The Psychological Finance of the Bitcoin Explosion — A Study of Anchoring Effect and Loss Aversion

Abstract

Since Trump took office, cryptocurrencies have received widespread attention. The Bitcoin market has witnessed a brief bull market, fluctuating within the range of $95,000 to $110,000, with investors' enthusiasm for investment remaining high. On February 22, 2025, the Bitcoin market witnessed a sharp decline, triggering a large number of margin calls. It was later revealed that this plunge was initially triggered by panic selling due to a wave of Bitcoin thefts. However, the theft of Bitcoin cannot be regarded as the main reason for this sharp drop. Traders are also a factor, especially their psychological fluctuations and irrational behaviors before and after margin calls. By studying the original articles in psychological finance, behavioral finance and neuroscience, combined with the specific manifestations of the anchoring effect and loss aversion psychology of Bitcoin market traders, this paper explores how traders' excessive reliance on anchor points and loss aversion lead to irrational behaviors and adverse trading outcomes, with the aim of reducing cognitive biases and improving decision-making for market traders under uncertainty. This study reveals that anchoring effect and loss aversion significantly affect the decision-making process of Bitcoin traders. Understanding these psychological factors can help traders manage risks more effectively and make more rational investment choices.