Crypto traders are eagerly waiting to see whether it will be Republican presidential candidate Donald Trump or his Democratic rival Kamala Harris who will sit in the White House come January 2025.
Harris narrowly leads Trump in national polling averages, but some betting markets have Trump as the favorite to win. According to the election gaming site Polymarket, the odds of Trump winning the election are 67% as of this writing.
These chances will definitely be welcomed by cryptocurrency investors. Trump has previously shown his support for crypto, including at a Bitcoin conference in Nashville in July, where he pledged to make the United States the “crypto capital of the world and the global Bitcoin superpower.”
Indeed, the price of Bitcoin approached a three-month high in October in anticipation of a Trump victory. And cryptocurrency investors believe the price of Bitcoin could rise again, hitting a new high if Trump wins.
This might just be an opportune time to invest in crypto. But cryptocurrency markets are known for their volatility and are subject to several behavioral anomalies that any potential investor should be aware of.
Associated Press / Alamy Stock Photo
1. Momentum and reversal effects
Buying crypto stocks that have recently performed well and short selling (selling stocks that are falling in value, then buying them back later at a discounted price) those that have performed poorly is often considered a potentially profitable.
When buying high-performing stocks, investors expect the positive trend to continue, leading to further price increases. And, along the same lines, investors expect prices to continue to fall when they short those who perform poorly. In the crypto world, as well as in finance in general, this is what we call the momentum effect.
However, financial theories suggest that the complete opposite strategy can, in some cases, generate even better returns. Stocks that are performing well could also be seen as being on the verge of exhausting their growth potential, suggesting that a decline is likely to follow.
So some investors may instead buy poorly performing stocks in the hope that their price will rebound. This strategy, called reverse trading, aims to generate substantial profits as the market corrects.
By targeting underperforming cryptocurrencies, large investors in particular can help increase the liquidity of these assets. Liquidity can be measured simply by trading volume: the more active traders there are in the market, the easier it is to buy or sell the asset. This should allow for greater growth potential.
Bitcoin is performing well in anticipation of a Trump victory. But amateur investors should be aware that large institutional investors may employ different tactics. It is also important to consider that even seemingly robust trends can be reversed at any time.
2. Salience and recency bias
Events such as the U.S. presidential election attract investors’ attention, in part because of something called salience bias. Various studies suggest that crypto investors, in particular, tend to focus on an important event or emotionally salient piece of information.
Rational investment decisions should be based on a balanced assessment of the risk and return of investment assets. But during an election, crypto investors’ attention will likely focus narrowly on polling data or media coverage of the candidates.
For newer, less mature markets like cryptocurrencies, it is more common to rely on easily accessible information than to carry out sophisticated analysis of financial metrics or underlying (fundamental) economic indicators. This is risky, because all other less important but important information can be easily ignored.
The history of cryptocurrencies shows numerous collapses, demonstrating the vulnerability of cryptocurrencies as an asset class. In November 2022, for example, the collapse of FTX, a leading cryptocurrency exchange, triggered a major collapse across the entire cryptocurrency market. This included a significant drop in the price of Bitcoin.
Artist Nadia Russ / Shutterstock
3. Lottery Preferences
Cryptocurrency markets are subject to significant speculation. Investors are hoping for big gains, although the chances are slim. Similar to purchasing a lottery ticket, investors may purchase assets motivated by the illusion of lucrative future profits.
This of course also applies to certain investments in traditional markets. But stories of Bitcoin millionaires and how they quickly made their fortune create the illusion of the possibility of getting rich quick.
Such successes are not necessarily replicable under current market conditions. Regardless of the election outcome, cryptocurrency markets will remain highly volatile, speculative and risky. Just because some people win the lottery doesn’t mean you will.
4. Anchoring effect
Another behavioral anomaly typical of cryptocurrency markets is the anchoring effect. This is where investors accept and hold on to the “anchor” of the first information they receive. For example, if they read an article claiming that the price of Bitcoin will skyrocket after Trump wins, they will hold on to that idea, regardless of what other sources or information might suggest.
Again, this is because analyzing the fundamentals of crypto markets is very difficult. Unlike traditional stocks, which can be valued based on factors like earnings reports and revenue growth, cryptocurrencies often lack similar financial metrics. Therefore, crypto investors are especially likely to believe discussions in the media and on various online forums.
There were no details on how Trump’s promise to make the United States the world’s Bitcoin superpower will be fulfilled. However, it would be difficult for crypto investors to change their minds if they are already entrenched in this idea.
Investing is not gambling. Even if you think your decision is completely rational, it’s essential to double-check to make sure you’re not subject to any of the aforementioned behavioral biases. You will likely be subject to all of them, just like any other human being.
