Is The Crowd Ever Right?
Updated
This article aims to address a question that seems to be burning at the back of many investors’ minds: Can the crowd be right? How can we enter a recession or depression when everyone seems to be thinking about it? But first, I’ll give a bit of background and some of my opinions on the current fundamentals of the cryptocurrency market, and why these opinions are in keeping with my general character.
The Crowd's Market Choices and Economic Revolution
As anyone who has been following me for the last few years will know, I’ve tended to embody a somewhat revolutionary mindset. I’m a hippie artist guy who finds dystopian realities disturbing, but also fascinating. At the same time, I’m also hopeful we will continue to evolve as a species and “figure our shit out.” That’s why I frequently talk about big tech collapsing and why I’ve even speculated about crypto as a promising new financial system. Particularly over the last two years, several observations have led me to become skeptical of something I once thought had some potential. In fact, it seems more and more that cryptocurrencies have become just another way for profiteers to generate income off people’s mere hope to obtain financial freedom. This seems pretty messed up, right? Cue Michael Saylor’s pseudo-radical, esoteric Tweets.
Being a supporter of some cryptocurrencies has always given me a vague feeling of cognitive dissonance, and events of the last two years have revealed to me why that’s the case. Current implementation of cryptocurrencies just doesn’t align with my values. After all, I was a hippie artist guy long before I ever got into crypto or financial markets. I’m still entranced by the idea of a frictionless global currency that’s accessible, lightweight, and inclusive. This is why I feel more neutral to positive towards projects like Nano, Stellar, and now Algorand. One of the things I find interesting about crypto is that people are free to choose projects and protocols that fit their own economic vision. It’s a fascinating sociological case study into Internet communities and economic values. But I think this hyper-decentralization itself has become a downfall of the space. The projects that work the best as currencies have been left by the wayside, while the clunky, expensive, expansion-oriented projects garner most of the attention.
In some ways, the growth of Ethereum, Bitcoin, and Binance Coin all represent the parallel growth in our society––a growth without real substance and meaningful positive change. And with clunky, bureaucratic infrastructure to boot, with lots of unnecessary fees and almost too many instances where one can slip up. In fact, American Neoliberal economics values the “pull yourself up by your bootstraps” mentality, which is why healthcare is not universal here, and why the social welfare system seems to entrap rather than empower. If you want evidence, read American Society: How it Really Works by Joel Rogers and Erik Olin Wright.
“Being your own bank” is just the financialized version of “pick yourself up by your bootstraps”, so it’s in effect anti-revolutionary; it merely goes along with the Neoliberal policies of Nixon, Reagan and Clinton (I think these three are the biggest culprits). Crypto is very American, and is aligned with the policies of the American government since the early 1970’s. Therefore, developing countries adopting crypto seems to be more of a step closer to disaster than away from it. Much like socioeconomic policy in the U.S. It enforces individual responsibility in such a way that people don't have much to support themselves. It pretends to be revolutionary, when it is really oppressive and disempowering.
I speak mostly of the United States, since this is where I live, and it’s the socioeconomic context I learned about in social work school. What I’m talking about here is also lasting output. You cannot say, with evidence, that Bitcoin or Ethereum has a net positive effect on access to resources, education, sound infrastructure, or financial efficiency. Sure, there are some places in the world where using Bitcoin for purchases makes more sense. These are places where everyday citizens experience absurd inflation and do not have easy access to banks or dollars. In this case, it serves a distinct purpose as a tool––essentially a last resort. It is a good thing to have last resorts, but I also wonder whether localities within these countries would simply just develop their own currency or bartering system. I wouldn’t be surprised if this were the case. In some ways, Bitcoin is even more obedient to the whims of the elite, since supply is easily accumulated by large wealthy entities over periods of time. If a small community in an inflation-stricken nation decides to use small pebbles as currency, they have more control over the rules than had they chosen to use Bitcoin. With Bitcoin, they’d be subject to numerous technological limits, portals, fees….and that’s just unnecessarily complex.
This article wasn’t really meant to be about crypto and why I don’t particularly believe in its long-term durability. But my belief in its durability affects how I, as an “analyst” read the market.
