Greed and fear - two basic instincts of people that completely suppress rational thinking. Times change, and so do investment options. But what always accompanies people are these two basic instincts. Only when you accept that you are no exception and can be just as greedy and fearful, and only when you admit your mistakes and learn from them, only then do you have a chance of becoming successful in investing. Because, as you know, most crypto investors
are losing money.
Why this introduction when we talk about Bitcoin today, or as it is often called these days, “digital gold”? Because in no other investment are these basic instincts as strong as when investing in cryptocurrencies. Many compare cryptocurrencies to the Klondike gold rush, others to tulip mania, and some skeptics talk about a very typical bubble in the financial market, about a product whose cost is somewhere around zero.
In today's guest post, I would like to introduce you to the topic of market cycles and investor psychology using Bitcoin as an example. We will look at a few patterns and capture a few points that are absolutely essential for investor success in the long run.
But first, let's talk about history! Not about the Napoleonic Wars or World War II, but about the past as such, because in most cases only the past can give us enough information to make informed investment decisions for the future. It is said that the longer the period we analyze, the more information we can extract from it and the more informed the decisions will be. The first cryptocurrency, Bitcoin, was born only in 2009, after a big real estate crisis. So the period we can analyze is also relatively limited: 14 years.
However, even in such a short period of time, attentive investors could notice certain patterns. On the one hand, bitcoin and cryptocurrencies in general are very cyclical, like some stocks, only much more extreme. Here I would like to quote an observation by Howard Marks, founder of Oaktree Capital Management:
The economy, companies and markets also follow patterns. Some of these patterns are commonly referred to as cycles. They arise from natural phenomena, but - and this is important - also from the ups and downs of the human psyche and the human behavior that results from them. Because psychology and human behavior play such an important role in shaping them, these cycles are not as regular as clock and calendar cycles, but at least they lead to times that are better and worse for certain activities. And they can have a profound impact on investors. If we pay attention to cycles, we can come out of them stronger. By studying previous cycles, understanding their origin and meaning, and preparing for the next one, we don't need to reinvent the wheel to re-understand each investment environment. And then there is less chance that events will surprise us out of the blue. We can master these recurring patterns in favor of increasing our value.
After this passage, we understand that understanding the cycles and their impact on the human psyche is much more important than understanding the technology itself. This does not mean that we do not need to deal with technology at all. We need some basic understanding for every investment we make. Rather, I mean that we should not spend too much time on technical details and lose sight of the big picture.
By analyzing the past and finding that cryptocurrencies are highly cyclical and that a rush phase is followed by a long bear market, including an accumulation phase, we can align our investments accordingly. What are the typical mistakes of a new investor who wants to invest in cryptocurrencies? He usually finds out about it when everyone is talking about it, and it's actually too late: TV, radio, newspapers, even his neighbor Klaus has already invested! At this point, all the alarm bells will ring for an investor who has previously dealt with market cycles. But our inexperienced investor is of the opinion that for some time he will remain so positive and at the first correction he buys more, not suspecting that this is only the beginning of a multi-year correction. If he understood cycles, he could immediately understand that the current risk/reward ratio is pretty lousy and that it would be better to wait.
The main question is: what phase of the market are we in?
Understanding where we are in the market right now is probably the most difficult task, but it is not insurmountable. The longer you deal with financial markets and especially cryptocurrencies, the better you will feel about them over time. Particular attention should be paid to the following factors: the general news situation, the current inflation rate and how strong the US dollar is (DXY chart). A strong US dollar is bad for high-risk assets like bitcoin or tech stocks. General macroeconomic processes also play their role. If there is a war somewhere and all market participants are unsettled, it is very unlikely that bitcoin will decouple from the market and reach new highs. The tenor has completely changed since 2018. At that time, they still said that if the markets collapsed, cryptocurrencies would become a salvation and absorb all the capital. But after the coronavirus pandemic, we saw that this was not the case.
“Why should it be any different when the market is now dominated by the same players as stocks and are the first to dump bitcoin as soon as the first signs of a recession or major correction appear on the horizon?”
“So what do I do now? Invest or wait?
the new investor will now ask. Human nature is such that we want to have an immediate answer to everything without thinking. This is how our “lazy” brain works. we don't like uncertainty! We become insecure when we lack information and, conversely, the more information we have and the better we can understand and attribute processes, the safer we become, and not only when investing!
Conclusion: how to become a successful crypto investor?
In this short guest post, I did not want to give a step-by-step guide showing which cryptocurrencies to buy and when. It won't lead to anything. On the other hand, independent thinking helps you. After all, what makes a successful investor? For a successful investor, the focus is not on short-term profits, but on their strategy for the long term. He understands how market cycles and investor psychology work and builds his strategy accordingly, because without a strategy you are at the mercy of the market and emotions! He knows that he can also be greedy and fearful, but he tries to turn these weaknesses into advantages. A successful investor is always looking to acquire new knowledge and exchange ideas with like-minded people to increase their success rate.
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