What to Learn About Trading Psychology, Discipline and Bubbles From Bitcoin Charts (2017–2018)

The article was written by Yuval Gov.

The first crypto, Bitcoin, recently celebrated its 10th anniversary. The past year may have been the most significant for the coin, and some would say that during the year it transformed from a geek-only currency to one that became part of the public consciousness.

The past year has been accompanied by many jolts, which have made for a real roller coaster ride. At the beginning of the year, Bitcoin became the most desired asset in the world as the ‘What is Bitcoin’ search volume soared to become the most Googled term of last year.

After a long consolidation period of several months, 2018 ended precisely the opposite way to how it began. From the most popular kid at school, Bitcoin now had no friends at all. Is what you see from the outside (or through the media) really what happened inside? Was this a bubble that had burst and spelled the end of Bitcoin? And what can be learned from this?

November 2017: Bitcoin crossed the 5-digit mark and is met with media praise

The veterans of Bitcoin, ​​who had only dreamed that one day Bitcoin would touch the thousand-dollar mark (which was last visited in late 2013), could not believe that in less than a year from the day the coin crossed the 1,000 dollar mark for the second time in its short history, it had also surpassed the ten thousand dollar mark.

That moment marked the beginning of the real crypto hype as newspaper headlines shouted: “Bitcoin crossed the $ 10,000 mark!” Worldwide the many Bitcoin ATMs, ​​which until that month were pretty calm and empty, became pilgrimage sites for citizens from all over the world.

As a writer who specializes in Bitcoin and crypto, I began to receive random phone calls from childhood friends, Facebook friends whom I barely recognized, and more. From their mouths came just one question — how do you buy Bitcoin?

Among the people who discovered Bitcoin was Joe (pseudonym), who I knew from high school. We will return to Joe later. Helping people learn about Bitcoin was easy as I had already made a guide on “how to buy Bitcoin” and thanks to copy and paste, my life was beautiful.

December 2017: Bitcoin bubble at its peak as Bitcoin touches $20,000

One Bitcoin for $10,000? Not anymore. Bitcoin kept climbing to $11K, $12K, and so on. Well, you know the end of the story. The media hype was at a fever pitch. Everyone was asking, “Where do you buy this magic coin that only goes up?”

During that time, it is essential to mention the term “fear of missing out” or FOMO. Those who had a bit of Bitcoin became the currency’s ambassadors. “And, what about you? Yes, you! You might be the only one on the planet who doesn’t hold Bitcoin, and besides you, everyone is getting rich.” Well, no. The wise behavior is to take a deep breath and wait to invest for the right reasons following in-depth research.

By December 2017, I had been ‘attacked’ by messages and calls from an ever-widening circle. There were people who knew me from all stages of my short life, including elementary school and high school friends, friends of my parents, even Facebook friends I had not spoken a word with for over a decade, everyone wanted just one thing — not to be left behind and to be among the holders of the rising stars Bitcoin, Ethereum and “the currency of the banks” (aka Ripple).

The line at our local Bitcoin ATM crossed continents. Next to the ATM is the local Bitcoin ‘embassy’, which was dealing with a new situation: security guards and queues with numbers, just like at the hospital.

The climax was when an elderly, disabled Jewish Orthodox man, in his wheelchair, arrived alone at the so-called Bitcoin embassy to purchase Ethereum. When he was having a problem, the guy who approached to assist him asked for his smartphone so he could install a digital wallet app for his Ether storage. The old man pulled out an ancient Nokia 3010 from the days when “Snake” was the latest technology.

Needless to say, the respected religious man barely managed to pronounce the word Ethereum correctly. So what brought him to the embassy on a stormy day? It turned out that his Rabbi had advised him to buy the crypto created by Vitalik Buterin.

There was further reinforcement of the rising trend when my parents’ housekeeper asked me whether it was worthwhile buying OneCoin. I will not elaborate on this shit-coin, but I will just emphasize that OneCoin is a complete Ponzi scheme.

Without being insulting, the economic jargon for all the above-described investors is “dumb money”. In this case, for the Bitcoin holders this dumb money assisted and granted the last push for Bitcoin on the way to the $20K all-time high. I’m not sure if the increase from $10K to $20K is thanks to them alone, but they were indeed the last to fuel the final moments of the tremendous Bitcoin 2017 rally.

