I’m sure you’ve heard the investing philosophy “be greedy when others are fearful, be fearful when others are greedy” – a quote from famous stock investor Warren Buffett.
But there’s more to this quote than people interpret on the surface.
The quote basically tells us to be contrarian when it comes to market cycles, but I think it can also teach us a few deeper things about investing as a whole.
Let’s rewind a bit. What is investing?
Well, it’s finding something you can put money into so that it multiplies.
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How do you do this?
If it’s a company, you look for a company with good staff, a very intelligent CEO and/or founder with good connections and experience, a good business plan, an idea that has potential to be disruptive and valuable.
If it’s a currency, you look for a country that has a stable government and a strong economy and hard working people so demand for that currency will be strong over the long term.
If it’s a property, you look for a building that is well maintained, located in a safe and developed area with high tenancy demand and on high quality land.
In investment circles, these research points are known as fundamentals. Show these criteria to any respected investor, they’ll likely agree with you.
But you’ll notice that greed and fear aren’t mentioned anywhere in there. So, why would Buffett’s most famous quote be about investing based on greed and fear?
This underlies an aspect that a lot of people misinterpret in investing, which is a large percentage of it is based on emotion.
Traders will see shares in Snapchat go up from $2 to $4. 100% gain!
So they buy Snapchat at $4 hoping to sell it at $5. When it gets to $5, even more traders jump on it hoping to sell it at $6. The bubble begins.
Most of them don’t even have Snapchat. Half of them don’t even know what it does. Who’s the CEO? No idea. What’s their profit margin? Not important. Why? Look at the chart man! It’s going up!
This is the greed phase.
When it finally gets to $10, the people who bought at $2 start to sell.
That was easy! 5x my money!
At this point, people have started to turn from buyers to sellers. Demand falls and supply increases. Because markets are simply based on supply and demand, this pushes the price down.
When it falls to $9, the people who bought at $3 sell.
3x! I’m the greatest!
When it falls to $7, even the people who bought at $7 start to sell.
Well I didn’t make anything, but didn’t lose anything either.
It keeps falling. It hits $5, people start panicking. Even the people who bought at $6 get out while they can. It drops to $4. Now people are really scared.
What if it goes to zero? I’M SELLING IT ALL!
Welcome to fear.
Eventually, the price falls far enough that people start buying again.
Can I really get shares in Snapchat for 90 cents?? I’m in!!!
Demand turns into supply, and the cycle starts all over again.
Over the last 30 years, the Dow Jones has risen from 2,000 to around 25,000.
In a world where people simply followed fundamentals, markets wouldn’t be volatile. Why? The CEO only changes twice a decade, results are only released once a quarter, interest rates can go 5 years without moving.
Things just don’t change that much.
The chart would probably look like this:
But we know that’s not true.
Of course, the chart moves in that direction over the long term, but in the short term it simply reacts to the emotions of fear and greed.
That looks like this:
Let’s think about how this applies to Bitcoin.
Bitcoin is the perfect place for fear and greed to foster.
Because it’s a new asset class, people are yet to be fully educated on it. There are die-hard maximalists who believe it will take over the world and there are die-hard denialists that believe it’s total donkey shit worth less than Monopoly money. Emerging asset classes are always volatile for this reason.
If you compare this to the Dow Jones, there is nobody in the world who believes the Dow Jones will take over the world. Likewise, there is nobody who thinks the Dow Jones is Monopoly money.
Yet fear and greed are so influential in the movement of the Dow Jones.
That means when it comes to cryptocurrency, this influence is ten-fold. If the Dow falls 50% in a recession, it’s closer to 90% for Bitcoin.
Let’s take a look at the chart for Bitcoin since inception:
As you can see, the standard chart doesn’t show us clear trends. All the movement between 2009 and 2016 is practically invisible.
Because the movements have been too great.
For example, when Bitcoin went from $10,000 to $20,000 – a 100% gain – it takes up half the chart.
However, when Bitcoin when from $10 to $20 – also a 100% gain – you can’t even see it.
Therefore to find trends, it’s much more effective to use a logarithmic chart, which charts movements based on magnitude (percentage).
Here’s what the same chart looks like on a logarithmic scale:
As you can see, people always claim Bitcoin is “stupidly volatile”, but on a logarithmic scale there aren’t too many surprises in this chart. If you flashed this chart at someone and told them it was the Dow Jones, they’d probably believe you.
Now before we go on, let’s quickly return to the fundamentals.
Take a look at these few charts.
This is the log chart of the BTC hash rate:
Hashing refers to the computational power required to secure the network. As you can see, the hashing activity trends upwards over the long term.
Remember this is a log chart, so it should naturally flatten (but remain upward trending) as we move up the y axis.
This is the log chart for the number of daily Bitcoin transactions.