There seems to be a pervading assumption in markets that when everyone is talking about selling and fear is palpable, smart investors should really be buying. However, natural logical reasoning dictates that if a bunch of people simultaneously give up on something, the project will halt, and it won’t get finished. So why has the market tended to behave differently? Why can’t we just be allowed to give up on something that doesn’t work? We saw with 2008 that a bunch of banks in the U.S. could have completely failed, because they did not adequately serve the people with integrity. But…the government stepped in and bailed them out, instead of improving the system. This is unfortunately in line with the monetary policy that has snowballed into the current crisis.
I believe the reason why the crowd always seems to be wrong is mostly a function of wealth inequality and exploitation within markets. This is because when the general public is excited about something, they are often late to the game, and they are already being actively exploited, whether they know it or not (early investors using the purchases of newcomers to generate profit). Then, once the bubble pops and prices bottom out, the everyday person has already sold because they cannot afford to see their assets decline any further. Then, the market runs out of sellers while the wealthy (and even the moderately privileged) can afford to continue adding to their balance sheets.
What breaks this cycle? A debt reckoning and deflation. If one subscribes to the belief that markets naturally correct themselves to rebalance, and if one observes the pace at which inflation has exploded relative to stagnant wages since the '70's....then clearly there is an imbalance, although it is difficult right now to ascertain what effect this imbalance will have. What is always clear is that he process of a return to equilibrium after unsustainable growth is a painful one. Excess gets trimmed, and as the saying goes, you get to see who’s standing naked once the tide goes out. The ones in power feel the pain last because they’re standing deep in the water.
There is also the pervading idea that markets only go up. Let’s take a look at the Japanese markets, which have not even breached their highs from the late 1980’s. This shows us it is possible for U.S. equities to enter a period of slower growth that lasts decades. Yes, decades. In this case, even though the crowd seems to be overwhelmingly bearish, they are secretly bullish––meaning they do not believe a recession would last longer than a couple years, at the very worst. In a way, the crowd actually still expects investing in equities and other assets to be a surefire play. And again, if we look at Japan––they have been experiencing an aging crisis. Many studies have recently shown that the same is about to hit the U.S., as the baby-boomer generation reaches old age while younger generations have less and less children. This is not an environment suitable for the kind of growth the market has seen since the 1970’s.
The Crowd's Stance on Bitcoin
Active addresses have not sustained meaningful growth since the 2015-2017 bull market. studio.glassnode.com/metrics?a=BTC&m=addresses.ActiveCount
In fact, the amount of active addresses has essentially stagnated. This leads me to believe that everyone who wanted to own Bitcoin has purchased some already, and it will be hard to get others to do so without enforcing it. But even with El Salvador and The Central African Republic adopting it as legal tender, addresses have grown minimally. The crowd seems to feel indifferently or negatively towards Bitcoin. To be fair, it’s gotten a lot of flak for its environmental impact. And this is warranted: If Bitcoin scaled to facilitate a quantity of transactions on par with the current financial system, it would be far more devastating. Does this mean Bitcoin’s growth is finished?
Amongst the remaining Bitcoin bulls, I've noticed three major justifications for continued price appreciation:
1) Cycles. Bitcoin will definitely go up again because of its repetitive cycle behavior. *Wink Wink* Trust me bro, now is a great price. Anything under 20k is a good buy.
2) Negative funding – funding has been consistently negative for weeks and weeks while open interest remains stubbornly high. This means the crowd is shorting, and they will be squeezed.
3) The dollar will eventually become nearly worthless, since the FED will need to turn the money printer back on. Everything else is priced in. The history of currencies tells us fiat fails.
4) The crowd is bearish, so we should all be buying.
Now, I’m going to address each of these points and explain why I think we should be careful with this logic.
1) This is making an assumption based on past behavior. Bitcoin has already deviated from this behavior by lingering near its previous cycle high without a meaningful bounce. Although the crowd is short-term bearish, it is still long term bullish. People are hopeful to purchase Bitcoin at
12K or lower, expecting another cycle eventually.
2) This is an interesting one. Exchanges generally want trading activity. They also want asset prices to move up, since it attracts new investors to their platforms. Funding has been extremely negative across the crypto market for much of this year, even as prices have continued lower. I recall ridiculously negative funding for LUNA right before the collapse, and recently extreme negative funding for ETH right before the merge. Usually, negative funding tells us that the market is biased to the short side. But is that really what it tells us? Or does it mean the exchange itself wants to make shorting more expensive, to make retail traders more likely to keep tight stops and close out positions early? These “forced” trades generate fees and income during a bearish period for the exchange.