So why do we call these people dumb money? Well, all these people who had heard from the media about Bitcoin had not done a shred of research. Most of them probably had no investment experience and had certainly not dealt with volatile assets such as Bitcoin. They surely were not informed of the ideology behind Bitcoin, and they probably didn’t know about the revolutionary blockchain technology. They only invested because they did not want to miss the train. Did they have a plan of action for their investment?

Let’s say you bought a volatile asset. What now? The price doubles in a month or so. What to do now? Cash out the capital or leave it for the long-term? Let’s say that the price fell by 30% within a week (very likely to happen with such assets). Is it time to buy more to average down or cut the losses? And finally, how much money to invest in total?

What about Joe from November, who had already doubled his investment in less than a month? He was drinking Heaven’s wine — a mutual friend of ours said that he was buying even more Bitcoin and had also bought some altcoins (altcoins are considered more volatile than Bitcoin).

February 2018: First signs of the bubble burst — ‘Experts’ explain why Bitcoin is falling

When Bitcoin started falling, all those “I told you guys” popped up in Facebook groups, forums, and basically everywhere. Experts from the conservative stock exchange forum danced in the streets with joy and happiness. They had been waiting for this moment for a long time. Interestingly, they were not here to say the same thing when Bitcoin crossed the $1,000 barrier at the beginning of 2017 (a nearly 2,000% yield). Or even by the end of 2015 when the price of Bitcoin was only a few hundred.

The HODLers argued that “Bitcoin for $9,000 is a sale price.” Rob, a person who was crushed in lines to buy Bitcoin during December, asked on a crypto Facebook group, “Where is the bottom?” Rob was met with the typical troll responses (this group of Hodlers disappeared as the price of Bitcoin decreased).

What’s the real answer? It was reasonable to expect that “violence causes more violence” — an asset that rises rapidly is likely to fall even quicker.

Needless to say, no one stands in line anymore to buy Bitcoin — how ridiculous. There was an endless demand for Bitcoin at the $20,000 price, but at $9,000 there was no demand. You are welcome to replace the word Bitcoin with any other product desired (i.e., iPhone X) and understand the absurdity. I will elaborate on this at the end of this article.

“When it returns to $12,000, I’ll take out what I have without a loss and forget about all this crypto shit.” This was said by the happiest man on Earth on December 17, 2017, the day when Bitcoin touched its record, as he had quick decent profits (on paper only as he didn’t sell). Then just two months later he was desperately searching for a way to end this story with some dignity.

November 2018: A total collapse, panic in the streets, and Hello from Joe

Until November there was a status quo and a widespread thought that Bitcoin was trading steadily at around the $6,000 mark and that it was just consolidating until it returned to the upward path to break new records.

Then, came November 2018, and within just ten days Bitcoin collapsed nearly 50% to a 2018 low of $3,100.

“Bitcoin is Crashing!” the newspaper headlines screamed. Even among the Hodlers the despair was beginning to be felt. Immunity was over. Despite Bitcoin surviving a 90% loss of its value and recovering nicely. However, during the collapse itself, it was hard to see a chance for recovery after losing more than 80% from the all-time high.

It was time for the experts to crawl out of the woodwork. “What do you think? Will we see it in 5-digits ever again? I’m a bit afraid,” asked an anonymous Facebook user on a Facebook group. Another user quickly asked, “The question is whether BTC will continue to crash, or whether it will rise gradually.”

“Where did everyone disappear to? Those who said that $12K was a good price? What will be the end?” asked a young man in despair.

In December and January, anyone who bought Bitcoin before May 2017 went around like a peacock and enjoyed trolling newcomers asking crucial questions such as “Where do you buy Ripple?”, “A wallet recommended for IOTA?” As noted before, despair was evident both for them and the crypto veterans. They all wore a worried expression on their faces and had gone silent.

I received another wave of questions from people I know, and from friends of friends of friends. But unlike December 2017, the issue was now how to sell Bitcoin. Unfortunately or maybe on purpose, there is no article on the website on how to sell Bitcoin (there was only the guide on “How to buy Bitcoin”). And guess who was the first to ask how to sell? You are right; it was Joe.

Why do the rich people always become richer, and how can you learn from all of this?

