During my research into the crypto space, I have seen some things I can relate to from my 10+ years of trading and research.
1. Confirmation Bias (or Self-Affirmation Bias)
When I first started trading forex in the 2007 and 2008, I was lucky (or maybe unlucky) to have made a killing. Call it beginners luck, but I didn't think so.
I always thought I was smarter than average and this great trading performance basically confirmed this preconception to a point where I felt like I was a genius! After all, I did get official validation, becoming a Certifified Market Technician (CMT) and all.
2009 and 2010 were a struggle because the safe-haven play was no longer "easy" as it was during the peak of the financial crisis. I started to lose my confidence and became kind of depressed. My ego was hurt and I became constantly defensive about my intelligence.
I will tell you this though - the experience exposed my sensitivity, vulnerability and lack of discipline. Eventually, I got my bearing back under me and decided to dig in deeper to become a good trader. I had to unlearn a lot of things.
I had to learn a lot about myself too before finally coming out of the J-curve and becoming a sustainable trader.
2. Dunning-Kruger Effect
Confirmation bias can lead to the Dunning-Kruger Effect (Wikipedia):
Essentially, whenever we start learning about something new, we get excited about the knowledge, especially if you are one of the few among your friends.
Sometimes our friends ask, "how do you know all this?", or praise you "Wow, I would never be able to understand this." If we don't have perspective, these praises can inflate our ego to a point where we stop striving to learn and coast on our early laurels.
Eventually we climb past Mt. Stupid. Maybe we go to a conference where the real experts make you feel like a fish out of water. Or our early streak ends and we realize we were just lucky.
Yes I was in that valley of despair, but it wasn't all gloom and doom. As I dug deeper into all aspects of trading - psychology, statistics, technology etc. - I have become a much more well-rounded trader and person.
This journey helped me find a bug in my operating system, which prevented me from learning. But now, I have enough wisdom to drive me up the slope of enlightenment at least when it comes to trading and financial markets.
Overconfidence is only one of the pitfalls in trading.
Hope is another. I am calling out this trap because I see so much cheer-leading in the crypto space. It is inundated by claims that you can easily turn $300 into $10,000, or $10,000 into $1 mil. The fact that there have been gains like that inflates this imagination further - the work of confirmation bias spilling over from newly-minted "experts" (product of Dunning-Kruger Effect).
I do want to note that there ARE real experts in this field. I have listened to investors like Trace Meyers and Chris Burniske, who make it very clear that they were lucky to have gotten into crypto early.
Finally, staying humble does NOT go against the "Fake it Till you Make it" attitude. As long as you are aware that you are faking it, and you do want to eventually make it, you will keep learning and training.