This year we’ve seen historic levels of uncertainty, which has resulted in historic levels of volatility, and irrationality. Bitcoin and Stocks have been dominating the headlines for the last few months as retail investors rush to jump in. We’ve seen a 700%+ increase in Robinhood, and Coinbase traders.
Traders don’t know what to do, and are buying and selling based on whatever the crowd is doing, rather than their own consciousness. We’ve seen this with the dozens of overpriced tech stocks such as Apple, Amazon, and Tesla, as well as the level of money being blindly thrown into Bitcoin, and even worthless DeFi coins named after memes.
Nobody knows the “true” value for these speculative assets. Everyone is speculating on what it’s worth, and we often go through these market cycles which are essentially a display of Investors emotions.
The same people that are blindly jumping into Bitcoin above 13K, were likely the same people who sold Bitcoin in March as we dropped below 4K.
This article will touch on how hype can quickly turn to fear, and why buying into this rally above $13,000 is a big mistake.
What are we rising on?
Think of Tether as the Federal Reserve for Bitcoin. This controversial coin has the ability to essentially mint fake U.S Dollars, and move them into Bitcoin.
This year, we’ve seen Tethers market cap grow by over 300%, which much of the MC has been funneled into BTC, and other assets to boost the price, and essentially launder money back into real fiat.
Many bulls will refuse to acknowledge this theory, simply because it means the majority of Bitcoin market cap is propped up on fake money, which would mean there is a lot less demand than many claim.
The reason that this isn’t sustainable, and supports my short term bearish sentiment is the fact that Tether is currently involved in a massive fraud and price manipulation investigation by the U.S.
When they do become insolvent in the future, it will be a big deal that can no longer be ignored by Bitcoin maximalists.
When the prices rise, you’ll often see new narrative pop up. These narratives gain popularity as they are constructs generated through misinterpretations, and over reactions. Investors often feel unsafe holding or buying into an asset unless there is continuous “good news” that further justify their irrational positions.
We saw many overreacted narratives such as Bakkt Futures, TA’s Golden Cross, and even Libra, in 2019. Which all eventually failed to match up to their expectations, as I predicted they would.
In 2020, we’re seeing a repeat in this trend. A rapid increase in narratives that are being misinterpreted, and over-reacted upon by greedy investors.
To summarize, this whole narrative on institutional investors rushing to buy up all of Bitcoin’s supply is nothing more than a marketing scheme by big companies such as Greyscale, Square, and MicroStrategy to grow the price of their stocks.
U.S Stimulus / Stock Correlation
What perma-bulls fail to realize is that in 2020 we’ve witnessed with largest increase in Quantitative Easing in history. Trillions of dollars have been printed, and are now circulating around the global economy.
This money has undoubtedly effected all markets, which is why Bitcoin isn’t the only thing rising. We’ve seen a huge surge in most assets, including companies that have even gone bankrupt.
Bitcoin has a STRONG correlation with the stock market. Many don’t know this, but BTC has followed a similar market trend since it was created in 2009.
In addition, the 2020 market bottom for stocks and cryptocurrencies took place in the same time that stimulus was approved.
This isn’t just a random coincidence…
The markets aren’t rising because of new demand, they are rising because of artificial money being pushed into them, which isn’t sustainable forever.
Many traders have a short term memory.
Just last year, we had a bull rally that was almost identical to the rally we’re seeing this year, and yet nobody learned any lessons.
In 2019, the market sentiment started off in a fearful way. We had just plummeted from 6K to low 3Ks, and there was lots of bad news circulating, especially regarding the Tether lawsuit scandal.
This fear lasted a few months, until the markets started seeing some green as spring came along. This growth started picking up momentum as time went on, and ended in the summer of 2019, pumping to just under $14,000.
This chart below displays the rally we saw last year. It was characterized by three main shifts in sentiment. This rapid increase in price was largely caused by Facebook’s Libra, which was gaining worldwide publicity.
