Obviously that’s a generalisation and there are exceptions to every rule. But sadly, it has been my experience that traders do not understand crypto investing. This post explains what I mean.
Old Bit Brain followers may recognise this topic. I’m not speaking about it for the first time, though I’ve never written a dedicated post about it before (at least not one which I remember!) This is a topic which usually ends up being debated in the comments sections of posts.
I ended my post yesterday with this statement:
If you are an investor then please do not follow the advice of traders – especially traders who do not specialise in crypto markets. The philosophy of trading is very different to that of investing. The philosophy of crypto is very different to that of other markets – a fact which most financial professionals deny. I can see that I will have to write another post about that topic soon.
As usual, I stand by what I said.
When I first started studying TA (a story in itself – perhaps one day I will tell it), I was very keen to learn and develop the best methods. As an inexperienced outsider, I was well aware that biases and fallacies exist within groups of similarly minded individuals – sort of like the phenomenon I wrote about in my article titled Crypto Tribalism a few days ago. Perhaps you have heard of the phenomenon called “Groupthink”. I was fortunate enough to learn about it when I studied psychology many years ago. In a nutshell, it is this:
Groupthink is a psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenting viewpoints, and by isolating themselves from outside influences.
Groupthink requires individuals to avoid raising controversial issues or alternative solutions, and there is loss of individual creativity, uniqueness and independent thinking. The dysfunctional group dynamics of the “ingroup” produces an “illusion of invulnerability” (an inflated certainty that the right decision has been made). Thus the “ingroup” significantly overrates its own abilities in decision-making and significantly underrates the abilities of its opponents.
Sound familiar? Sound like any crypto communities or Facebook groups which you belong to? Read the article, it may help you greatly in your understanding of people and how they react to their environments!
Groupthink definitely exists among traders, investors and analysts – to a large degree! For instance: Why do people buy Ripple? There are no fundamental reasons to support a Ripple buy! Or how about Elliott Waves? I have been rather outspoken of my feelings towards Elliott Waves – a theory I have determined to be useless and which adds zero value to TA. Yet there the waves are, on many of the charts you see every day.
Back to my story: I picked a few traders to learn from, traders who appeared to be “getting it right” and whose methods of analysis tied in with my own ideas that I had been developing independently. Still, I could see that some of those traders were locked into a mindset which was overly restrictive and which failed them when it came to crypto.
Yesterday I saw a post by a trader whom I still follow. This person posted on Facebook that they had taken profits in Binance Coin. “Great!” I thought… until I noticed that they had taken them in January! ?
Now don’t get me wrong, this person is still a very good trader (who generally deals in Forex), but clearly they doesn’t understand crypto! You could say: “But Bit Brain, nobody could have foreseen that BNB would do so well in the first quarter on 2019”, to which I would reply that a). you’re only partly correct and b). that’s irrelevant.
You see, here is a Bit Brain article from 6 December 2018 (one month prior to when our pro trader took profits) explaining why Binance Coin was a goodbuy: https://mentormarket.io/bitbrain/buy-nance/ the reasons in that post are solid and still apply (top tip: BNB didn’t rise with the other coins this week – making it a fantastic bargain!). In addition to that, the crypto market bottomed out in December – another fact you would have known if you had been reading my blog. To sell a coin with fundamental growth potential in a market that’s at its bottom is nothing short of madness. BNB has tripled in price (in USD) since that trader sold their’s – a mistake which could have been avoided. They should have known better!
But they didn’t, because traders struggle to understand crypto markets.
Traders vs investors vs crypto investors
A trader is a short-term thinker, medium-term at best. They may occasionally glance at a long-term chart, but only to see how it will affect their short-term trades. Traders don’t want to lock large sums of money away into cryptocurrencies and then wait for them to “Moon”, doing so would tie up their trading capital and rob them of liquidity. In order to make money, a trader needs to keep trading frequently.
The mindset of someone who buys and resells the same asset within a day or even a week is significantly different to the mindset of a long-term investor, in particular the mind of a crypto investor.
An investor looks at long-term charts and only occasionally glances at the short-term ones. I have told you on numerous occasions that I’m quite happy to take short-term hits, because I believe in the success of crypto in the long-run. To a trader this may sound ludicrous. Firstly they may doubt that the market will rise as I expect it to. Secondly they will be thinking of all the missed trading opportunities that will take place during that long period which I intend to hold.
It is absolutely true that trading opportunities are missed by someone who sits and holds. A “hodl” strategy is not the optimal way to make money, but I would argue that it is the best way to make money in crypto. You see: successful trading relies on buying near the bottom of a dip and selling near the top of a peak. That’s not always easy to do – in fact, it’s a full time job to get it right. I don’t know about you, but as a crypto investor I don’t want that to be all I think about every day. (It IS all I think about, but that’s besides that point and isn’t related to trading, I just have a real passion for crypto!) The Hodl strategy is dead easy and literally requires no effort on your part after the coins have been bought. It’s absolutely stress-free as long as you can remember that short-term dips are fine and that you’re in it for the long run.