3) The USD hasn’t been around for terribly long. Because it holds so much power internationally, it is unlikely to become worthless in the short term. In fact, its value goes up as the demand for debt decreases and the demand for cash increases, regardless of its supply. My opinion is that if the money printing and QE in the U.S. had gone into substantial projects (infrastructure, education, clean energy, etc.) we would have seen true growth, which could be sustained. It might have taken more time, but it would not result in bubbly market behavior requiring constant bailouts. Our systems would be more self-sustaining. Money spending isn’t a bad thing. It’s what we do with it that matters.
4) We have programmed fear responses for a reason. Animals will often sense an earthquake or hurricane well in advance, and escape to higher ground or a protected area. Just because everyone seems to be panicking or running away does not make disaster any less likely. As I’ve written above, it only seems to be that way because there are certain members of society who take advantage of the herd to generate liquidity and profit.
Since this article has been fairly long, I’ll give a small TL; DR:
The crowd is usually wrong because they’re being fleeced by someone with more power. A mass sell-off IS a revolution – action towards change. The crowd can be right, in a sense. The markets need to tumble significantly for new powers to establish and allocate resources mindfully.
And I’ll leave with a couple of questions:
Bitcoiners believe this bear market won’t last more than a couple of years, and certainly most believe Bitcoin will see another cycle. But then, most outside of crypto seem to not believe in it and find it unattractive, scammy, or even funny. By abstaining from crypto, people are exercising their freedom to choose. Will they be right, or is Bitcoin “inevitable?”
As I've mentioned in some of my recent posts, Bitcoin needs to manifest an impressive 100+% rally in a pretty short timeframe in order to keep up with its long term trend, particularly against traditional assets. That required percentage keeps increasing every day. Ideally, Bitcoin needs to clear that
48K level marked on my chart and stay above. What could be a catalyst?
This is not meant to be financial advice, but speculative and reflective opinions on current conditions. Please consult a professional financial advisor before making significant financial decisions.
-Victor Cobra
The Crowd's Market Choices and Economic Revolution
As anyone who has been following me for the last few years will know, I’ve tended to embody a somewhat revolutionary mindset. I’m a hippie artist guy who finds dystopian realities disturbing, but also fascinating. At the same time, I’m also hopeful we will continue to evolve as a species and “figure our shit out.” That’s why I frequently talk about big tech collapsing and why I’ve even speculated about crypto as a promising new financial system. Particularly over the last two years, several observations have led me to become skeptical of something I once thought had some potential. In fact, it seems more and more that cryptocurrencies have become just another way for profiteers to generate income off people’s mere hope to obtain financial freedom. This seems pretty messed up, right? Cue Michael Saylor’s pseudo-radical, esoteric Tweets.
Being a supporter of some cryptocurrencies has always given me a vague feeling of cognitive dissonance, and events of the last two years have revealed to me why that’s the case. Current implementation of cryptocurrencies just doesn’t align with my values. After all, I was a hippie artist guy long before I ever got into crypto or financial markets. I’m still entranced by the idea of a frictionless global currency that’s accessible, lightweight, and inclusive. This is why I feel more neutral to positive towards projects like Nano, Stellar, and now Algorand. One of the things I find interesting about crypto is that people are free to choose projects and protocols that fit their own economic vision. It’s a fascinating sociological case study into Internet communities and economic values. But I think this hyper-decentralization itself has become a downfall of the space. The projects that work the best as currencies have been left by the wayside, while the clunky, expensive, expansion-oriented projects garner most of the attention.
In some ways, the growth of Ethereum, Bitcoin, and Binance Coin all represent the parallel growth in our society––a growth without real substance and meaningful positive change. And with clunky, bureaucratic infrastructure to boot, with lots of unnecessary fees and almost too many instances where one can slip up. In fact, American Neoliberal economics values the “pull yourself up by your bootstraps” mentality, which is why healthcare is not universal here, and why the social welfare system seems to entrap rather than empower. If you want evidence, read American Society: How it Really Works by Joel Rogers and Erik Olin Wright.