During the FOMO phase, in June 2019, a majority of news outlets, cryptocurrency influencers, and public figures were talking about how everyone should buy in up there.
That area was undoubtedly where the majority of retail traders jumped in. They were tricked into a false narrative that we would surpass all time highs, and reach insanely high targets like $100,000 or $1,000,000.
I vividly remember many traders talking about a “golden bull cross” which allegedly signaled a bull run to $1,000,000+ by the end of the year. This obviously wasn’t the case, and was nothing more than speculation.
As we can see in the visual below, once the rally had gone mainstream, and everyone jumped back in, the markets corrected hard. With all the bullish news conveniently circulating at the top, (that was allegedly going to pump it higher) we instead witnessed extreme fear for months, which ended with a total correction of almost 75%.
Why is this important? Well it shows how market cycles work. The area where everyone is blindly buying in because of hype, is where the market tops, and the point where everyone is blindly selling because of fear, is where the market bottoms.
Investors fall for these traps over and over again, which is why being a contrarian Investor is important. It’s important to avoid the noise, and not become the next victim associated with buying the top, or selling the bottom.
We’re seeing Extreme FOMO right now.
The truth is, nobody knows exactly where the price will top, but we can make general assumptions based on how greedy/fearful the sentiment is.
Right now, we’re witnessing extreme levels of greed, not seen for a while.
“ Greed is always followed by fear. “
This unsustainable level of greed will undoubtedly result in extreme fear in the future, as the over exaggerated narratives begin to lose significance.
It’s very dangerous to be buying into this hype rally, especially considering there’s a strong (95%) chance that we correct below $10,000 in the near future, and even potentially drop to below March lows — as crazy as that sounds now.
There’s many unfilled CME gaps that have been opened on the last few months of market action. These gaps are almost always filled, and have been a strong indicator for market movements.
This was one of the main reasons why I was advising my followers to buy Bitcoin in March after we crashed under $4000.
The CME gaps predicted a rise beyond 11.8K, which obviously came true. We’re now in a period of lots of hype, and excitement, which is exactly what happened in December 2017, and June 2019, where the late and inexperienced investors begin FOMO’ing in.
The average Investors lack many experiences in the market to make rational decisions, which is why they partake in group think.
This dysfunctional decision-making has resulted in many of the severe pumps, and crashes over the years. People would prefer to blindly follow the crowd, rather than act alone due to human psychology.
Going against the crowd is what being a contrarian is about. Sir John Templeton was famous for saying that the best time to buy stocks is “when there’s blood in the streets.”
Howard Marks constantly reminds us in his letters that human nature compels investors to “buy high and sell low,” and his advice is to do just the opposite.
When groupthink dominates and valuations reach extremes, it’s probably time to take the opposite side of the trade.
I personally will not be opening any long positions into Bitcoin in this pink box, and continuously be adding to my shorts the higher we go.
Shorting on a hype rally can be dangerous, so I always advice individuals to use little to no leverage to avoid liquidation.
I believe we will top soon, and even in 2021 we will experience lots of red in the markets (both stock + crypto). We cannot forget the many reasons why the markets aren’t sustainable, and why buying in at a 90 degree angle probably isn’t the best decision.
What can I do to avoid FOMO?
Controlling your emotions can be extremely difficult. I’ve written many threads on how to do so, but many still fail to follow these rules.
The simplest way to avoid large losses during FOMO rallies like this is to just avoid staring at the charts. As mentioned earlier, nobody knows the exact top. It is inconsequential to continuously look at the prices each day unless you are waiting on a buying entry, in which won’t be suggested for long time.
Take a break from being on the computer, or your trading app, and avoid continuously viewing the prices. By watching them for long periods of time, you will experience the feeling of missing out, and want in.
Authored by CryptoWhale @ https://cryptowhale.substack.com/p/must-read-heres-the-reality-of-why