Do you follow bitcoin and/or the cryptoasset market? If so, what would you say the market is most anticipating in the weeks to come? More likely than not, you said something like“BTC $10,000". No surprise there, as the broader market has been anticipating $10K for quite some time. Between social media, hedge fund managers, and mainstream financial news networks, EVERYONE is waiting for that magic number to finally hit. The question is will the $10,000 milestone indicate a time to buy or a time to sell? History suggests the latter…
One of the things that I’ve always loved about economics, finance, and investing is the psychology that drives it all. Have you ever bought a lottery ticket? Have you ever bought from a vending machine? We’ll, if you were rational in your assessment of winning the lottery you would have discovered that your odds of being killed by a vending machine (1/112M vs. 1/176M) are greater. Thus, if you believe your next lotto purchase will be the big one, you also believe the next time you order that tasty vending machine snack will in fact be your last… I digress. We know these things, yet we continue to act irrational.
We’re Naturally Irrational Creatures…
Behavioral finance, the study of investment decisions and market anomalies using psychology-based theories, can help us better understand why people act and react the way they do when it comes to investing. The underlying assumption of behavioral finance is that humans are irrational, counter to the notorious Efficient Market Hypothesis and Capital Asset Pricing Model (CAPM).
One idea that exists within behavioral finance is “anchoring”, or using irrelevant information as a reference point for determining or estimating some unknown value or information. Anchoring can cause an investor to reject a correct decision (buying when undervalued) or accept an incorrect decision (holding when overvalued). Anchoring can often be applied in the context of our bias for round numbers. To be clear, round number bias is our natural tendency to pay special attention to numbers that are round. Thinking of buying that stock, but you’re waiting for it to go back down to $10? You’re portfolio is doing great, but you know you’ll feel so much more accomplished once you hit that $1,000,000 mark, right? Technical analysis is indicating support is clearly $50, so now is surely a great time to buy given its bounced off of $50 and now trading at $50.25, correct?
Trader wears “DOW 20,000” hat in anticipation of a new all time high.
We’ve Seen This Before In Bitcoin
Bitcoin holds no exception to these biases and oddly enough no one (to my knowledge) pointed out that sell offs took their course after reaching the two of the biggest milestones YTD, $2500 and $5000. As we approach $10,000, I couldn’t help but reflect back and wonder why bitcoin reacted the way it did after hitting all time highs.
So, You’re Telling Me To Sell?
I can’t predict the future, and if I could I surely wouldn’t be writing this. But what I can say is that there are signs suggesting a correction could come afoot after the $10K milestone is hit & some more. As I said before, we all know the space has moved at light speed this year. $10K is coming up fast, faster than most would have thought, and the crypto world is watching with many investors having ridiculous returns that have yet to be locked for 2017. Is it truly silly to think a healthy correction is on the horizon? I think not.