All of the aforementioned is not restricted or limited to just Bitcoin. The discussion of whether this is bubble behavior or not began as soon as Bitcoin crossed the $10K mark. There were raging debates and discussions on Facebook. Although the Hodlers condemned opinions that it was an economic bubble, now there is no doubt that during the past year we have had a chance to watch one of the most exciting economic bubbles in history.

Like Bitcoin, there was also the real estate bubble — known as the Sub-Prime crisis of 2008, the Internet or Dot-Com bubble of 2000, and if we go back in time, there was also the 17th-century tulip bulb bubble in the Netherlands.

There was also the Chinese stock market bubble, which is very similar to the 2017 Bitcoin bubble. The SSE index rose five-fold in less than two years (2006–2008), followed by a drop of more than 70% in 2018. Shujie Yao and Dan Luo from the University of Nottingham describe the Chinese bubble of 2006–2008 in The World Economy (2009):

Finally, as the stock market bubble was largely inflated by ‘greed’, ‘envy’ and ‘speculation’, the current market crash represents not only a market correction but also a depression caused by the reflective psychological factors of ‘fear’, ‘disappointment’ and ‘lack of confidence’.

“Finally, as the Chinese stock market bubble was largely inflated by ‘greed’, ‘envy’ and ‘speculation’, the current market crash represents not only a market correction, but also a depression caused by the reflective psychological factors of ‘fear’, ‘disappointment’ and ‘lack of confidence’.”

Some of the above bubbles also killed the asset as the bubble popped. Cautiously, I would say that Bitcoin had already survived losing an even higher percentage of its value. It not only survived but became even stronger. Will history repeat itself? The prophecy was given to the fools.

The following table shows the largest Bitcoin bubbles in the short history of the currency:

[caption id=”attachment_27230" align=”aligncenter” width=”412"]

Bitcoin Major Declines[/caption]

Finally, I have summarized some tips and conclusions that can be taken and learned from this:

- Buy low, sell high. This is so simple but so difficult to implement. Why was the demand for Bitcoin at its peak when Bitcoin was the most expensive? And at a sale price of 80% discount, there is no one willing to buy? A quick look at the asset’s long-term chart (in this case Bitcoin) will show a perspective on the current price compared to its past.

- Bitcoin is a volatile asset with high risk. It is recommended that you only invest an amount that lets you sleep calmly at night, even if the amount invested evaporates completely. This is not just a platitude. Those who bought Bitcoin near its all-time high in December 2017 are down over 80 percent as of writing this, just a year later.

- What is a good price to buy? This is the mother of all questions. With volatile assets such as Bitcoin, it is recommended that you split the buy amount into several parts and durations, to average down the entry price, thereby minimizing volatility as much as possible.

Before buying any asset for investment, especially Bitcoin, prepare a detailed written investment plan with short-term loss spots, if any, and take-profit spots. You won a jackpot and doubled your capital within a short term? Say thank you, don’t be ashamed to take profits and return capital (and profit). That will definitely make you sleep better at night.

On the other hand, what is the plan if the price drops by half? Are you willing to buy more now because the price is lower, and thus the average buying price will drop or are you willing to sell and minimize your loss?

- Do not involve your emotions and stick to the above plan. I will say it again, if you do not sleep well at night because of nightmares about the Bitcoin price, no money in the world is worth it.

- Ignore any background noise (media and FOMO). Usually, the media outlets will only bother to report when new highs have been reached. This is not limited to Bitcoin because it happens on the stock exchange too.

The media only started to publish news reports when the BTC price crossed the $10K barrier. That was despite the bullish trend starting before July when the price was less than $2,000. In other words, the Bitcoin price had to surge 500% before the media started to report on it extensively. The effects of FOMO are mentioned above.

- HODL, HODL, but up to a certain extent: Whoever decides to buy Bitcoin needs to do it for the right reasons. The Bitcoin idea will win as long as there are more HODLers. However, it is ambiguous and incorrect to ignore the issue of Bitcoin’s current value. Therefore, if you believe in Bitcoin, look for a good entry point.

For more tips, you may want to read the “8 tips on trading Bitcoin and Altcoins” guide and also “The 7 common tips and mistakes for beginners in trading crypto.”

The article was initially published on CryptoPotato.com