The finance world has been watching the crackerjack rise of bitcoin, the digital cryptocurrency phenomenon, with a combination of fascination and, in many cases, severe skepticism. Bitcoin is currently trading at around $16,000; at the beginning of the year, bitcoin price was at $1,000, raising warnings from some analysts and prominent financial figures that it’s a bubble. The currency is extraordinarily volatile despite its recent ever-peaking performance, rising by thousands of dollars in value on one day only to fall by even more the next. Which raises the question: For an investor, what does holding on to such a volatile asset do to mental health?
Financial decision-making is among the most stressful processes out there. And, when it comes to high-risk, high-reward investments like bitcoin, an investor may go through a roller coaster of emotions. As the cryptocurrency specialist site Bitcoin.com notes, there’s been at least one story about an investor who committed suicide following a deep depression about a bitcoin investing strategy gone awry; following bubble bursts and market crashes (a distinct possibility with bitcoin), visits to mental health professionals rise as economic anxiety balloons.
One of the most stressful parts of high-risk trading is the oscillating emotions. For instance, there is evidence that “decision-makers in a happy mood have higher levels of financial risk tolerance, holding bio-psychosocial and environmental factors constant,” according to a 2017 study by British researchers. In other words, there can be a short-term tendency to “buy on the emotional high,” particularly among less experienced investors.
But those emotional peaks can be followed by deep troughs, particularly when considering a relatively new product whose value may whiplash. There’s also financial FOMO (“fear of missing out,” for the non-millennials) and the hindsight effect of selling too early or too soon. With a digital currency like bitcoin, there’s also the added risk of potential hacks that can wipe out billions in value.
Those are mental and emotional realities of risky trading. And minimizing the psychological toll of financial stress may boil down to asking three basic questions, writes Paul Merriman, founder of Seattle-based Merriman Wealth Management: 1) Have you lost sleep over an investment?; 2) Do you constantly, compulsively follow the financial news over an investment?; and 3) Does watching financial news make you worry about your future? “If you answer yes to even one of those questions, you probably have taken on too much risk,” says Merriman.
This essay appears in today’s edition of the Coins2Day Brainstorm Health Daily. Get it delivered straight to your inbox.