On Speculative Bubbles, Strategies, FOMO, and Early Exits

By root / January 27, 2018

In the 16 years that I have spent observing and trading the markets, there were several incredible events that changed how I look at investments. The bull market in stocks that is fuelled by free money, the Lehman-Crash, and the Dot-Com bubble were among them. To be clear, the current cycle in cryptocurrencies is not one of those, even as some of the coins routinely double daily.

Why is that? Because the dynamics behind the moves are familiar; precious metals in 2011, the Chinese stock market a couple of times in the past 10 years, oil in 2008, the Dot-Com bubble, and so on. All of these trends had an eerily similar dynamic, although the exact path of price movements and the volatility of the moves differed substantially.

“History doesn’t Repeat itself but often Rhymes”

Allegedly Mark Twain observed that, and I couldn’t agree more. As a certain topic goes through boom-bust cycles with spectacular gains and higher and higher bottoms, it naturally draws in new investors that are standing on the sidelines waiting for confirmation of some sorts.

After a while, as publicity rises, the success stories go mainstream, and the number of participating investors multiplies, the market reaches an inflection point where the influx of capital won’t be enough to hold the marginal selling by the already invested public. To be precise, this inflection “point” is sometimes a longer period of grinding gains, one blow-off advance, or another topping pattern such as a double top for instance.

Tha Nasdaq Bubble and the Aftermath

Here is the catch though; in advance, you never know when this point arrives, as the pool of potential investors, the willingness of the previously entered investors to hold, and several other factors are unknown. That said, as the market matures, it will be harder and harder to sustain the gains that drove the valuations far from reality already, and the market will be more and more similar to an old-fashioned pyramid scheme, where the last entrants lose almost everything.There were several potential tops along the way, just as it has been the case with BTC, and the majority of the most successful long-term investors sold very early, in line with their tested strategies.

The Crypto-Boom is Legit, But…

As I stated in one of my articles before, I don’t doubt the validity of the crypto-boom for a second, and I believe that blockchain applications are one of the next big things. Having said that, the validity of a story, at the end of the day, can’t justify the insane gains that we are experiencing currently, just as the validity of the dot-com story didn’t justify the lofty valuations of basically non-existent business during the late phase of the tech-bubble.

Are We There Yet?

Back in July, when already a lot of people were calling the top mind you, I wrote that:

“(…) the attention given by the investing public to coin offerings is nowhere near the levels of the .com bubble and the major players participating in the field are few and far between. That could mean that the top of the current bull market is far away, as there is a huge potential of additional buyers left that could fuel the rally.”

I also said that the conditions didn’t feel like the end of a speculative bubble, rather the end of a cycle within. Both were true, but the real question is not about the past, rather about the future… And now the situation is different, on Bloomberg, CNBC, and other major news outlets, Bitcoin has been the headliner for weeks, every second Google and is an ICO or a trade-signal provider, people are quitting their jobs to trade crypto, the market is at $500, oh wait $600… no $650 billion…

The Total Value of the Crypto-Segment Since June

So yes, now it feels like the end of a speculative episode that could end in a multi-month or even multi-year bear market. But where will be the exact top? Honestly, I don’t know, but by now, you should be sitting on healthy profits and waiting for the current cycle to end.

Why am I Out of this Market?

Those only reading my daily analysis, and following my advice, might see this as a mea culpa, as they are likely looking at the market without major positions—but it is not, I would trade and analyze such trends similarly all over again. I firmly believe that this is the time to fight the FOMO, even as we might see further stellar rallies, and keeping your “gunpowder“ dry – holding cash or fiat – will pay off greatly in the coming weeks and months.

Trading these markets (using our recommendations for example) is, of course, different, you can still jump in an out for quick gains, riding the volatile waves. But while doing that, remember the basic rules of trading (stop-losses, position sizing), and how it is fundamentally different from investing.

I admit that this cycle has been different from the others and we missed a whole lot of the profits in several coins. But again in July, we had a similar experience, and in hindsight, selling Ethereum at $330 or $400 is not that big of a deal, as the token fell all the way to $130 during the correction. I fully expect corrections in that dimension in the segment, so if you are not ready to endure such draw-downs, please keep your portfolio conservative.

To fight the Fear Of Missing Out remember Baron Rothschild’s answer to the question on how he became one of the richest investors ever:

“I always sold too early…”

About the author

root


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