If you are to believe that the cryptocurrency market is a bubble, then it is because of an irrational market that is judging a “Keynesian Beauty Contest.” According to investor PlanB, you can separate the players in the crypto space based on their level of thinking. Some play it by ear and base their investment decisions on the market trends (e.g., TA). Others don’t know what they are doing and just FOMO in. Then there are the really rational thinkers who bring smart money to the game. In all this, it appears that the higher an investor’s level of thinking, the better off they are. They have less chances of getting REKT compared to the zero-level thinkers. For the most part, it seems that people think based on what is popular at the time rather than what is the most rational (e.g. follow the leader).
What makes them so irrational?
It is the hype cycle where everybody hears something, and they want and then jump the bandwagon. That was the narrative of 2017 when BTC (Bitcoin) was reaching an ATH close to $20K. Then 2018 came, and the support dropped as weak hands exited and FUD set in, eventually leading to a very large correction. BTC fell by 65% during the month from January to February 2018. It seems to be a cycle that has now been an observed pattern. Just when BTC was reaching a new ATH, it would correct and fall back down to a lower level of support. Then it suddenly surges after a bearish cycle.
A bad decision would be to put money in something, whether stock or cryptocurrency because the prices are surging. By impulse, those who don’t bother to think about what is really happening just get in because they expect the prices to continue going higher and making gains. Often though, these people never expect that what goes up must eventually come down. When things go down, they are also among the first to pull back, hoping to minimize losses. This move can actually lead to more losses.
The Narrative Has Changed
By the end of 2020, BTC began a similar trend to 2017. This time, however, the price surge surpassed expectations as ATH continued into 2021. As a result of many factors, including stimulus from the US government due to the COVID pandemic, zero interest rates, and a hedge against inflation, the narrative in 2021 is much different. It is not so much about retail investors now. Institutional investment into Bitcoin has become a prime mover as PayPal, Square, MicroStrategy, Grayscale Investments, BlackRock Capital, and Tesla have entered the space. This wall of capital was what was missing after the 2017 ATH. BTC even reached $60K as the sentiment has turned more bullish than ever, leading some analysts to indicate the start of a parabolic bull run is in the works.
This time around, BTC rallies almost immediately after the prices dip. There is a buy order waiting for sellers in digital exchanges. The OTC market is also not doing so bad during most of this rally. The buyers appear to be larger institutions, ready to buy. This helps to create higher levels of support. At a price valuation of $60K, a fall of 30% would mean a support level of $42K. Any fall higher than 30% would be considered a red flag and could easily signal panic. So far, in early 2021, the dips in BTC have not been too low. There is still plenty of optimism, and there is a good reason why.
New capital is flowing into Bitcoin (Photo Credit Photo by David McBee)
Bolstering up further mass adoption of cryptocurrency echoes a positive vibe in the market. The growth in the DeFi space powered by Ethereum smart contracts has also helped the cryptocurrency market to grow to $2 Trillion in 2021. The announcements of new ETF, new investors, and exciting projects that can bring more liquidity into the space are also bringing with it the type of news investors want to hear. It is not all good news though, (e.g., Ripple lawsuit, India cryptocurrency ban news, New regulation proposals in the US, etc.)With all the good news though, it seems like there might be a more rational market now than there was before.
Who is judging the “Beauty Contest”?
It appears to be the likes of Michael Saylor, Raoul Pal, and Chamath Palihapitiya. You can include Elon Musk in the mix, but are they really doing something rational when it comes to investing? Here is the idea, as explained by Michael Saylor in the decision for MicroStrategy to put their cash into BTC:
“We feel pretty confident that Bitcoin is less risky than holding cash, less risky than holding gold”
Cash sitting in reserves is not going to earn anything. You either invest it into new ventures or provide capital to fund new projects. If the returns on traditional financial investments are near 0%, at this point, BTC is a much better decision to put your money into.
If your cost to holding cash is $0, that is fine. Then you are just waiting for inflation to set in, and despite just holding it, the purchasing power of money diminishes as time passes. If the rate of inflation increases to 5% per annum, in 5 years, 25% of your cash value will be lost. That is just a simple assumption since in the real world, there are other factors affecting the value of money. Whereas putting that cash into an investment that earns is a much more rational decision.
While it is nice to assume that the cryptocurrency market is now much wiser than before, PlanB does not see it that way. According to PlanB:
“You think all other people are also rational, but that is not the case. A lot of people don’t think at all, or don’t understand (and still act). Most people only think one or two steps ahead. The market is ‘most people.’”
Education, Not Speculation
If most people are following Michael Saylor by putting money into BTC, then why are they irrational? The difference is in their way of thinking. When the market dips, there is a psychological factor that many cannot handle. Emotions usually run high, and the most natural reaction among many of these people is to pull back and exit. That is a very poor choice to make since price dips are very much a common occurrence in the volatile cryptocurrency market. A pullback leads to more losses because the prices could just as suddenly rise. People then go back in, but this time they “buy high” as the price rises but do not realize that they now have less BTC than what they had before the price dipped. It is like a rinse, dry, and repeat the cycle.
More education leads to better understanding and knowledge of cryptocurrency (Photo Credit by Oladimeji Ajegbile)
This does not mean that those who have put their money in BTC are always right. That is for the market to decide. No one is saying that you are wrong or right, just understand that there are always consequences to any decision. What makes it a good decision is having the knowledge that the Michael Saylors in this world have. Even the critics of Bitcoin have valid points, so take that into consideration in order to make the most rational decision.
Perhaps at the moment, things are not fully rational. There are still many weak hands among the noobs who just entered out of hype or FOMO. There is also a lack of education among new entrants who still don’t understand the true purpose of BTC and cryptocurrency, for that matter. Maintaining a HODL position should be the fundamental rule taught to noobs just entering the space. Never put in more than you are willing to lose, or else be prepared for the worst. It is really about education over speculation. When more participants begin to see things the way the high-level thinkers do, it is going to further change the game and hopefully for the best.