Psychology for you!

For Nicolas Chéron, market strategist at Zone Bourse, the cryptocurrency downturn is a real test for investors.

If there's one thing that hasn't changed in a century on the financial markets, and which has fascinated me in recent years, it's the psychology of investors. "Buy fear, sell greed", as Warren Buffet is wont to say. The concept is simple: you buy when everyone is scared, when the players are in a state of total depression and are exiting in capitulation, and you sell when euphoria follows optimism in a parabolic uptrend.

Translated to cryptos, this concept can be transposed according to the following formula: you buy to the sound of anti-crypto jubilation, when brokers get hacked and when big youtubers get their accounts liquidated because of 80% falls. And we sell when 15-year-old teenagers explain on TikTok how to make money, with gigantic leverage, on an unregulated platform that was advised to them by a business introducer during a "personal development" evening in Dubai.

I didn't think this concept could be taken to such an extreme on cryptos. And the last few years have allowed me to see that by reading the comments on social networks, the general atmosphere, the excesses of optimism or pessimism, you could detect price zones of importance where a turning point could take shape. This was the case with the 'double top' at $65,000 in November 2021, when targets of $200,000 were springing up here and there. And it's still the case right now, as regulators, media and anti-cryptos point to (or celebrate) the deflation of the bubble.

For the record, at the 2021 edition of the Surfin Bitcoin conference (where I hope to meet up with The Big Whale team 🐳 and aficionados of the sector at the end of August), I met an investor who had been involved in cryptos for at least five years and was a big fan of studying investor psychology. He explained to me that he was invested in Dollar Cost Averaging (DCA, an investment method that involves investing regularly to smooth out volatility) over the long term. He was hoping and anticipating a possible rise in the coming months, before a clean-up took place. In his view, all crypto bull phases are born out of an excess of pessimism, when the sector is on the brink, when people lose 80% on their portfolios, brokers close down and the media have a field day bashing this new asset class that is once again "doomed"...

He said that this phenomenon was missing to go close to $100,000 or more. He didn't know when, or how long this phase of depression would last, but it was bound to happen. And that's exactly what's happening right now. I hope I'll see him again to congratulate him.

In other words, all is not lost. Quite the contrary! The current "bear market" phase is an essential stage in the sector's maturation, a purging phase through which the market must pass before experiencing a possible revival, a new phase of adoption and a new bull market.

In order to spare you a novel, here are a few questions I've answered over the last few days. I hope they will help you refine what I have just explained.

Are we at the beginning or the end of the decline?

I think we are close to the end of the decline. In any case, we can no longer lose more than $20,000. 😁

Will prices recover quickly?

After the fall, comes neutrality, not necessarily the rise. We'll have to give it time. Instead, I see a long and painful lateralisation, which will test the pugnacity of investors in position. A period of depression, sometimes followed by a final capitulation, a phase of discouragement, before hope is reborn.

Is the current fall an opportunity?

If we refer to the historical averages of crypto declines, of course. Bitcoin's worst corrections have seen declines of 82% to 86%, and here we're already down 75%. There may still be a way to go, because it's far too early to say that we've bottomed.

What has changed compared to other bull and bear markets?

In contrast to the 2009-2021 period, liquidity is drying up. Yet they are the fuel that allows the crypto market capitalisation engine to rise. For that we will have to wait.

What makes me think that we can perhaps go another notch lower?

The players have not suffered enough. The decline was rapid, the lean period short, too short. We still see too many YouTube videos where they talk about a low point before returning to $45,000. These people need to disappear so that a healthy, long-term rise can take place. Secondly, the equity markets, whose correlation with bitcoin is at an all-time high, are going through a major correction that has yet to capitulate. The risk of a summer slide is therefore high, and I prefer to remain cautious across all asset classes.

A piece of good news in all this?

Jean-Michel 'DCA' is a happy man! He who wanted to invest for the very long term with programmed purchases, because he is confident of a 10-year horizon, is going to be able to do so for much less than he was three or six months ago. What more could you ask for?

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