This fortnight’s article is something of a follow up to the last [A Maturing Market]. This time, I’m wanting to look at the way in which the maturation in price action can also be reflected in the outlook of the market participant. Remember, from the behavioral economic perspective [a paradigm with which I have some sympathy], price is simply a reflection of a conglomerate of market participants. It will be my intention to illustrate the way in which those that have a hypothesis to work with will have the competitive advantage over those who are swept up in the hype.
When investors/ traders have in mind a working hypothesis [as opposed to hype, memes or dogma] they will only ever be sufficiently bullish, which is to say they will be bullish enough without being overly bullish. This is also to say they will be hedged. As a hypothesis stands somewhere between fact and fiction, between the real [future] world and what we think, then it will always be held at arm’s length… or critically. A hypothesis is considered a provisional truth; it works as long as it works. As there is no certainty involved, such as to be found with mathematics, geometry and logic, there can be no complete investment in it, whether that investment be financial or psychological [complete psychological investment coming with hype].
Also, given that a rational modeler with a hypothesis/ theory is never overly invested [in that psychological sense], there should be no anxiety involved in case the theory may in the end be proven wrong. This is because the theorist realizes the difference between hypothesis on the one hand, and clairvoyance on the other. For the theorist, there is nothing at all problematic with a theory being invalidated. In other words, the ego is not overly invested in the theory; there is always at play a critical distance toward that theory. And of course, this distancing toward the theory leads in turn to a hedging of one’s positions, which takes us from the theoretical to the more practical.
In practice, I have a theory, a model, known as the LGC [logarithmic growth curve]. I am sufficiently bullish BTC on the basis of a model that has effectively performed for the past few years in predicting the range in which price would track. Notice that this theory is a hypothesis [not an explanation]. The hypothesis is empirical [based on experience] and involves stating that price moves [and will move] as if it were a developing logarithmic growth curve. Why that should exactly be the case would be grounds for further conjecture, and would take you into the fields of explanation of a more macro-economic and metaphysical kind. These explanations, though of interest, are essentially superfluous to the theory; just as a scientific theory [based on mathematical uniformities] does not require a complete explanation, but simply functions [provisionally] as the best one available… until a better one comes along.
Ok, now to the more practical aspect. Here is the chart, and the hypothesis, we are all interested in.
As mentioned, where the previous article focused on price maturation, on the trend of the chart above, this article focuses on the maturation involved in investor psychology. It is a well-known phenomenon that those first entering into a speculative market get caught up first in the hype. At a later period, they tend to become a lot savvier [fool me once…]. The market, never your friend [though the trend may be], hammers that initial enthusiasm and hype out of the new entrant, out of which process a more cautious trader/ investor emerges. Of course, the danger here is that the once-burnt retail investor becomes twice shy, and so becomes too cautious. The way ahead through the extremes of hype on the one hand, and fright on the other, is one of being sufficiently bullish in my opinion. But on the basis of what, the reader may ask, after having seen the price of Bitcoin capitulate below its previous peak nearly a full five years ago now. And here is where hypothesis replaces hype.
In the above chart, we have the LGC model. The prediction [since 2018] was that price would range within the channel, and so it has. Notice the channel is narrow enough to be severely tested at times, i.e.; it could have been invalidated if price moved outside the channel [and could still], but that channel has instead functioned as if it were both support and resistance. On the basis of the model’s previous performance, one can have can have further confidence it will continue to perform… without of course being certain [inbuilt into the idea of a model is fallibility and hence the need to hedge].
Of course, the reader may be thinking this is all very well from a purely rational and coldly calculating perspective, but aren’t markets moved by sentiment… and isn’t sentiment currently at all-time-lows? In response, I’d say that the LGC pre-empted this criticism by ‘pricing in’ the turn of sentiment [deflationary expectations and a dismal macro outlook] at the top. In an article ‘Deflation and Bitcoin’, written when the price of Bitcoin was more than twice what it is currently, I argued that it was exactly this kind of sentiment was what would take price back down to the bottom of the LGC range:
It’s been my intention so far to describe the market swinging between both inflation and deflation expectations as opposed to seeing one or the other of the narratives simply as the driver of price in the market place….
Given this view of the market, price will neither explode to the upside, nor crash to the downside. Rather it would develop along very volatile lines, where it first enters into a speculative episode on inflationary expectation [FOMO], and then corrects severely on deflationary expectation [this essentially seen as a variant of FUD]. I was looking for this kind of volatility to play out, within the parameters of the LGC, over a year back here. Over the course of the following year, that outlook has been well corroborated/ confirmed in the price action. In this article, I also touched on how irrational and psychological factors trump the rational/ theoretical ones.
And yet, a disillusioned reader may still ask how I can stick to my guns here. In the face of a ‘macro’ environment considered detrimental for Bitcoin - in the face of mass sentiment at all time lows, aren’t I still being a bit dogmatic with a long-term macro bullish chart??
Yet of course, I’m not, for the LGC model, as I’ve outlined above, is a hypothesis, which is the very opposite of a dogma. One has a model/ hypothesis, having never bought into an earlier hype; one has continued confidence in that model as it has predicted recent price development well; the model has predicted negative sentiment as a driver of price; and the model [and core position] is hedged at it is not considered a certainty. In fact, it’s this disillusionment, as couched in the question above, that was also predicted a year back:
Just as the language of bear and bull, as applied to market participants, is problematic, so too is the language as applied to the market itself. In this sense, they are in reality two sides of the same coin, for those participating in markets will of necessity interpret them a certain way. One would hope to have a semblance of objectivity in reading the market, and yet if locked into a dichotomous bull/ bear narrative of that market, there is the risk of simply projecting your own pre-occupation or mindset. In this scenario, there is no room for disinterestedness/ objectivity. Here the disappointed or disillusioned ‘bull’ may suddenly flip to seeing a bear market, where that submerged and lurking fear, long repressed by a laser-like/ singular focus on bullish fundamentals, will rise to the surface with a vengeance.
As the longest-term chart [above], giving the basic parameters of the developing logarithmic growth curve [always primarily a concept/ model/ hypothesis] can give the visual illusion of price just tracking sideways [given the logarithmic scale], I’ll finish with a more medium-term chart that zooms in on the years that will no doubt be more relevant to us:
As can be seen, much potential for a recovery to better prices going forward after an extended correction.
It’s been the aim of this article to illustrate the way in which the investor is perfectly reasonable in having a continued bullish outlook on Bitcoin as based on the LGC model. As a model, as a working hypothesis, it’s also a work in progress, it’s never complete, always provisional. One’s attitude to it is moderate, where the golden mean comes to mind, surely appropriate for something with all the potential to be digital gold. For those caught in the throes of the current doom and gloom, which has to be the equal and opposite of the hype at the top, consider that a major criticism of the LGC at the top was its sobriety, that it failed to buy into… and perpetuate that hype. Need I say anymore.