Jimi Smoot Entrepreneur / Software Engineer

The house money effect

If you are in crypto right now congratulations because you’ve made some returns. You may have even doubled your money and thinking about taking out the amount you initially put in and “playing with the house money”.

In the early 90’s, Richard Thaler and Eric Johnson studied the effect on prior outcomes on risky choices and found that people tend to “increase risk seeking in the presence of a prior gain”. So it’s completely natural to think this way.

This is an instance you should fight your nature though. What you should be doing after prior gains is reassess risk.

Once your crypto wallet is worth more USD then you put in there is an opportunity cost to losing that value since there are other lower risk investments that can generate returns.

Remember that a 7% return will nearly double every 10 years so what kind of an impact would an extra $10k have on your retirement? What about your kid’s education fund? What about a downpayment on a rental property?

The reality is that if you got into crypto sometime this year the risk hasn’t changed much so you probably should maintain your original position in terms of the percentage of your total capital.

Translation: if 10% of your portfolio went into crypto, and it’s only been a few months, you should probably still only be investing 10% of your portfolio. Make the calculation and sell any excess.

Sure it sucks to sell some crypto assets and watch the price continue to rise. But the game is to maximize returns and MINIMIZE exposure to risk. And to do this you need to fight your natural tendencies.

Be smart and rebalance.

Tags: cryptocurrency, trading, and psychology