Crypto Market Cycles, Trump’s Tweet Storm Swaying Global Markets and Trading Psychology #24
Market Meditations | October 7, 2020
Crypto Market Cycles, Trump’s Tweet Storm Is Swaying Global Markets and Trading Psychology
The crypto markets continue to be quiet, surprisingly. Despite the bad news we’ve been receiving, large scale hacks, our biggest exchanges going down, world leaders getting sick, new regulations…
Bitcoin is holding its place for now.
Today we focus on education. Let’s take a look at a crypto market cycles through a few different lenses to get a better idea of where we are now, get up to date on all recent events and finish off by looking into a trader’s psychology.
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Surviving a Crypto Market Cycle
Ethereum Browser and Wallet App Metamask Now Offers Token Swap Functionality
FCA Bans Crypto Derivatives for Retail Consumers in the UK
John Mcafee Sued by Securities and Exchanges Commission for ICO Promotions in 2017-2018
Trump’s Tweet Storm Is Swaying Global Markets Again
Central Banks Flip to Gold Sales After Record Rally
Black Holes Suck in the Nobel Prize for Physics
The Importance of Trading Psychology
Surviving a Crypto Market Cycle
Except for the Bitmex news, there hasn’t been a major story to write about this week and with the decentralized finance (DeFi) theme going through a mini-winter since early September, it’s time for an educational piece. Bitcoin and Ethereum have matured a bit, but some crypto investors clearly went through a period of optimism and greed this summer when it comes to the altcoin market. As experienced investors like to say: Markets take the stairs up, but the elevator down. Are we in a new crypto bear market? Let’s have a look!
What’s a Market Cycle?
One of the most famous images when it comes to market cycles is the legendary Wall Street cheat sheet, portraying a full market cycle paired with common emotions felt during the various stages. To simplify, we divide a market cycle into two stages: A bull market (optimism) and a bear market (pessimism). Jason Zweig once wrote: “The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The Intelligent Investor is a realist who sells to optimists and buys from pessimists.” Many market participants fail to recognize the cyclicality of markets but to avoid being off-guard, knowing the different phases of the market cycle can be incredibly valuable. It allows one to risk appropriately and position your portfolio for what lies ahead. Market psychology plays a big role in price performance and any investor or trader that spends enough time on social media platforms like Twitter knows how obvious the various emotions can be at times.
Another way to think about market cycles is through different stages, which was popularized by legendary trader Wyckoff. Each cycle first goes through an accumulation phase. After early investors are done accumulating, the market enters the markup phase where prices go up for a prolonged period of time. Once the market reaches its peak, a distribution phase takes place where sellers start to overtake buyers. After distribution at the top is finished, the market enters a markdown phase where prices trend lower until they reach a bottom. Once a bottom has been reached, a new accumulation phase begins and the market cycle is complete.
Crypto vs. Traditional Markets
In traditional markets, a full market cycle can take a decade or more to play out. The crypto market is different in the sense that because of the immaturity of the market, cycles are faster and more violent. Bitcoin, the oldest cryptocurrency, is barely 11 years old and has gone through at least 3 major cycles so far.
Cycles in the altcoin market happen even quicker and can be very obvious in hindsight. This summer the market was filled with optimism caused by the decentralized finance (DeFi) craze. Everybody was making money, prices only went up, private sales became overcrowded and public listing instantly made 5-10x. Barely 2 months later, prices of most altcoins are down 60-90% across the board. No altcoins seem to be immune when it comes to market cycles. That said, Chris Burniske, a partner at venture capital firm Placeholder, posted an interesting tweet in reaction to many investors claiming that another crypto bubble had just popped. He pointed out that, In the grand scheme of things, the crypto market barely moved over the summer. Were DeFi participants too optimistic during the summer? Likely so. Were we in another big crypto bubble? Probably not.
What Comes Next?
I believe it’s useful to make a distinction between the overall crypto market and the isolated DeFi craze earlier this year. Some DeFi projects found product-market fit and optimism surrounding the new innovation was reflected on the altcoin market in general, quickly ending in unstainable optimism once again. Prices are now going through a necessary correction with altcoin charts and sentiment clearly trending down. Unless you’re an investor that focuses on dollar-cost averaging, interesting opportunities in the market have become more scarce. As @QwQiao pointed out earlier this week, there is still a bit of hope in the market despite the strong sell-off, which could imply that we haven’t found an altcoin bottom yet.
If we take a broader approach and look at crypto in general, bitcoin has barely moved despite several (bad) news events in the past few weeks and is this year’s best performer compared to all traditional markets. There is definitely uncertainty in the markets due to the Coronavirus crisis and upcoming US elections and if global markets were to correct further, it is not unreasonable to expect that crypto would follow along. Correlations across all markets have risen significantly so sentiment in traditional markets will likely transfer to the crypto market as well.
The 2018-2019 bear market seems to have ended and different metrics show continued growth and positive signs of adoption. Due to the massive stimulus and money printing attempts by central banks, more and more traditional and institutional investors have started to look at crypto as a possible inflation hedge and ‘smart-money’ continues to enter the space. Crypto is nowhere near the mainstream attention it received in 2017 and it looks like further growth is possible.
