The market for cryptocurrencies is still in its infancy. The first stock exchange was created in the 14th century. It was an informal meeting in the house of family “Van der Beurze” in Antwerp. A nice fact is that ‘Beurs’ is the Dutch name for exchange. And if you dig a bit you will see that the Dutch have played a big role in the establishment of the formal stock market.
The funny thing is that, even after centuries of progress and technical achievements, markets are still driven by human interactions. And because of the human factor, emotions play a big part in how a market behaves. This is the case for established markets and, because its infancy, even more for the market for crypto currencies. We call this market sentiment.
This sentiment is, for a big part, created by actors like you and me. We are important actors as we make up the majority of the market. We are called Shrimps. Shrimps are emotional beings that make mistakes and sometimes get lucky. We live and learn. The problem is that whales know this all too well and will use this to their advantage.
If you look at the anatomy of a shrimp, you will see that the heart of is shrimp is located in its head. So, this means that we think with our heart and let emotions control the way we trade. In trading this is considered a big no-no. When emotions get a hold of you, you better watch out.
Let’s talk a bit about the common emotional mistakes that we make, how we recognize them and how to defend against them.
If we see the value of a chain increase quickly, we tend to think that we have to act in a split second. This is due to the fact that we suffer from the ‘fear of missing out’ emotion. If you act on it, you will end up buying a pump or all-time high. Thing is, unless you are swing trading, there is no such thing as a split second and you are not missing out. Markets move in waves and you can always buy in at a later time.
The same is true for chains that take a nosedive. I you see the value of a chain plummeting, your emotion will tell you to get out as quickly as you can. But this is crypto. Every month we see numerous flash crashes and if you are not swing trading, you will end up getting out at an artificially created low. And you will hit yourself in the face when you see the price of a chain skyrocketing only hour after you got out.
The Pump and Dump scheme is based on this emotion and whales use it a lot. The scheme is almost always disguised by some news event, so the increase in price can be explained. If this happens, do not buy in. And if you already have a position and feel like taking a gamble, this is your moment to swing trade. Spot the peak and sell. Wait for the next run and buy in again. There, you beat the whale at its own game.
A golden rule in investing is that you should never invest money that you use to pay your bills. The main reason is, off course, that you can lose everything. But there is another reason. If you have everything on the line, you will not be able to control your emotions. And this will cause you to make the worst decisions you can think of. It is a recipe for disaster.
If you are over-leveraged, you will always sell at the worst possible time. Our market is highly volatile and you know this. But when the market actually does take a dive, your emotions will start to question everything. We all know this feeling. This is called having “Weak Hands”. This emotion becomes really hard to deal with when you are over-leveraged. You have bills to pay and you will probably sell when you are at a loss. Weak hands always lose a lot of money.
Whales know that there are a lot of over-leveraged shrimps out there. They will create waves in the market that are much bigger than you anticipate. In our market you see a lot of flash crashes. The majority of these crashes are caused by whales. They know that when they let the price of a chain tank, it will tank even more because of the shrimps with weak hands. That is for them an opportunity to buy in cheap and make an instant profit.
As a shrimp, the best protection is to grow a pair and stay where you are. The market will recover sooner or later. You are in this for the long run remember? It is also wise to have part of your portfolio in cash. You should use this cash to buy in cheap when a market crashes. I know, it requires that you go against your emotions to buy in during a crash. But it is one of those things can be highly profitable for a shrimp.
As you might know, shrimps live in schools. And this can be a problem as these schools sometimes lose touch with reality. The behavior of a group can be affected by peer pressure or by malignant influences from outside the group. Just visit a Telegram channel of a certain chain and you know what I am talking about. No room for critical discussions, a lot of misconceptions and a general thought that has nothing to do with reality.
This is toxic as it plays with your emotions. And when emotions are in play, you are bound to make mistakes. This phenomenon is clearly visible when there is a “Buy the rumor, sell the news’ event. A chain has something to present at a certain date. The herd will start to create a lot of rumors and will start to see and hear what they want so see and hear. Shrimps that are sensitive to these rumors will start to increase their position. The price will rise and these rumors will be priced in. And when the rumors turn out to be false, and that is usually the case, the price will take a nosedive. And a lot of shrimps got burned by peer pressure.
Because anyone can join our school, whales can join as well. And they always will as it is cheaper to pump a price by rumors than by money. You even see examples of this outside your school and in regular media. Whales know we like rumors and gossip. Just do not trade on rumors and gossip, unless you got an inside lane. It is always good, like in normal life, to not let yourself be influenced by the people around you. It is you that makes your decisions, not your school.
As you can see, emotions can really mess up your game. You should shut off your emotions as much as possible. That is easier said than done. It will take time, experience and making mistakes before you will be able to. And that is okay. It is okay to make mistakes. Sometimes your mistakes will cost you money, but like in poker, you have to pay your dues. Do not be ashamed of your mistakes. You learn from them and they make up nice stories. I know I have a few ;).
And if you think that whales do not make mistakes, think again. There are some nice examples out there. A really nice one you can find on Netflix. Dirty Money has an episode about Valeant and because it’s weekend, I advise you to watch it. You will see how the mind of short seller works and you will see how a huge whale by the name of Bill Ackman makes a 4-Billion-dollar mistake.
Another nice example of a whale messing up is Goldman Sachs buying Venezuelan bonds with a big discount. They thought they could unload those easily and make a windfall. Problem was that Venezuela is Venezuela and that caused the bonds to drop even lower than the discount. They are still stuck with quite a large portion of them.
Next week I will polish my crystal ball and try to look a in the future. For now, I hope you liked this article. If you do, then please share, tweet and clap 50. As a reward you will receive my eternal gratitude ;). Thanks for reading.
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