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Psychology of Market Cycles & Recency Bias - Let's Get a Grip

06/25/2018 15:58

I woke up and thought about the markets, thinking it's going to be a brutal way back to $10,000. Will it ever get back up to 10k or even an all-time high? Did I have a case of the Mondays? No. I have just been bombarded by the crypto hate lately so I took a step back. June 25th, 2017 bitcoin closed at $2,477. Today its currently trading at $6,258 a solid 152% ROI in one year. If you told me 365 days ago Bitcoin would be up 152% after climbing up from $1,000 earlier in the year I would have been happier than a pig in mud. Which brings me to……..



A topic not discussed enough and recency bias.  Wikinvest defines it as: "where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves”. This is a very important concept to understand. Many of you have probably seen this image but it has an importance for trading/investing and how we FEEL about our positions. See image below

Crypto is a polarizing topic. You have half the crowd rooting for it to fail and then you have the other half wanting it to reach the moon. You couple that as a reader, learner or market participant for what you want to see hear and read. Now you can think of confirmation bias (Fox News, CNN, MSNBC do you watch the same news station or same stations?).

From December 2013 to January 2015, the aggregate network value of crypto dropped from $15.9B to $3.1B, representing an 80% drawdown. Since peaking in early January 2018, we’ve fallen from $835.5B to $252.8B in aggregate network value, representing a 70% drawdown. As many have read from Peter’s update a few days ago this drop is normal in Bitcoin and has happened five times over the past seven years. So, why is it so different now?

I know we are at better times than the Mt. Gox saga that hurt markets from 2013-2015. Back then Gox controlled everything. Awareness was extremely low and the network effect of bitcoin was almost non-existent. I don’t foresee another 150+ week return to a new all-time high. We are a little more than 6 months into the bear trend and yes it might take many more weeks or months for bitcoin to build its next base before a bull trend. Why would I think those thoughts this morning but due to the fact recency bias has been in my face for weeks about how crummy bitcoin is. What would make you think that Bitcoin won’t reach an all-time high again (it’s come back five times over seven years, why not an sixth)? Do the best teams repeat in sports? Will the Patriots win the AFC East again this year? Things have a habit of happening over and over again like anything in life. I don’t think the crypto markets will be any different so I beg of you to zoom out and look at history as an indication.

I understand everyone's pain with bitcoin, altcoins and losing money but you don’t just walk into trades and make money. This does nothing if you bought the top, and is relative. But in absolute terms for the bitcoin experiment, it's literally incredible it has come this far. Making big returns just isn’t that easy. People thought it was so easy during the November/December run up it should have been a moment to take pause. When I have people contacting me from high school that don’t give a damn about tech asking me about BTC, XRP & IOTA that should have been more eye opening. (yes, I got these messages a lot from December-February).

I’ve been at this four years and got caught up in the recency bias of the times then and only sold about 5% of my holdings. So I'll learn something from this cycle and market move. Even I have some regret. "Why didn’t I sell even more?" My mind tells me “jeez, Mark you only sold 5% of your bags and you left so much capital on the table.” As you already know or will soon to find out, hindsight is an enemy in trading and should be avoided at all costs unless it is to learn a lesson or take a truth for the next round. My stance on crypto is that it makes these run ups and downs and after the crashes comes back stronger. It has done it before and it’ll do it again.

If your thesis for investing in bitcoin/crypto assets is still the same then logic indicates you hold your positions at these price points. If your rationale for investing in these assets no longer exists sell and move on. Crypto 2013-15 vs Crypto 2018 isn’t even close for the level of investment risk. Today is so much lower than any other time in history. It might not seem that way but it’s true. Crypto isn’t going anywhere and those of you who understand Bitcoin doesn't need to be a full time payment system to have value, are aware of its digital gold storage like properties

I stick by my investment thesis, even if it takes another 6+ months before returning to a bull market. This is actually good for investments, the markets and realizing that wealth and capital is built over time not overnight.