As an investor you don’t require an encyclopaedic knowledge of TA. It doesn’t matter to you that a trader spotted “three black crows” on the Bitcoin chart this morning or what the MACD may be indicating. You can wait. From an analysis perspective; Fundamental Analysis is far more important to crypto investing than what Technical Analysis is. Fundamental Analysis teaches you the nuances of crypto investing. It is only after you understand why crypto investing is not regular investing that you can begin to invest with confidence.
Some traders are investors too. There is a lot of overlap between the skill-sets and intelligent individuals should be able to master both. But again the problem arises that those who have grown up investing in traditional markets don’t understand crypto markets.
Crypto marches to the beat of its own drum. Normal analysts can’t/won’t/don’t understand this – in fact they normally flatly deny it. Can you blame them? After doing something for 10/20/30 years, it’s hard to imagine that something like crypto can be “different” or “special”, especially when crypto often does behave just as a normal asset would on a chart. Worse still, the mentality of crypto investors is normally the same of that of regular investors, perhaps just less experienced and more fanatical. To the experienced investor: crypto investors are delusional and don’t understand the macroeconomics of markets. Their assets are the same as everything else and follow the same rules. The experienced investors could not be more wrong.
Crypto IS a special asset class. Traditional analysts can’t understand this because they haven’t seen anything like it in their lifetimes. Unfortunately for them, there haven’t been any major new asset classes recently. They were born into a world of stocks, commodities, Forex, derivatives etc and that’s all there has ever been. When the dotcom companies took off, they thought they were seeing something new, but really those were just stocks based on internet technology. Cryptocurrencies are not stocks. They don’t even conform to conventional norms like trading in fiat currencies: (crypto can be traded in BTC or ETH or Tether among others), they aren’t regulated (they can try to regulate crypto – they will not succeed), they aren’t centralised (most people I speak to can’t even grasp the concept of decentralised ownership, let alone it’s implications!), they operate freely across borders, they operate anonymously. THE RULES DO NOT APPLY TO CRYPTO!
Most important of all: cryptocurrencies are based on blockchain technology.
Blockchain tech is HUGE news. It’s revolutionary – again – on a scale which is not understood by most. Blockchains will do to the world of trading and investing what the internet did to the world of communications – with similar financial reward for those using it.
Because blockchain tech is a technology that is being adopted, it will continue to grow. This growth is inexorable. That which is inherently tied to blockchain tech (cryptocurrencies) will grow along with the technology.
Yes, JP Morgan can go and make their JP Morgan Coin based on a blockchain too, but they are kidding themselves. Their coin is centralised, regulated and won’t be anonymous – thereby missing out on many of the major benefits benefits of a blockchain in the first place. They won’t let you use it for unregulated cross border transactions or to save yourself from large fees. Those savings will be kept to the bank (you may get a small portion passed on to you). People are NOT going to buy JP Morgan Coin when they could buy Bitcoin. Bitcoin is accepted anywhere, is decentralised, it’s anonymous and it does not require you to pay to use it. It’s the original blockchain, not a cheap and pervertedly disfigured form of privatised blockchain use. Cryptocurrencies are growing because they put control back in the hands of the people; by definition: big business can’t use them successfully!
I’ve already alluded to the herd mentality that crypto investors have. that is unavoidable and will show up on the charts. you will be able to track it with standard TA tools, normal investors and traders will understand that too. The part they don’t get is the continued growth. They call it a gambler’s fallacy. They’ll call it wishful thinking. They’ll call it inexperience. But as long as blockchain tech is still being adopted – which should carry on for at least several decades – crypto will grow rapidly in price.
Take home message: Crypto will continue to grow as blockchains continue to be adopted.
Don’t hate the traders. Don’t tease them, “I told you so” them or get angry with them. They’re not stupid for not understanding crypto and it doesn’t make them bad analysts. For them to accept crypto as something completely new is against basic human nature, you can’t really fault them for the way they were born! Help them, disagree with them, some of them (especially the younger ones) will come around if they watch the continued successes of crypto for long enough. The older ones will probably never come around, and that’s okay. Look at Buffett – he will never understand Bitcoin, despite being one of the greatest investors ever to have lived. In his case I just wish he’d stop talking about that which he does not (by his own admission) understand!
Crypto is not Tulip mania. It’s not the dotcom bubble (which turned out pretty well for those companies that survived it). Crypto is a growing new technology that will break new ground as it becomes adopted by the masses. Invest accordingly. If you have questions – you know where to find me.
Yes I know there are no pictures in this post – use your imagination!
Yours in crypto
“The secret to success: find out where people are going and get there first”
~ Mark Twain
“By this means (fractional reserve banking) government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”
~ John Maynard Keynes