“Being your own bank” is just the financialized version of “pick yourself up by your bootstraps”, so it’s in effect anti-revolutionary; it merely goes along with the Neoliberal policies of Nixon, Reagan and Clinton (I think these three are the biggest culprits). Crypto is very American, and is aligned with the policies of the American government since the early 1970’s. Therefore, developing countries adopting crypto seems to be more of a step closer to disaster than away from it. Much like socioeconomic policy in the U.S. It enforces individual responsibility in such a way that people don't have much to support themselves. It pretends to be revolutionary, when it is really oppressive and disempowering.
I speak mostly of the United States, since this is where I live, and it’s the socioeconomic context I learned about in social work school. What I’m talking about here is also lasting output. You cannot say, with evidence, that Bitcoin or Ethereum has a net positive effect on access to resources, education, sound infrastructure, or financial efficiency. Sure, there are some places in the world where using Bitcoin for purchases makes more sense. These are places where everyday citizens experience absurd inflation and do not have easy access to banks or dollars. In this case, it serves a distinct purpose as a tool––essentially a last resort. It is a good thing to have last resorts, but I also wonder whether localities within these countries would simply just develop their own currency or bartering system. I wouldn’t be surprised if this were the case. In some ways, Bitcoin is even more obedient to the whims of the elite, since supply is easily accumulated by large wealthy entities over periods of time. If a small community in an inflation-stricken nation decides to use small pebbles as currency, they have more control over the rules than had they chosen to use Bitcoin. With Bitcoin, they’d be subject to numerous technological limits, portals, fees….and that’s just unnecessarily complex.
This article wasn’t really meant to be about crypto and why I don’t particularly believe in its long-term durability. But my belief in its durability affects how I, as an “analyst” read the market.
There seems to be a pervading assumption in markets that when everyone is talking about selling and fear is palpable, smart investors should really be buying. However, natural logical reasoning dictates that if a bunch of people simultaneously give up on something, the project will halt, and it won’t get finished. So why has the market tended to behave differently? Why can’t we just be allowed to give up on something that doesn’t work? We saw with 2008 that a bunch of banks in the U.S. could have completely failed, because they did not adequately serve the people with integrity. But…the government stepped in and bailed them out, instead of improving the system. This is unfortunately in line with the monetary policy that has snowballed into the current crisis.
I believe the reason why the crowd always seems to be wrong is mostly a function of wealth inequality and exploitation within markets. This is because when the general public is excited about something, they are often late to the game, and they are already being actively exploited, whether they know it or not (early investors using the purchases of newcomers to generate profit). Then, once the bubble pops and prices bottom out, the everyday person has already sold because they cannot afford to see their assets decline any further. Then, the market runs out of sellers while the wealthy (and even the moderately privileged) can afford to continue adding to their balance sheets.
What breaks this cycle? A debt reckoning and deflation. If one subscribes to the belief that markets naturally correct themselves to rebalance, and if one observes the pace at which inflation has exploded relative to stagnant wages since the '70's....then clearly there is an imbalance, although it is difficult right now to ascertain what effect this imbalance will have. What is always clear is that he process of a return to equilibrium after unsustainable growth is a painful one. Excess gets trimmed, and as the saying goes, you get to see who’s standing naked once the tide goes out. The ones in power feel the pain last because they’re standing deep in the water.
There is also the pervading idea that markets only go up. Let’s take a look at the Japanese markets, which have not even breached their highs from the late 1980’s. This shows us it is possible for U.S. equities to enter a period of slower growth that lasts decades. Yes, decades. In this case, even though the crowd seems to be overwhelmingly bearish, they are secretly bullish––meaning they do not believe a recession would last longer than a couple years, at the very worst. In a way, the crowd actually still expects investing in equities and other assets to be a surefire play. And again, if we look at Japan––they have been experiencing an aging crisis. Many studies have recently shown that the same is about to hit the U.S., as the baby-boomer generation reaches old age while younger generations have less and less children. This is not an environment suitable for the kind of growth the market has seen since the 1970’s.
