What Is the Role of Confirmation Bias in a Crypto Death Spiral?
Confirmation bias plays a crucial role in a crypto death spiral by causing investors to selectively seek out and interpret information that confirms their existing fears and negative beliefs about an asset. Once a downward trend begins, investors with a bearish outlook will focus on negative news, social media posts, and price charts that validate their decision to sell.
This cognitive bias filters out any positive or countervailing information, creating an echo chamber of negativity. As more investors fall prey to confirmation bias, the collective belief in the asset's demise strengthens, leading to more aggressive selling and a faster, more severe death spiral.
Glossar
Cognitive Bias
Assumption ⎊ Cognitive biases, particularly within cryptocurrency derivatives and options trading, frequently stem from unwarranted assumptions about market efficiency and predictability.
Crypto Death Spiral
Trigger ⎊ A crypto death spiral initiates when sustained negative price action in an asset, often amplified by leveraged positions and algorithmic trading, erodes market confidence.
Bias
Distortion ⎊ In cryptocurrency, options trading, and financial derivatives, distortion refers to systematic deviations in market prices or trading behavior stemming from informational asymmetries, behavioral patterns, or structural inefficiencies.
Confirmation Bias
Bias ⎊ Confirmation Bias represents a pervasive cognitive bias where traders selectively seek, interpret, and recall information that validates their pre-existing market position or directional view.