Ethereum Browser and Wallet App Metamask Now Offers Token Swap Functionality. Crypto’s popular browser extension Metamask now allows users to swap tokens from within the app itself. The news was announced on Tuesday, claiming that the new feature would request token prices from decentralized exchanges (DEX) and aggregators so that users can get access to the best prices available. MetaMask will support Uniswap, Airswap, Kyber, 0x API and more. This approach means that users won’t need to navigate these platforms individually to find the optimal price. On top of the new feature, the Metamask also announced it had reached and exceeded one million monthly active users, stating that ‘adoption of DAOs, Web3 games and the rapid consumer uptake of DeFi products and services has further accelerated our growth curve.’ Read more
FCA Bans Crypto Derivatives for Retail Consumers in the UK. The Financial Conduct Authority (FCA) has published final rules banning the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of crypto assets to retail consumers. The financial regulator considers these product to be ill-suited for retail consumers due to the potential harm they pose, claiming that they could not be reliably valued by retail consumers for several reasons. the ban will affect “the sale, marketing and distribution” to retail investors of any derivatives contract or ETNs that linked to “unregulated transferable crypto assets”, including major cryptocurrencies like bitcoin, ether and XRP, issued by entities in or outside the U.K.The U.K. ban will come into effect on Jan. 6, 2021. Read more
John Mcafee Sued by Securities and Exchanges Commission for ICO Promotions in 2017-2018. The U.S. Securities and Exchange Commission (SEC) filed a suit against crypto investor and promoter John McAfee for his past promotion of initial coin offerings (ICOs) on social media. The complaint read that “from at least November 2017 through February 2018, McAfee leveraged his fame to make more than $23.1 million U.S. Dollars (“USD”) in undisclosed compensation by recommending at least seven “initial coin offerings” or ICOs to his Twitter followers.” Specifically, McAfee is accused of not disclosing that he was paid to promote the ICOs by the issuers and that the encouraged investors to purchase the securities sold in certain of the ICOs without disclosing that he was simultaneously trying to sell his own holdings. In a separate action by the Department of Justice (DOJ), McAfee has been charged with tax evasion. McAfee has been arrested in Spain where he is pending extradition and could face a maximum sentence of five years in prison for each count of tax evasion. Read more
Trump’s Tweet Storm Is Swaying Global Markets Again. Conflicted Twitter posts from Trump today have swayed the markets. U.S. stocks slumped on Tuesday while Treasuries surged after Trump tweeted that he had decided to halt stimulus talks. His posts during the Asian hours on Wednesday – calling for support for airlines and the Paycheck Protection Program – helped erase losses in U.S. stock futures and Japanese shares. Most Asian currencies crept lower amid uncertainty over the next round of U.S. stimulus. In total, Trump tweeted or retweeted just under 40 times in the space of two hours. That’s boosting market volatility, which has already picked up this month after Trump tested positive for coronavirus as investors grappled with the existing uncertainty surrounding the U.S. election and a stimulus deal. Read more.
Central Banks Flip to Gold Sales After Record Rally. Central banks became net sellers of gold in August for the first time in a year and a half, in the latest indication that demand for the metal is slowly following a record setting rally. Global central banks sold a net 12.3 tonnes of gold over the month, according to estimates published on Wednesday by the World Gold Council, an industry-backed body. The shift came just as the precious metal reached a record high above $2,070 a troy ounce in early August. It has since fallen more than 8% to $1,890 per ounce. The latest data reflect the pullback of some major buyers as countries free up resources to deal with the coronavirus crisis. Read more.
Black Holes Suck in the Nobel Prize for Physics. On October 6th, the Nobel-prize committee awarded the famous honour in physics to three people who have led a decades long effort on understanding black holes. Half the prize of SKr10m ($1.1m) went to Sir Roger Penrose of Oxford University, who built on Albert Einstein’s general theory of relativity to predict how black holes could form in the universe. Andrea Ghez and Reinhard Genzel, of the University of California’s Los Angeles and Berkeley campuses respectively, shared the other half for their decades of work mapping the movements of stars around the centre of the Milky Way. Their studies demonstrated that this is the site of an enormous cosmic object, which is assumed to be a supermassive black hole. Read more.
The Importance of Trading Psychology
Many skills are required for trading successfully in the financial markets. They include the abilities to evaluate fundamentals and to determine the direction of a trend. I write this newsletter to help my audience with this but the self-improvement section is designed to help my readers with something even more important: a trader’s mindset.
As my followers will know, containing emotion, thinking quickly and exercising discipline are components of what we might call trading psychology. There are two main emotions to understand and keep under control: fear and greed.
When traders get bad news about a coin or stock, they naturally get scared. They may overreact and feel compelled to liquidate their holdings and sit on the cash, refraining from taking any more risks. If they do, they may avoid certain losses but may also miss out on some gains.
To avoid this, we need to dissect fear. Fear is a natural reaction to a perceived threat. In this case, it’s a threat to their profit potential. Quantifying the fear might help. Traders should consider just what they are afraid of, and why they are afraid of it. But that thinking should occur before the bad news, not in the middle of it.
By thinking it through ahead of time, traders will know how they perceive events instinctively and react to them, and can move past the emotional response. Of course, this is not easy, but it’s necessary to the health of an investor’s portfolio, not to mention the investor. For more on this, reread the market meditation that discusses risk appetite.
There’s an old saying on Wall Street that “pigs get slaughtered”. This refers to the habit greedy investors have of hanging on to a winning position too long to get every last tick upward in price. Sooner or later, the trend reverses and the greedy get caught.
Greed is not easy to overcome. It’s often based on the instinct to do better, or get just a little more. A trader should learn to recognise this instinct and develop a trading plan based on rational thinking, not whims or instincts.
Greed as a problem or even an evil is a story as old as time. It is one of the cardinal / seven deadly sins within Christian teachings which are contrary to the seven heavenly virtues. Thankfully since then we have managed to come up with some ways to manage or overcome greed.
The bottom line: if you are investing time and energy into your trading technique, make sure you match that with ample time spent developing your trading psychology. Trading technique is a necessary but not sufficient condition to your success in this space; be sure to use this section of the newsletter regularly to grow and challenge your mindset.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.