Cryptocurrencies can rise by thousands of percentage points in a few months and then drop 70% or more in the same amount of time. That makes the crypto sector a brutal teacher of quite a few basic investing truths.

In that vein, if you hold Bitcoin (BTC +1.48%), Ethereum (ETH +5.34%), Solana (SOL +4.28%), or even Dogecoin (DOGE +4.86%) today, you’re a student sitting in what might just be the most unforgiving classroom in finance. Below are three lessons this market teaches again and again — and they’re just as relevant for investing in blue chip stocks or even index funds as they are for digital coins, so pay close attention.

Image source: Getty Images.

1. Markets change, but people don’t

A decade ago, almost nobody outside of a niche community had heard of Bitcoin. Ethereum had just been launched, and practically zero people had even an approximate understanding of what a smart contract was. Solana didn’t exist at all, and Dogecoin, the first meme coin, was down severely and looked like it’d never bounce back. Today, these four coins are household names, with new narratives suggesting a better future for each. It’s now hard to imagine how they might be completely extinct 10 years from now, in late 2035.

Yet beneath the rotating buzzwords and market narratives, investor behavior with these coins looks eerily similar to what it has been in every prior set of market conditions, going back long before crypto existed. People hear about an asset that went up five or 10 times, and they quietly convince themselves that getting in now is somehow less risky than it looks. They feel as if they’re late, so they try to catch up quickly to satisfy their fear of missing out (FOMO). That’s the get-rich-quick instinct that never really leaves the human brain.

Bitcoin

Today’s Change

(1.48%) $1279.34

Current Price

$87899.00

The lesson here is that technology and narratives change, but the way investors behave tends to stay the same. Periods of explosive upside eventually invite heavy optimism, hype, media attention, and friends bragging about their gains. Those conditions make it hard to resist a last-minute lunge for quick riches, even though history shows that the tail end of a parabolic move is usually the riskiest time to enter.

2. Investor sentiment is path-dependent

Two investors can own the same coin at the same price and feel completely different about it, and then take different actions as a result.

For instance, imagine that an investor bought Bitcoin at $20,000 and watched it climb to $100,000. They probably feel pretty good about their choice, and so they could be viewing Bitcoin’s current tumble below $100,000 as an opportunity to buy the dip rather than a sign that it’s time to cash out.

But consider another investor who bought near the peak of $69,000 in late 2021, and held it through a 70% decline. This investor then waited years for the price to crawl back to breakeven. Now, they see the same price as the first investor, but it’s very likely that their long period of being underwater makes it very psychologically difficult to buy more Bitcoin. In the long run, that disposition could mean failing to allocate enough capital to a compelling investment thesis that’s still playing out.

Behavioral finance researchers call the discrepancy between these two sets of behaviors “path dependency,” or sometimes the “disposition effect.” What you paid, the deepest drawdown you lived through, and the last peak you remember all quietly become mental anchors even when those anchors end up preventing you from taking the best actions on behalf of your portfolio.

Be aware of the path your investment took to arrive at the present, as it’s bound to influence your investing psychology, and not necessarily for the better.

3. Don’t get too attached to your investments

The final lesson is the hardest to practice.

In crypto, there’s a cheeky saying that investors shouldn’t “marry their bags.” This slang speaks to an eternal truth. If you get too emotionally attached to your investments or the products of your decision-making process, you’re likely exposing yourself to severe downside risk. And the more attached or convinced you are about an investment’s worthiness, the more blind you’ll be to problems it has or that it might have in the future.

So try to fight getting too attached to your coins, stocks, or other assets.

In my experience, it’s usually a losing battle in the long run. One decent remedy is to schedule quarterly “cold water” sessions where you reevaluate the different elements of your investment thesis for an asset with a pessimistic or highly critical view. You’ve mastered the exercise when you can admit one of your high-conviction assets is no longer the same one you were excited about buying originally such that you don’t feel any internal resistance when you think about selling it.