The Crowd's Stance on Bitcoin
Active addresses have not sustained meaningful growth since the 2015-2017 bull market. studio.glassnode.com/metrics?a=BTC&m=addresses.ActiveCount
In fact, the amount of active addresses has essentially stagnated. This leads me to believe that everyone who wanted to own Bitcoin has purchased some already, and it will be hard to get others to do so without enforcing it. But even with El Salvador and The Central African Republic adopting it as legal tender, addresses have grown minimally. The crowd seems to feel indifferently or negatively towards Bitcoin. To be fair, it’s gotten a lot of flak for its environmental impact. And this is warranted: If Bitcoin scaled to facilitate a quantity of transactions on par with the current financial system, it would be far more devastating. Does this mean Bitcoin’s growth is finished?
Amongst the remaining Bitcoin bulls, I've noticed three major justifications for continued price appreciation:
1) Cycles. Bitcoin will definitely go up again because of its repetitive cycle behavior. *Wink Wink* Trust me bro, now is a great price. Anything under 20k is a good buy.
2) Negative funding – funding has been consistently negative for weeks and weeks while open interest remains stubbornly high. This means the crowd is shorting, and they will be squeezed.
3) The dollar will eventually become nearly worthless, since the FED will need to turn the money printer back on. Everything else is priced in. The history of currencies tells us fiat fails.
4) The crowd is bearish, so we should all be buying.
Now, I’m going to address each of these points and explain why I think we should be careful with this logic.
1) This is making an assumption based on past behavior. Bitcoin has already deviated from this behavior by lingering near its previous cycle high without a meaningful bounce. Although the crowd is short-term bearish, it is still long term bullish. People are hopeful to purchase Bitcoin at
12K or lower, expecting another cycle eventually. 2) This is an interesting one. Exchanges generally want trading activity. They also want asset prices to move up, since it attracts new investors to their platforms. Funding has been extremely negative across the crypto market for much of this year, even as prices have continued lower. I recall ridiculously negative funding for LUNA right before the collapse, and recently extreme negative funding for ETH right before the merge. Usually, negative funding tells us that the market is biased to the short side. But is that really what it tells us? Or does it mean the exchange itself wants to make shorting more expensive, to make retail traders more likely to keep tight stops and close out positions early? These “forced” trades generate fees and income during a bearish period for the exchange.
3) The USD hasn’t been around for terribly long. Because it holds so much power internationally, it is unlikely to become worthless in the short term. In fact, its value goes up as the demand for debt decreases and the demand for cash increases, regardless of its supply. My opinion is that if the money printing and QE in the U.S. had gone into substantial projects (infrastructure, education, clean energy, etc.) we would have seen true growth, which could be sustained. It might have taken more time, but it would not result in bubbly market behavior requiring constant bailouts. Our systems would be more self-sustaining. Money spending isn’t a bad thing. It’s what we do with it that matters.
4) We have programmed fear responses for a reason. Animals will often sense an earthquake or hurricane well in advance, and escape to higher ground or a protected area. Just because everyone seems to be panicking or running away does not make disaster any less likely. As I’ve written above, it only seems to be that way because there are certain members of society who take advantage of the herd to generate liquidity and profit.
Since this article has been fairly long, I’ll give a small TL; DR:
The crowd is usually wrong because they’re being fleeced by someone with more power. A mass sell-off IS a revolution – action towards change. The crowd can be right, in a sense. The markets need to tumble significantly for new powers to establish and allocate resources mindfully.
And I’ll leave with a couple of questions:
Bitcoiners believe this bear market won’t last more than a couple of years, and certainly most believe Bitcoin will see another cycle. But then, most outside of crypto seem to not believe in it and find it unattractive, scammy, or even funny. By abstaining from crypto, people are exercising their freedom to choose. Will they be right, or is Bitcoin “inevitable?”
As I've mentioned in some of my recent posts, Bitcoin needs to manifest an impressive 100+% rally in a pretty short timeframe in order to keep up with its long term trend, particularly against traditional assets. That required percentage keeps increasing every day. Ideally, Bitcoin needs to clear that
48K level marked on my chart and stay above. What could be a catalyst?This is not meant to be financial advice, but speculative and reflective opinions on current conditions. Please consult a professional financial advisor before making significant financial decisions.
-Victor Cobra
Note
Ooops! Typo - “four” major justifications for continued price appreciation, not three.
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