Again we can see this dips and peaks like any regular chart, but is still trending upwards over the long term.
This chart represents the number of unique Bitcoin addresses being used.
Again, it’s a log chart so the volatility is muted, but we are definitely trending up over the long term. You can see we’ve clearly grown from 10,000 up to a million since 2011-2012.
So if there is more hash (miners) on the network, more addresses being used and more transactions being sent, we can safely assume Bitcoin’s fundamentals are healthy and improving. Not to mention all the developments in Bitcoin, such as the Lightning network, the fact that most banks are opening Bitcoin services and positions, and institutional investment is at its highest etc etc.
On a fundamental level, Bitcoin is sound.
From that we can conclude the current bear market is emotion based (we already knew that though, right?)
So how deep does fear and greed run in Bitcoin?
The best way is again, to look at history.
If, hypothetically, the previous bear markets lasted 400, 450, and 380 days, we could make an educated guess that this bear market will last 400ish days too.
We can also make the educated guess that it probably won’t last 20 days, or 2,000 days.
History doesn’t repeat, but it does rhyme.
To analyse this, let’s take the Bitcoin chart and put it into a spreadsheet:
Let’s break this down a little.
As for bull markets:
- From August 2010 to June 2011, Bitcoin went from 7 cents to $35. It took 296 days.
- From November 2011 to April 2013, Bitcoin went from $2.29 to $198. It took 506 days.
- From July 2013 to December 2013, Bitcoin went from $68 to $1,151. It took 152 days.
- From January 2015 to December 2017, Bitcoin went from $177 to $19,290. It took 1,068 days.
As for bears (meaning a fall of 80% or more):
- From June 2011 to November 2011, Bitcoin went from $32 to $2.29. It took 164 days.
- From April 2013 to July 2013, Bitcoin went from $184 to $68. It took 86 days.
- From December 2013 to January 2015, Bitcoin went from $1,151 to $177. It took 406 days.
So what rhymes can we expect from history here? Here’s what the data says:
- The bull is always a little over twice as long as the preceding bear.
- New highs are always hit in November/December.
- Bear market pullback % is between 60% – 90%.
- Bull market gain % is unpredictable.
To be honest, that’s not a lot to work with. With only ten years of data, it’s hard to draw concrete conclusions.
However, making an educated guess is free. So here’s what I’m thinking:
As shown in the table, I’m predicting we hit a bottom somewhere during the early half of 2019.
I think $2,000 is a good psychological bottom, but I’ll predict slightly lower at $1,800 to be prudent.
That would give us a 90% pullback, which wouldn’t be an outlier according to the data.
If we hit it around April/May, that will equal 450-500 days in the bear, the longest on record, but not out of touch with the previous bear (406 days).
We said earlier bulls tend to be around twice as long as bears, and end in November or December. If we put it at December 2021, that’s almost bang on 1,000 days.
Now what about price?If you look at the numbers, each all time high is higher than the previous one by at least a factor of 5:
If we take a 5x increase, that would put us at $100,000.
$100,000 would also make it a 5,455% rise from the previous low – about the average of the last 3 bull runs.
Things to consider
Remember that investing is a multi-pronged game.
Data is only one piece of the puzzle.
There are many outside factors to consider, such as macro factors, the government, technology etc. Here are a few I can think of.
Based on historic data, the global economy is due for a recession any day now. Within the next 1-3 years is a good estimate.
Bitcoin has never been through a recession, so predicting any reaction is hard.
I’m part of the group who believes Bitcoin will probably rise during a recession, but really it’s too hard to tell.
If all major governments come out tomorrow and say Bitcoin is illegal, that’s a huge Black Swan event that will obviously affect the price.
I don’t think it is likely and to be honest I don’t even think it will do much over the long term. It is still a possibility though.
Bitcoin is hacked
I don’t think people understand the unlikeliness of this happening.
So many things need to come together for Bitcoin to collapse due to a hack.
A 51% attack won’t kill Bitcoin. It may disrupt it for a short moment, but it’s a hiccup.
In my opinion Bitcoin disappearing due to an attack is a Black Swan event more unlikely than government outlawing.
Other events I haven’t thought of
This is a very new asset class. Any number of things could happen that I haven’t even thought of.
Did you ever think that all banks on Wall Street would be exposed for dodgy mortgages and investments so dirty that they could crash the world economy?
So as with any investment, there are risk factors that we don’t even know we don’t know.
Does that mean I should buy Bitcoin?
It doesn’t mean you should (or shouldn’t) do anything.
What I’ve written above is just information. Information I’ve used to make my own personal prediction.
You could show this same information to someone else, and their prediction would be entirely different.
There’s every chance we get to December 2021 and Bitcoin isn’t $100,000. There’s a chance it’s a million dollars. There’s a chance it’s zero.
Therefore the best I can do is present the information to you. How you interpret it is up to you.