Now Look at the Market Psychology vs Bitcoin Daily Price Chart: There's no telling how long anger and depression last but there will be a disbelief stage and it’ll be great. See where numbers one through seven line up. It's no ouija board but something I do find interesting.

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  • 1

    Thank you :)


    Submitted 1 year ago by Gabs
  • 0

    My thoughts exactly. No reason to sell your Bitcoin now. Should have done that when it hit 10K based on long term trend. 

    Submitted 1 year ago by G Lebowski
  • 0

    Thank you :) ... u remind me of the big picture 


    Submitted 1 year ago by Nader
  • 0

    Perfectly timed article, as a wise (rich)  man once said " when everyone is scared be greedy"


    Submitted 1 year ago by Bradshaw
  • 0

    Sorry mate, but the comparison here with the cheat sheet is rubbish. I am quite active in the twittersphere, and it is obvious to me we are still in the denial stage - plenty of folks still believe in the triple bottom and how we are going to 50k this year. A comparison to the 2014 pop is much more in place in here and you would see that there is plenty more downside to go before we bottom. In addition, everytime we have a pump I see everyone believing we are going up again - which is NOT how markets reverse, people are usually very skeptical. This is not the time for reversal.

    Submitted 1 year ago by Erez Ben-Aharon

    Actually, the truth is Neither of you know where BTC is on the Cheat Sheet, so arguing about it is plain silly.  The chart is merely interesting food for thought. Fortunately price does not travel stright up or straight down, and profits are to be had by going short as well as long in an evolving market.


    Submitted 1 year ago by Jonathan

    Please see the last few paragraphs I wrote

    "I stick by my investment thesis, even if it takes another 6+ months before returning to a bull market. "
    There's no telling how long anger and depression last 

    I am not calling this the bottom or the end of the bear market etc.  This bear is young compared to history and it would indicate also that we have many days, weeks to form a bottom and I agree we are not there yet.  This is simply a step back and see how far we've come and how are you thinking as a trader/investor.


    Submitted 1 year ago by Mark Dukas
  • 0

    I agree more with tone vays that we are going lower, to many people still hoping that bitcoin is going to skyrocket up again. A good alternative point of view to this post can be found here 

    Submitted 1 year ago by Michael collins
  • 0

    Thanks Mark, this fits with my LT view. Please see this Weekly BLX BTC Chart, which shows quite good LT support where we are now. Does not say we can not go lower but this seems to be quite a solid area to start casting some buy ladders instead of jumping on the SHORT side.

    Submitted 1 year ago by Ula

    Yes I agree jumping on the short side now would be pushing it and risking your existing bitcoins.  Starting to become a crowded environment with everyone being doom and gloom.  It'll have some legs like the bull market did but no market lasts forever.  #PATIENCE


    Submitted 1 year ago by Mark Dukas

    Great perspective with a long range chart...it is eay to get sucked into the daily ups and downs of the market.  Twitter can make you feel like the smallest gain is monumental.  This can be true for scalpers and day traders(I am not one of those) but for many we are here for the longer term potential gains. 


    Submitted 1 year ago by Ryan Christopherson
  • 1

    The article is spot on. It's hard to predict short term price action, but this market (BTC) is regularly creating more shock and disbelief when it's going up, much more so than when it's correcting. There's always a price to pay for everything in life. The market got caught up in a bubble where grandmas are investing, and ICOs bubble, and now we are dealing with it. 

    Submitted 1 year ago by Max Gains
  • 0

    Sorry but I don’t agree. Bitcoin had a rapid rise based on public FOMO and a lot of retail buyers got burned badly. They won’t be coming back any time soon and the public require time to forget about how they got dumped on. 



    Submitted 1 year ago by James

    I’m also not sure how much involvement Tether had in bitcoins massive surge. And how they’re unwilling to provide an audit makes me feel very uneasy.


    Submitted 1 year ago by James
  • 0

    great post--- thank you

    Submitted 1 year ago by Shaetechnewbie

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