The Psychology of Bull and Bear Markets

For all the talk of adoption, new partnerships, government-issued cryptocurrencies, and ever-increasing mainstream media coverage of the cryptospace, the market is really an emotional beast that can tank at a moments notice.

I’m not saying that to put anyone off – it has historically always rebounded bigger and better than ever, but corrections are hard, fast, and unpredictable. Often a bear market creeps up unrelated to the technical side of things, and like a snowball rolling down a mountain, it can start to build in size and speed until something truly enormous is taking place.

Today the market lost $16 billion in value.

Boom, gone. Arguably this was due to Japan’s FSA issuing six exchanges with business improvement orders resulting in bitFlyer temporarily halting the acceptance of new customers and reviewing current customer ID as part of their new anti-money laundering measures. That alone could easily spook the market and put off the many libertarian investors to whom Bitcoin and cryptocurrency is a way of distancing themselves from the government and taking control of their own finances.

Also people who are, you know… laundering money.

If the FSA’s measures were indeed behind the most recent decline, however, it was likely one of many relatively minor factors that ends up triggering a major event such as that seen today.

Traders can scour the news, read over the charts, and toss the chicken bones and examine the tea leaves, but at the end of the day things don’t always go according to plan.

There are, however, certain common psychological phenomena that commonly occur in any marketplace, and crypto is no different.

Enthusiasm, Greed, Denial, Fear, Capitulation

Sounds kind of scary. These are actually trends seen in the rise and fall of a typical price bubble – however, with Bitcoin and the cryptomarket as a whole, we’ve already repeated this phase several times.

Damn, son.

Greg Schoen sold 1,700 BTC in 2011 only to see the price skyrocket from $0.30 to $8.00. Then to $80, $800, $8,000 – even in this current bear market with BTC at $6,000 as I write, those BTC are worth over $10 million. Gregg was around for many Bitcoin bubbles – according to the ‘Bitcoin Obituaries’ website, Bitcoin has been pronounced dead in the media over 300 times and counting, each time suddenly resurging once again. With each wave of volatility came waves of emotions, pretty much in the same order.

Enthusiasm: Hey, this Bitcoin stuff seems pretty cool. You know, I think it’s actually kinda going somewhere! I don’t know too much about it, but I’m gonna buy in and see where it goes.

Greed: Man, have you seen the Bitcoin charts? This shit is crazy, if I get in now I can retire when I’m 12 and live in a tower made of Lamborghinis stacked as high as the god damn moon!

Delusion: This is it. That $472 I put into Bitcoin is going to make me among the richest beings in the multiverse. When I talk, people will bottle the air around my head and sell it on eBay to feed their children. 1 Satoshi is going to be the new $1 million, and I will be so rich that I literally cannot die.

Denial: Alright, things are taking a bit of a downward turn. You think I’m gonna cash out now? Are you high? Did you not hear that thing I said about my bottled breath being more than you could make in a year, you idiot? It’s just consolidating, don’t stress me out like that.

Fear: OK what the hell. What the hell is this. Do I bail? This is still more than I ever thought it was going to be worth when I got in, but that was then. I’m HODLing this shit until you pry my digital assets from my cold, dead, cryptographically encrypted fingers.

Capitulation: It’s over. I surrender – no lambo tower to the moon, no godlike immortality – this Bitcoin stuff is stupid, and I hate it, and I hate you, and I’m selling my laptop and moving to Alaska to chop trees and drink myself to death.

The Cycle Continues

Here’s the thing about bubbles – they burst, they reform, the cycle continues. No-one can predict when an asset’s value is really “dead” or whether it’s just resting its eyes – the bubble cycle we listed earlier is a variation of a commonly recognized Wall Street cycle in the emotional journey of investors. This can happen on a macrocosmic level as seen in the 2017/18 boom and bust of the crypto market which brought it into the mainstream media at last, but it happens on a much more frequent and minuscule level with market assets all the time as well, even on a day-to-day basis.

People looking to trade cryptocurrencies would certainly do well to learn technical analysis, which in particular is relevant for day-trading – however, it’s important to consider TA in the context of market emotions as well.

In hindsight, investing at the ATH of Bitcoin in 2017 was not a smart move (pfft, not that I would know anything about that), but it’s only when considering the market in terms of the above psychological cycle that such a thing is crystal clear.

Bull markets sweep people off their feet with the infectious greed and/or excitement of making a lot of money, while bear markets pose opportunities as well for those who think they can time the market and read the writing on the wall. In a bear market, there’s the constant risk of catching the falling knife and cutting your hand open (i.e., thinking you’ve bought in at the bottom only for things to, you know…)

At the end of the day, bull.bear market psychology is really interesting stuff that gives us insights not only into the markets but into ourselves as a society. A society of reactionary, greedy, easily terrified, hysteric lunatics. That’s deep.

On Wall Street, the VIX is an actual fear gauge used by traders to literally measure market fear and volatility, and a prominent Wall Street investor recently said that Bitcoin was actually predicting the movement in the VIX charts, an earlier measurement of market fear than the VIX itself.

Anyone interested in learning TA to try their hand at day trading can check out resources like The Chart Guys to get neck deep into trading charts and price indicators, but always remember – the thing that will affect the price more than any other factor is human emotion. Those red and green candles are a brain scan of the collective consciousness of the market as a whole, and you need to be just as good at recognizing the emotions of others as you are at being logical with your own if you want to take part.

Interested in a cool crypto story….check out TOTAL DOMINANCE: The Story of Binance and The Top Secret Hedge Fund That Everyone Knows About.

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