Greed and fear – two primary human instincts that completely suppress rational thinking. Times change, and investment options change too. But what always accompanies people are these two primary instincts. Only when you recognise that you are no exception and can be just as greedy and fearful, and only when you recognise your mistakes and learn from them, only then do you have a chance of becoming successful at investing. Because, as is well known, the majority of crypto investors
are losing money.
Why this introduction when we are talking about Bitcoin today, or, as it is often called nowadays, “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 sceptics talk about a very typical financial market bubble, a product whose value is somewhere around zero.
In today’s guest article, I would like to introduce you to the topic of market cycles and investor psychology using Bitcoin as an example. We will examine several patterns and highlight a few points that are absolutely essential for long-term investor success.
But first, let’s talk about history! Not Napoleon’s wars or the Second World War, but the past as such, because in most cases only the past can give us enough information to make informed investment decisions for the future. They say that the longer the period we analyse, the more information we can extract from it and the more well-founded our decisions will be. The first cryptocurrency, Bitcoin, was only born in 2009, following the great real estate crisis. Thus, the period we can analyse is also relatively limited: 14 years.
However, even in such a short space of time, observant investors could have noticed certain patterns. On the one hand, Bitcoin and cryptocurrencies in general are very cyclical, much like certain equities, only far more extreme. Here I would like to quote an observation by Howard Marks, the founder of Oaktree Capital Management:
Economies, companies and markets also follow patterns. Some of these patterns are commonly called cycles. They arise from natural phenomena, but — and this is important — also from the ups and downs of the human psyche and human behaviour, which is the result of it. Because human psychology and behaviour 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 suited for certain actions. And they can have a profound impact on investors. If we pay attention to cycles, we can emerge from them stronger. By studying previous cycles, understanding their origins and significance, and preparing for the next one, we do not need to reinvent the wheel to make sense of every investment environment. And then there is less chance that events will take us by surprise. We can master these recurring patterns to increase our value.
Following this excerpt, we understand that awareness of cycles and their impact on the human psyche is far more important than understanding the technology itself. This does not mean that we do not need to deal with technology at all. We need a certain 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 analysing the past and discovering that cryptocurrencies are highly cyclical and that the hype phase is followed by a prolonged 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? Usually, he finds out about it when everyone is talking about it, and in reality it is already too late: television, radio, newspapers, even his neighbour Klaus has already invested! At this point, all the alarm bells would ring for an investor who has previously dealt with market cycles. But our inexperienced investor is of the opinion that he will remain so positive for a while 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 realise that the current risk-reward ratio is pretty lousy and that it would be better to wait.
Main question: what phase of the market are we in?
Understanding which stage of the market we are currently in is probably the most difficult task, but it is not insurmountable. The longer you deal with financial markets and especially with cryptocurrencies, the better your feel for them will become over time. Particular attention should be paid to the following factors: the general news climate, the current level of inflation, and how strong the US dollar is (the DXY chart). A strong US dollar is bad for high-risk assets like Bitcoin or tech stocks. General macroeconomic processes also play a role. If there is a war somewhere and all market participants are thrown off balance, it is very unlikely that Bitcoin will decouple from the market and reach new highs. The tone has changed completely since 2018. At that time, people were still saying that if the markets collapsed, cryptocurrencies would be a safe haven and absorb all the capital. But after the coronavirus pandemic, we saw that this is not the case.
“Why should everything be different when the same players that dominate the stock market currently dominate the market, and are the first to dump Bitcoin as soon as the first signs of a recession or serious correction appear on the horizon?”
“So, what should I do now? Invest or wait?”
– asks the newly minted investor. Human nature is such that we want an immediate answer to everything without giving it any thought. That is how our “lazy” brain is wired. We do not 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 feel, and not just when investing!
Conclusion: how to become a successful crypto investor?
In this short guest post, I didn’t want to give a step-by-step guide showing which cryptocurrencies to buy and when. That leads nowhere. On the other hand, independent thinking helps you. After all, what makes a successful investor? For a successful investor, the main focus is not on short-term profits, but on their long-term strategies. He understands how market cycles and investor psychology work and shapes his strategy accordingly, because without a strategy you are at the mercy of the market and emotions! He knows that he too can be greedy and fearful, but he tries to turn these weaknesses into advantages. A successful investor always strives to acquire new knowledge and exchanges ideas with like-minded people to increase his success rate.
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(*) meaning:
With our recommendations, we want to help as many people as possible look after their finances. We fund our work through affiliate links. We mark these links with an asterisk (*).
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