Emotional management of the bitcoinversor

In investments as in life, identifying emotions and being aware of them is the first step to knowing how to manage them. All the intellectual knowledge acquired about the fundamentals of Bitcoin and technical analysis would be useless if we did not learn to remain calm in moments of maximum investment tension, when our own and collective emotions are at full boil.

 

Numerous are the studies that show that the market is moved by emotions in the short and even, sometimes, in the medium term. The psychology of the investing masses, often irrational, penetrates us all, leading us to states of enthusiasm, excitement, euphoria, anxiety, denial, fear, depression, etc. which are ultimately the cornerstone for wrong decision making.

 

How many times have you sold your assets in moments of panic or bought in moments of euphoria? Well, I'll tell you a secret: it's done just the other way around!

Not in vain the best investors make a lot of money in economic crises, because they use what is known as "contrarian philosophy", or contrary to what the majority does.

Hence Bernard Baruch's famous phrase:

 

"When even the shoe shiner talks about the stock market,

it's time to sell

To understand what I mean, let's take a look at the cycle of market emotions:

As the price of bitcoin rises, the positive emotions intensify. First it's just optimism, then we move on to enthusiasm, then excitement, and finally euphoria. On the other hand, in corrections it is the other way around: the price falls as negative emotions, anxiety, fear, depression, panic... intensify.

 

You have to know that the point of maximum financial risk comes when there is euphoria in the market. At that point everyone is talking about the action, the media in particular. The predictions are stratospheric and investors are putting all their money into something they are completely unaware of. They haven't even spent a few hours understanding what they're investing in. They invest because others invest. Hence the phrase of the shoe shiner. It is the speculative phase. The phase of fear of missing the train. The FOMO phase (fear of missing out or fear of missing something). The phase where everyone thinks they will get rich overnight. This is the time when you have to be extremely careful.

Why should you be extremely careful in the euphoria?

Because those same inexperienced speculative investors unaware of the cycle of market emotions who bought in the excitement not knowing what they were getting into will rush out scared in fear and sell their bitcoin quickly (seeing themselves at a loss) greatly increasing volatility and causing a huge fall by the domino effect.

 

By the time you want to get out of the investment, it may be too late. You will have to take huge losses. Unless you are a hodler and your time horizon is the long term.

Good investors know the emotions that the masses are going through and use them to their advantage.

On the other hand, at the point of maximum financial opportunity you will hear the worst predictions. It is paradoxical, but notice from now on how it is true. Some of those predictions include “that bitcoin is dead”, “that governments will never allow its implementation”, “that it has no practical use”, “that it will end up having only residual value”, “that it pollutes a lot”...  In short, there will be a sea of negative news and the general feeling will be one of surrender and discouragement. People will assume losses of 40%-60% in this phase. Without being aware that a new rise is just around the corner. It is the phase of uncertainty and doubt. It is the FUD phase (fear, uncertainty and doubt). Everyone loses interest, even the media.

But, at the end of that phase, when good news starts to be heard again, even if the discouragement persists, and the price remains low, we will know that it is the moment when bitcoin will turn around and start to rise again. It will be the beginning of a new cycle. As you can see in the graph, the depression will continue to be present even with the price slightly rising, but it will soon give rise to hope.

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Bitcoin is a digital currency that circulates through its own network of computers connected in a decentralized way. Precisely because it is decentralized, it does not require any central or local authority to manage it. Hence the libertarian character of the currency.

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In a parallelism with the Internet, it is said that the penetration of Bitcoin in society is in a period equivalent to the 90s, when the network of networks began its gradual adoption. The process of adopting a new technology is widely studied. In addition, a series of medium and long-term models developed by macroeconomic investors of various kinds are available. 

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Hence the famous phrase of Baron Rothschild:

 

“Buy when there is blood in the streets,

even if the blood is your own

 

Naturally buying when everything is bad news is scary. Prices fall precipitously and it seems that the world is going to end. But it's time to keep a cool head. You are being presented with a golden opportunity. It is not a question of trying to catch a knife on the fly, but it is convenient to pay the maximum attention to the good news (even if it does not move the price), to the fact that the fundamentals are still intact and to the Technical Analysis in search of divergences, rebounds, key supports, figures trend change, etc.

 

What happens when you manage to overcome that fear from objectivity?

Then it will not be called a drop, it will be called a discount. It is a change of mentality that will open up new opportunities for you and give you security when it comes to investing. That was the case of real estate investors who bought homes in Spain in 2013 and 2014 just at the worst moment of the bursting of the real estate bubble. They were clear that the world was not ending and that house prices would rise again, as always happens, which is why they entered the market when all the media, including the specialized ones, discouraged it. The depression was still present.

 

Do the exercise of becoming an emotional observer. Observe the feelings of others, of the media, even of yourself without participating in them. Oblivious to them. Then analyze what phase of the emotional graph they are in. This will greatly help you to keep your head cool.

 

The secret is to understand the emotional behavior of the investing masses and use it to our advantage; observing their behavior from an external position, much more lucid.

 

This happens with all assets, but in the case of bitcoin, the volatility is greater as it has a still small market capitalization. As time goes on this volatility will decrease and corrections will become less conspicuous.

The Hodler Mentality

This emotional control and view of reality "from the outside" is what has led many investors to buy bitcoin during the bear market of 2018; and many hodlers to hold their positions for years living corrections, bear markets, forks, good and bad news. Well, those people are the ones who are in the best position right now. They boast solid multi-digit earnings and care little for daily, weekly and even monthly volatility. They are known as strong hands because they do not sell or buy moved by the news, moments of panic or euphoria. They remain objective in their investment.

The Hodler mentality is characterized, therefore, by being long-term. Knowing that the markets are moved by emotions in the short and medium term, the Hodler mentality remains unchanged to all of them.

Hodlers are happy about the ups but also downs as they understand that corrections are normal in any asset as we discussed in the previous section. They even consider them discounts to continue accumulating bitcoin.

Nothing goes up in a straight line. Never. I repeat. Never.

The Hodler mentality is aligned with the Technology Adoption Cycle that we saw in section 1 chapter 3 and with the Stock-to-Flow Model of the same chapter. In other words, the Hodler strategy consists of enjoying the economic benefits in a few years when technology has penetrated society.

 

This way hodlers identify FUD and FOMO, but don't let them affect them. They prioritize their personal peace of mind to "going down to the medium or short term" and trying to guess the best time to enter or exit the market. Also avoiding tax oversights.

 

On the other hand, if the Hodler mentality is not your thing or if in addition to hodling you want to have a second account dedicated to trading, you have to be able to identify FUD and FOMO; be impartial and know when the media releases news to take advantage of the sentiment of the investor masses and thus maximize their readership and when not. Yes. Confirmed. The media also knows the Cycle of Market Emotions. And they take advantage of it. Let us be aware that the more clicks we make on a piece of news, the more digital newspapers earn in advertising. What you have to do is take advantage of that knowledge too.

 

To do this, it is best to examine the news from an objective point of view and constantly check the fundamentals of Bitcoin. Those explained in Section 1. If the fundamentals have not changed or have improved, the medium/long-term trend will be upward, no matter how bad the news seems and no matter how depressing the market sentiment is.

 

Remember that investors who really know about Bitcoin do not get carried away by short-term emotions.

An inefficient emotional control will lead you to sell in a valley and buy in a peak. Work to master your emotional side.

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