I’m sure most decisions you make, you believe to be based on numbers, rather than intuition or perception. However, as studies have shown, people will base their decision-making process on what others are doing.
That is the reason why cryptocurrencies, quickly polarise the discourse of so many gifted individuals.
How can emotion affect trading, investing and decision-making?
Famous Technology Hypes
There are historical patterns that repeat themselves in cycles.
Looking at the difference between smart money and dumb money – the former is considered to be whale investors, financial institutions and VC funds, while the latter is small investors, like myself. The key to understanding markets begins by learning that smart money buys low and sells high, and dumb money buys high and sells low.
Understanding where you are on the scale is the first step to making smarter decisions. If you wonder why, let’s look at some of the latest hypes and crashes; you’ll see how it can happen in any market, at any time, with any technology.
The unknown 3D printing bubble
There are many small bubbles that pass by without people noticing. One of these, was 3D printing technology. Although you can now see real applications for the technology, such as printed organs or 3D printed houses, can you guess when the price skyrocketed?
It was when there were limited use cases for that technology, when it was first emerging.
Does this sound familiar? It should, as the exact same thing is happening in the cryptocurrency space.
That’s why it’s so important to understand the purpose of a technology, what problems it solves and the right timing to hit the market.
It rarely matters how great a technology is, if it isn’t production-ready. In the 3D printing industry the issue was the machinery, or hardware, couldn’t cope with the market need.
With cryptocurrency, it seems we’re facing a similar problem: how to scale the technology without compromising its security or decentralisation.
That is why it is key to always look first at the most transparent variable: the price. Even if project X solves all the world problems, you should always reflect upon its price, as an overvalued asset rarely poses any serious interest to smart investors.
The brutal financial crash of 2008
The 2008 financial crash is the best example of why trusting other people to make decisions for you with your money will always end up the same way.
It’s extremely important to differentiate between allowing other people to invest for you and allowing products and platforms to help you making better decisions – the latter makes more sense.
The point of the financial crisis, at least to me, was to teach us that closed and non-transparent financial systems can only lead to misfortune. Plus, remember how virtually no traditional news media at the time was able to predict the drop in stock prices that was about to come?
An interesting fact, considering the richest people and companies (outside the banking sphere), were able to consolidate their net value even more, meaning, not only did they not lose money during the financial crisis, as they were able to consolidate their positions of power. Just look at where most tech giants are today, when compared to 2008.
The infamous dot-com Bubble
The most common example of a bubble people tend to discuss is the internet crash of 2001. During this period, the Nasdaq composite index peaked to higher than 5,000 points, crashing more than 78% over the next 30 months.
Most money wiped out was dumb money, from small investors who didn’t want to miss the train.
Data shows people who are less informed, are also less likely to make the right buy/sell decision, at the right time. This fact is important to understand as many of the successful ICOs, who will survive future bloodbaths, already exist today – meaning, if you’re not a Bitcoin maximalist and believe cryptocurrencies have multiple purposes and utilities, there’s already an ocean of opportunities to invest in.
When we look at the macro market trends, sentiment analysis is as important as technical analysis. The fate of your portfolio and earnings greatly depends on how much information you have available; never discard peoples’ emotions towards an asset, as they’ll most likely be your ticket out.
Hypes and crashes are part of the natural lifecycle of an asset, and the only reason why most investors get filthy rich.
As Warren Buffet said: “Be greedy when others are fearful and be fearful when others are greedy.”