Confirmation Bias, Anchoring Bias, and Availability Bias in Crypto

Three Biases That Work Differently

Cognitive biases in crypto investing come in many forms. Some biases affect how we predict the future (recency bias). Some affect how we assess our own skill (overconfidence bias). The three biases in this article affect a more fundamental function: how we process and evaluate information itself. Confirmation bias, anchoring bias, and availability bias each distort the way investors perceive and weigh evidence, which corrupts the quality of investment analysis at its foundation.

These biases are particularly insidious because they operate below conscious awareness: an investor experiencing confirmation bias does not feel like they are ignoring evidence. They feel like they are correctly evaluating information. The bias is invisible from the inside, which makes structural countermeasures more important than simple awareness.

All three biases are worsened by the crypto information environment: the high volume, emotional intensity, and social amplification of crypto commentary provides abundant raw material for each bias to distort.

 

Confirmation Bias in Crypto

Confirmation bias is the tendency to search for, notice, remember, and interpret information in a way that confirms your existing beliefs, while discounting or ignoring information that contradicts them. It is perhaps the most pervasive cognitive bias in investing and one of the most studied in psychology.

In crypto, confirmation bias produces the following pattern: an investor forms a bullish view on a specific asset. They then unconsciously filter their information consumption to favour bullish content: they read bullish analyses more thoroughly, find bullish arguments more convincing, and dismiss bearish arguments as uninformed or biased. Social media algorithms reinforce this by showing them more content similar to what they engage with. The result is an echo chamber in which the investor’s existing view is constantly reinforced regardless of the actual balance of evidence.

The most dangerous form of confirmation bias occurs when an investor has made a large public commitment to a thesis (told friends, written about it, or based a significant financial decision on it). Once committed publicly, the psychological cost of changing their view increases dramatically. They are no longer just revising an analysis: they are admitting they were wrong in front of others. This ego-protection motivation strengthens confirmation bias to the point where investors will rationalise mounting evidence against their position rather than acknowledge it.

 

Correcting for Confirmation Bias

The most effective counter to confirmation bias is the steelman exercise: deliberately seek out and engage with the strongest possible argument against your current investment thesis. Find the most well-reasoned bearish analysis of an asset you are bullish on, read it thoroughly, and evaluate it on its merits rather than looking for reasons to dismiss it. If you cannot identify any meaningful weaknesses in your bullish thesis after engaging with the best counterarguments, your confidence is justified. If the counterarguments raise issues you had not considered, your thesis needs updating.

The Capital Nexus newsletter presents balanced analysis of crypto market developments, providing the contrarian perspective that confirmation bias tends to suppress: Capital Nexus Newsletter.

 

Anchoring Bias in Crypto

Anchoring bias is the tendency to rely too heavily on the first piece of information encountered (the anchor) when making judgements. Once an anchor is set, subsequent information is interpreted relative to the anchor rather than evaluated independently.

In crypto, the most common anchor is the price at which you bought an asset. If you bought Bitcoin at AUD 80,000, that price becomes your psychological anchor. The asset is perpetually evaluated in relation to whether it is above or below AUD 80,000. This creates distorted decisions: you may hold a declining asset past your rational stop level because you are waiting for it to return to “your price” (the anchor); you may not buy more of an asset at a lower price because it feels like “paying more” relative to your paper loss.

The previous all-time high is another powerful anchor in crypto markets. Bitcoin’s 2021 high of approximately USD 69,000 remained a psychological anchor for millions of investors for years: people described Bitcoin as “down 70% from ATH” or “still below ATH” rather than evaluating it on its current fundamental merits. The anchor distorts valuation: an asset is not cheap or expensive relative to where it has been; it is cheap or expensive relative to what it is fundamentally worth.

 

Correcting for Anchoring Bias

When evaluating whether to buy, hold, or sell an asset, explicitly remove the anchor from the analysis. Ask: “If I did not already own this asset and knew nothing about its recent price history, would I want to buy it at today’s price?” If the answer is yes, the anchoring of your entry price should not prevent you from adding. If the answer is no, the anchor of hoping to “get back to even” should not prevent you from selling.

 

Availability Bias in Crypto

Availability bias is the tendency to assess the likelihood of events based on how easily examples come to mind, rather than on their actual statistical frequency. Events that are vivid, recent, or emotionally impactful are more cognitively “available” and are therefore judged as more probable than they actually are.

In crypto, availability bias produces two sets of distorted risk assessments. After dramatic bull market stories circulate (someone turned AUD 1,000 into AUD 1 million with a specific altcoin), the probability of achieving such returns feels much higher than it actually is: the vivid story is cognitively available, crowding out the statistical reality that the vast majority of similar bets produce losses. The realistic expectations for crypto returns guide provides the actual statistical context.

The reverse occurs after high-profile disasters. After the FTX collapse, Terra/Luna failure, or a major exchange hack, the probability of exchange collapse or project failure feels much higher than the base rate: the vivid recent experience is cognitively available and dominates the risk assessment. This leads to excessive caution that can cause investors to miss recovery opportunities, or to over-allocate to security measures at the expense of participation.

 

Correcting for Availability Bias

The corrective for availability bias is explicit base rate analysis: rather than relying on the vividness of memorable examples, deliberately research the actual statistical frequency of events. Before investing in an altcoin based on a 100x success story, research: what proportion of altcoins from the same vintage achieved 100x returns? What proportion lost 90%+ ? Replacing vivid anecdote with statistical frequency produces more calibrated risk assessment. The DYOR guide and the fundamental analysis of crypto guide provide the frameworks for evidence-based evaluation.

 

Managing All Three Biases Together

These three biases often interact. Confirmation bias selects which information reaches you. Anchoring bias distorts how you interpret that information relative to a reference point. Availability bias skews your probability assessments toward vivid examples rather than base rates. Together, they can produce a completely distorted picture of an investment’s prospects.

The structural defences are similar across all three: keep a trading journal that records your analysis at the time of decision (prevents post-hoc rationalisation); use the pre-trade checklist to force deliberate engagement with contrary evidence and explicit risk assessment; and review your trades regularly to identify which biases are most affecting your decisions. The herd mentality guide and the broader trading psychology section of Cryptopedia provides the full framework for developing the self-awareness and process discipline that manages these and other psychological challenges in crypto investing.

Shepley Capital Black Emerald membership provides independent research, market analysis, and psychological frameworks for Australian crypto investors who want to make better decisions: View Membership Options.