Do you know enough about market movements to keep your money invested?
With a very impressive start to the week, the gung-ho brigade started to flock back to social media and forecast massive gains. Yet 24-hours later, all we could hear was, WTF! Emotion is a beautiful thing!
Back in the real world, where one rally doesn't make a bull market, caution remains the name of the game. And without a doubt, it is a game!
Two things worry me about crypto at the moment. What is it becoming? Where is the fresh buying coming from?
Cryptocurrencies have hardly proven themselves as a storage of wealth or insurance against economic decline. They are no longer independent of governments or their central banks. And claims of being controlled by a decentralized community have evaporated.
As for potential growth in adoption, we have seen more people leave the space than join it over recent months, so where is the fresh buying coming from?
These questions are vital if we are to analyse coin valuations.
There is still a lot of money pouring into crypto and blockchain technology. We are still seeing a massive amount of promotion, especially from those who have invested vast sums into new companies and are finding themselves in a situation where it is too late to stop.
From most points of view, technology is the only thing that gives the business value. It will only be those companies that have spent heavily on R&D and have positioned themselves to cope with new regulations which will survive long enough to see a return on their investment. That means most currencies, nearly all, will fall by the wayside.
The demise of these "toy" currencies was always expected, so I am not saying anything new. However, the failure of these currencies will leave a bad taste in many mouths. This bad taste will not help the business attract new buyers and will probably keep new people away from investing for some time.
New business is food for the whales. When this is in short supply, we can expect to see them battle each other for survival. That means the market will become more of a short-term trading market than one for long-term investors, with each whale doing its best to move the market in the direction which suits him most.
Many of you will suggest that all whales want the markets higher, with some justification. But there are all types of whales. Some will simply HODL, and others will use their skills to trade for shorter-term gains.
That means we are entering a period suited to traders and speculators. And I worry how many in our young community possess the necessary experience to trade successfully in such conditions.
I am not being disrespectful to anyone. It's just that from my observations of what is being said on social media and in chat rooms, there are still many people invested in these markets who know very little about speculative two-way trading. Moreover, I worry that we might see more people hurt when rallies occur, and people mistakenly identify these rallies as the start of a new bull market when all it is, is a few whales fighting.
We also have the issue of the much-heralded increase in institutional buying.
Everyone cheered when the big financial institutions came into the markets because they gave Cryptocurrencies legitimacy. However, on the other side of the coin, these institutions are in this business to make money. And we all know that they have decades of expertise in manipulating and moving the market to generate the most income.
You will be encouraged to pump and dump regularly, so I'll warn you now, do not underestimate the underhand tactics of these major institutions. They can be absolutely ruthless!
If this is going to be the way forward, you have one of two ways to protect yourself from being churned and burned.
One way is to take all the emotion and ego out of your speculative activities.
Speculating can be great fun and will give you emotional highs and lows. But don't let your emotions be the reason to trade. FOMO is a disease that will cut your investing experiences very short. HODL will keep you invested for a long time, but ultimately, you could own something in the future with less value than toilet paper.
It is not good enough to make your bets based on your knowledge or view of one cryptocurrency, and as some have experienced recently (Terra), you need to take white papers at face value. To be successful, you need to know where you are in the economic cycle and base your involvement on the global situation rather than just on the hype you see in one particular asset or asset class. Analysing where you are in an economic trend is far from easy, especially when you are in the middle of it.
I realize the trend is your friend, and if you hold on to something long enough, the value should eventually increase. But these glib throw away phrases have caused the death and financial ruin of many a gung-ho emotional investor.
There is one more thing I want to say before signing off this week.
Cryptocurrencies and equities are far from their lows. The pain experienced by those at the lower end of society is still not reflected in market values. Excellent companies with beautiful products are still borrowing and developing, and so far, their living standards remain unaffected by the economic decline.
Sadly, history tells us we need to see more casualties and bigger casualties before reaching the bottom. It doesn't matter how many people wear rose-coloured glasses; drops in revenue, increased costs, tax increases, and more legislation have yet to hit home. When it does, we will see a lot more damage.
So, be very careful. It is going to get rougher.