Here’s what’s really driving bitcoin’s latest run – ignore it at your peril

Before I get started today, I just wanted to make sure you’re on the list for our special event at 7pm tonight.

During it, you’ll discover how you could make a fortune from the biggest disruption to the oil industry since the OPEC embargo.

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Now on with the issue…

After breaking $8,000, bitcoin is back in the mainstream. And news outlets everywhere are nailing their colours to the mast.

Pro-crypto CNBC led with the headline: “Bitcoin emerges as a global hedge while stocks tumble in US-China trade war”.

While entrenched “member of the old guard” Financial Times went with a snarky article declaring Bitcoin was a “risk-free” investment:

Don’t believe in central banks? No worries. Bitcoin is the US 10-year Treasury of the modern era. It hit a nine-month high on Sunday of around $7,400. Nuff said.

For proof of its risk-free credentials, look no further than Twitter, where you will find plenty of cool-headed market commentary, featuring lists of high-risk things (like shares in actual companies and the currency of the world’s second-biggest economy) in the red, and safe things (like bitcoin) in the green.

But it isn’t just financial outlets writing about bitcoin now, even mainstream UK newspapers have been reporting on its latest run.

The Independent’s headline reads: “Bitcoin price surges $1,000 in just a few hours as incredible recovery continues”.

The Times dedicated an entire article, going with the headline: “Bitcoin fired up by wild weekend”.

And bitcoin’s price even sneaked its way into a Daily Mail headline: “FTSE LIVE: Unemployment falls again; Vodafone dials up a £6.6bn loss; Bakery chain Greggs is rolling it in; UK stocks in the green; Bitcoin over $8k”.

I’m still waiting on a Guardian piece, which I can all-but guarantee will be negative (see my November piece: Why must the guardian lie?)

So it seems $8,000 was the magic number that’s got everyone talking.

Just a couple of months ago the idea of bitcoin at $8,000 was laughable. Most people believed bitcoin would hit $1,000 before it hit $10,000. In fact it became a running theme in online crypto communities.

After a year of constant disappointment and heart-wrenching price drops, bitcoin was all out of trust.

Then, over the course of two months bitcoin’s price more than doubled, from under $4,000 to over $8,000.

Now people are already predicting bitcoin will break its previous all-time high and hit $20,000 within the next 12 months. And not just random commenters on the internet. Real investment banks are making these predictions.

From CCN:

Canaccord Genuity, an investment banking and wealth management company based out of Vancouver, published a research note predicting that the price will gradually climb back to $20,000 by March 2021.

“Bitcoin has started to form the spring 2019 bottom we began mentioning last year, although a close look at the chart suggests the recovery may be slightly ahead of itself. Looking ahead, if bitcoin were to continue following the same trend, the implication is a slow climb back toward its all-time high of ~$20,000, theoretically reaching that level in March 2021.”

But the funny thing is, nothing’s really changed. The only thing that’s really changed in the last few months is bitcoin’s price has gone up.

Sure, there have been developments like Whole Foods announcing it will accept crypto, Fidelity announcing its custody service will open “within weeks”, Microsoft using bitcoin to create its “digital identity” program, and even Bakkt announcing its futures service will open in July.

But those kind of developments have been happening, none stop, throughout that entire bear market. If you’re a regular reader, you’ll have seen me writing about them time and again.

The only real thing that’s changed is the price has gone up.

And what many people don’t realise is, in the world of crypto – in most markets, for that matter – that’s enough.

When things are going well, we thing they will go well forever. And when things are going badly, we think things will never go well again.

This a trick our brains play on us known as the recency bias. It happens in all areas of life, but it’s particularly prominent in the world of investing.

From Morning Star:

Humans have short memories in general, but memories are especially short when it comes to investing cycles.

During a bull market, people tend to forget about bear markets. As far as human recent memory is concerned, the market should keep going up since it has been going up recently. Investors therefore keep buying stocks, feeling good about their prospects. Investors thereby increase risk taking and may not think about diversification or portfolio management prudence.

Then a bear market hits, and rather than be prepared for it with shock absorbers in their portfolios, investors instead suffer a massive drop in their net worths and may sell out of stocks when the market is low. Selling low is, of course, not a good long-term investing strategy.

Recency bias on a macro scale can lead markets to move up and down in an exaggerated way. In fact, recency bias exacerbated the stock market downturn in 2008-2009.

And when the market is down, investors become convinced that it will never go back up; they reduce risk at exactly the wrong time and stick their heads in the sand. Recency bias overrides the market’s collective sense of rationality.

But the market starts to go back up, and investors hesitate. And before we know it, markets have bounced back 20% to 30%, and investors are still sitting on the sidelines.

And remember the crypto market is like the stockmarket on performance-enhancing drugs – good ones.

I’ve heard it said many times that a month in the crypto is like a year in the stockmarket. Things happen faster and prices move more violently.

We would do well to remember the recency bias our brains have when thinking about crypto markets. In fact, I wrote a piece about this problem, and steps you can take to overcome it back in January 2018.

My essay was called “The FOMO vs FUD cycle: how to understand the most important price driver in cryptos”, and it’s probably one of the most useful things I’ve written as editor of Exponential Investor. You can read it here.

I wrote it right at the peak of the crypto bull run. But I think it could be more valuable today than ever.

As I said back then, understanding this simple concept is the key to good crypto investing. And to getting a good night’s sleep.

If you have any money in crypto, or if you’re thinking about putting money in, I really think reading that will be worth your time.

And on that note, today I’m meeting up with Sam Volkering, Eoin Treacy and Boaz Shoshan to record our first crypto podcast of the year.

As an Exponential Investor subscriber, I’ll be sharing it with you as soon as our sound department has finished mixing it.

Until next time,

Harry Hamburg
Editor, Exponential Investor

Category: Cryptocurrency

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