Is it possible to know where the crypto market is heading? Can you tell when the market is overbought, overheated, and getting close to a correction?
Here are three simple ways you can get an idea of where the crypto market is heading, especially when a lot of money is moving into the market, and it's reaching the peak of a bull market. Let's look at our own biases, then our own emotions, and finally some patterns of behaviour of others on social media.
Watch the video and listen to the podcast at the bottom of the post.
This is not intended as financial advice. I'm merely presenting the reasoning I use to make my own decisions.
Being aware of your own biases can help you step back and see things more clearly, maintaining perspective where you otherwise might lose it. Recency bias is one of these biases, where you believe you know what will continue to happen, because you're prioritising the events of recent months.
In past months, we saw comments on social media like: "I don't think it'll go down that much. It doesn't seem like it'll go that low. I don't feel it'll drop like that." Thinking, seeming, feeling... But where's the evidence? The evidence is probably that things have been this way recently, so they're giving this data priority.
A lot of people made this mistake when BTC was around $15,000, thinking no way it could go down to $5,000 again. At time of writing it's around $6,300 and $5,000 seems like a real possibility. If they'd been looking back at the 2013 bull run, they could see when BTC went up to $1,100 then bottomed out around $200 8 months later, it would have given them a much clearer picture of what was possible.
Similarly, we see this when crypto has been going down for 6 months. If someone isn't really into markets, tell them you're thinking of buying now and they might say "Why? Isn't that whole thing dead?" The market goes up for a few months, people think it'll never fall. The market goes down for a few months, people think it'll never recover.
The lesson is: when you think you know where something is going, ask yourself how you know. Maybe you don't know. It might just be recency bias.
Your own emotional guide
One wonderful tool you can use to judge what is going on in the market, is your own emotions.
Here is one common scenario for cryptonauts: You've put a fair chunk of cash into a project when it was doing nothing, and now it's taking off. You start wondering "Is this thing going to make me a millionaire?" You see the figures and your head starts swimming, you feel light-headed and say to yourself "Hoo... that's a lot of money." Right at that point, at that moment, you will know that other people are feeling the same. It's almost certainly a sign that you're overexposed to the market. Start thinking how you would feel if it dropped back down and you didn't take at least a little profit, to have something to show for your stress.
Or let's say you haven't put much money into a project, and you've seen it go up 5x without you. You start thinking "Everyone's going to be a millionaire but me!" You start thinking about where to get some quick cash to put into it so you don't miss out. At that moment, you will know that other people are feeling the same. It might keep going up before it goes down, but you need to know, any money you put in at that point is very risky. You're feeling it, other people are feeling it, so you know it's close to the top.
The lesson is: your own emotions are a powerful guide to tell you what other people are thinking and feeling.
Social media sentiment
Another great tool for seeing where the market is heading, is social media. There's always going to be a lot of noise out there, but by digesting people's comments, seeing where their heads are at, you're going to hear the thoughts of the money in the market. If there's a bunch of people with their heads down working on building the future, you might not hear so much about it - hard work isn't always noisy. If there's a multitude of people, fresh to the market, thinking they know it all, believing themselves genius traders, rest assured, if you look at Facebook groups and YouTube comments, you will hear them. Look out for these clusters of behaviour, and treat them as warning signs.
People say "This is a new paradigm! The dollar is crashing against crypto! BTC isn't the bubble; it's the pin!" There is a little bit of truth to these statements, and that's what makes them so seductive. They have this poetry or glamour to them, they appeal to anarchists and people who want to see bankers kicked off their thrones, ideological Bitcoiners. The technology is revolutionary... but that doesn't mean the price will go up forever without crashing.
When people are engaged by emotions, they're more likely to make simpler, weaker arguments, and they may also come from a place of ignorance. One argument I remember making in 2013 was: "Litecoin has 4 times the supply of Bitcoin, therefore Litecoin should be 1/4 the price of Bitcoin." Another one I heard recently was: "Bitcoin has a limited supply. That means it can go up forever." And another: "The Ethereum price will rise to the same ratio that it previously had with Bitcoin."
These arguments are superficially appealing, but analysed more closely we can see that they're not accounting for the difference in demand. To predict a price, we need to know future demand as well as future supply. Even so, when we hear this kind of argument we can know that there may be many new speculators in the market.
"Ethereum will be $4500 on March 17th, 2019 - wut!" No reasoning, no argument, no technical analysis, no fundamental analysis. This prediction is mostly without meaning, except that it shows investors are getting very bold, so swept in the hype, that they believe a statement with no reason is valuable.
Test the sentiment
When people are saying how Bitcoin is the pin, how high it will go, make a measured comment saying "I don't think the price will keep going up forever." See how many people pounce on you, and how upset they get. At this stage, people may be so filled by emotion, so much in their own little bubble, they will get whipped up into a frenzy at the mere mention that the market might crash.
Many people follow their own emotions, reacting to their own emotions. That means when market makers or media push their buttons, they act on them. Like leaves in the wind, moving at the whim of the forces that surround them.
What we're aiming for here is self-awareness. When you're aware of your own emotions, you can respond to them accordingly, like tells in a card game. When the news plays on your fear, telling you to do one thing, you can step back, pause, think about it. You can do the opposite, or simply do nothing at all.
Now, you know better. Now, you are not subject to force. Now, you become force. As our great teacher Lao-Tzu said, he who controls others is strong, but he who controls himself is powerful indeed.
Thank you for reading, watching and listening. If you got to this point, I'm sure you enjoyed it, and so my humble request is that you share this article, video and podcast with your friends and family so they can also benefit.
You can listen to the episode on Anchor and other podcasting services here: Cryptonomics - Bitcoin: Predict the Price. Or watch on YouTube below:
Edit: I updated this post to show the remixed video where the music is lower