‘There is a lot of surface noise in the cryptocurrency space and most of it is the psychobabble of investor sentiment. One week it is the sound of everybody rushing towards a feeding frenzy. The next the wailing and gnashing of teeth as those near the surface (the ones most exposed) get spooked and rush the other way, falling over each other in the race to escape.’
I wrote the above paragraph on June 11th as the introduction to an article I was asked to contribute to a national newspaper. The piece was essentially about what drives the roller-coaster of cryptocurrency prices – a pattern I have often referred to as ‘exquisite volatility’.
IT’S EASY TO OVERTHINK IT
Day to day volatility is something that market analysts and crypto-critics alike are obsessed with on a day-by-day basis. In my view they overthink it. The main thrust of my argument in June, with crypto prices tanking, was that ‘buying the dip’ is a tried and tested strategy. At that time Bitcoin was priced around £25,000. Over the next few weeks, it then ticked down even further to £21,762 on July 20th.
At time of writing, about 10 weeks later, it’s around £32,680 or US$44,700. If you follow certain online forecasts, pundits are now suggesting Bitcoin could push the $100,000 barrier before the year is out. But, as I said above, it’s easy to overthink things, and sensational predictions make headlines.
IT’S INVESTOR SENTIMENT THAT REALLY DRIVES PRICES
Cryptocurrency in general is currently trying to find its identity. Is it a currency or is it a commodity? Is it something you ‘trade in’ or is it something you use to ‘trade with’ – i.e., use to buy other goods? Currently short-term prices are being driven by traders not users – nothing wrong with that, the function of any market is to allow people to buy and sell and make a profit through matched bargains.
The value of any commodity is only what somebody is prepared to pay for it, or what they can sell it for. On a speculative basis, rising values are driven by fear of missing out (FOMO) when the price is on the way up, which ramps the price up. Downward values are driven by fear of losing out (FOLO), when the price starts dropping and the feeding frenzy turns into a selling frenzy.
Interestingly, traders measure their success not by what they can afford to buy with their crypto wallet, they measure success in terms of converting gains back to their local fiat currency – which rather misses the point of why Satoshi wanted to create a DeFi world in the first place.
THE RISK OF GAMING THE MARKET
The fact is that most traders are gaming the market. The risk is that there are some really big swinging crypto traders out there who can influence the market. Playing ‘coin’ like a computer game has inherent risks – rather like trying to predict when a murmuration of starlings over Brighton pier will change direction. I believe that as the market continues to mature and cryptocurrencies follow their destiny to become the enabler of decentralised finance on a global basis, the margins for traders will inexorably tighten.
At Dacxi we take the long-term view. We are firmly ‘buy-and-hold’ investors who, having looked at crypto’s growth curve and analysed the true sense of purpose of DeFi, don’t over-react to the short-term metrics. Dacxi is a wealth building platform and experience has taught us that very few people get rich quick – and more than a few of those that do, get poor again just as quickly.
For most of us building wealth takes a measured view and a measured time frame. From my point of view there’s nothing at all wrong with that!