Influence of anchoring bias on Bitcoin investors’ trading decisions

Abstract

Blockchain has been perceived by many professionals as the next revolution of humankind. Its application spreads across multiple industries and aspects of life, but the first impact was to be found in finance. In 2017, cryptocurrency became a new financial phenomenon around the globe when Bitcoin’s value skyrocketed to the peak of $19.535. Many investors, both professional and amateur, have taken part in this modern trend of trading. Unfortunately, a number of those experienced losses due to various reasons. Among which a prominent heuristic called “anchoring” might be one of the causes of incorrect assessment leading to potential damages. Several studies in the past have validated the existence of anchoring bias in conventional stock market. However, current literature failed to address similar effect in cryptocurrency market. This thesis examines the presence of Bitcoin price anchoring in trading decisions of investors. Order dataset, including bids and asks, were collected from Kraken exchange to serve the analysis purpose. The analysis has confirmed that investors’ trading decisions anchored to changes in Bitcoin market price. Furthermore, the result tells that anchoring bias influenced investors’ valuation of price differently when they placed bid or ask orders. Nonetheless, its impact does not vary between bull and bear market situations. In conclusion, investors should be well aware of anchoring bias when making trading decisions. The heuristic can lead to both negative and positive consequences, depending on investor’s perception toward it.