, relationship issues, and make it hard to hold jobs. The intentions of getting involved with different cryptocurrencies may be good; however, the impacts of addiction on mental health must be better understood.

On top of the volatility of the market, there is also an illusion of control that makes crypto trading quite risky. Because crypto trading is not completely based on luck, there is room for skill and strategy that can perhaps enhance a certain outcome. Technical analysis, or the study of price action charts, is one of the most popular ways to gain an “edge.” According to “The Psychology Behind Cryptocurrency Trading: Risk and Protective Factors,” this illusion for control is known to be a common feature of gambling. The article discusses that people “believe that strategies, skills, or certain rituals can increase the probability of winning (Delfabbro, 3). Perhaps this illusion for control gives traders a sense of invincibility or the perception that they can take greater risks while having an edge. While certain strategies have proven to grant an increased success probability, they are also not without failure. Social media influencers and traders have continued to make outlandish claims about their success rates with certain strategies, and many sell their course to teach new traders entering the market. Despite this, the fact remains that industry professionals cannot predict anything with certainty, much less individual traders looking to make quick money. This romanticized illusion of crypto trading as a guaranteed way to profit is one of the biggest ways that new traders are pulled into the world of crypto.

Another huge influence of crypto-trading has to do with the fear of missing out. The barrier to create a new coin is extremely low. Therefore, there has been a sharp uptick in the number of new crypto coins that have been created. More often than not, they are “pump and dump” schemes in which the creator will heavily market their new coin to the public before expelling their entire supply into the market, leading to stupendous drops in value. These creators can also market their projects by paying celebrities and influencers to post about their project to their millions of followers. The problem arises when new traders take the advice of their favorite celebrity, only to realize that said celebrity has no vested interest in the project and was simply paid to promote it by the project owners who make a hefty profit off of unsuspecting traders. Decentralization characterizes the basis of cryptocurrency limiting the SEC and other federal agencies in their ability to regulate such schemes. While there have been, and continue to be, attempts at regulation, the crypto industry remains hazy at best with laws and regulations. The biggest impact of this market is that crypto trading can lead to debt and homelessness issues. Spending and investing large amounts of money is risky and handling debt is a huge issue worldwide that can lead to issues with financial status and poverty.

With crypto trading rising in popularity now more than ever, it is important to keep note of the ways to avoid the risks that permeate throughout the industry. There are ways to keep crypto enjoyable without ruining the quality of someone’s life. Strategies to do this include budgeting, having low expectations, as well as using crypto as a passive investment for diversification. It is possible to have a high quality of life while trading crypto. However it is important to remain mindful that with the rise of trading volume lies the fall of many people’s mental health status. Cryptocurrencies must be flagged and recognized as they can be the next big factor in increased homelessness, poverty, and troubles with financial status and work.