Endowment Effect in Crypto: Impact and How to Avoid the Trap

In crypto investment, the endowment effect can strongly influence an investor’s choices and strategies. This article will explain the endowment effect and how it impacts decision-making in cryptocurrency investments.

1. What is the Endowment Effect?

The endowment effect is a phenomenon where individuals perceive losses more intensely than gains. According to the research by Kahneman and Tversky (1979), this leads to a conservative mindset, making it harder to give up what we already have, even when better opportunities arise.

2. The Impact of the Endowment Effect on Crypto Investment

In crypto investment, the endowment effect manifests when investors become overly attached to the assets they own, even though other assets may offer higher returns. This impacts decision-making and the ability to maximize profits.

When the price of an asset rises, investors often fall into the trap of expectation, thinking that its value will continue to increase, which leads them to delay selling. Conversely, when prices drop, they often believe the asset is undervalued and will soon recover, thus refusing to cut losses, even when indicators suggest action is needed.

For example, if you buy Bitcoin at $40,000 in February 2021 and the price rises to $65,000 in November 2021, you might think the price will continue to rise and delay selling. However, when the price sharply drops to $16,000 in December 2022, you face a loss simply because of the emotional attachment to the asset you own.

3. Other Effects of the Endowment Effect on Crypto Investors

The endowment effect not only causes investors to hesitate in selling underperforming assets, but it also prevents them from reallocating funds to more promising assets. This can result in a portfolio filled with “dead” coins that have no real value, negatively affecting potential profits.

For example, investors may continue holding coins that have significantly decreased in value after a previous bull run, instead of cutting their losses and investing in assets with better growth potential. This effect also slows their response to market changes, as they tend to make decisions based on emotions rather than data.

4. How to Avoid the Endowment Effect Trap in Crypto Investment

To avoid being influenced by the endowment effect and to keep investment decisions objective, investors can apply several strategies:

•  - Create a clear investment strategy: A well-defined investment plan will help investors make decisions based on data rather than emotions.

•  - Regularly evaluate your portfolio: Investors should frequently review and reassess their portfolio to eliminate underperforming assets, optimizing their holdings.

•  - Perform objective analysis: Use technical analysis, fundamental analysis, or macroeconomic factors to gain an objective view, avoiding emotional bias.

•  - Compare alternative options: Regularly compare the coins/tokens you currently hold with others to make a fair assessment of each asset’s potential for returns.

These strategies will help investors maintain focus, make better decisions, and optimize profits in the volatile crypto market.