Fear, Uncertainty, Doubt

Markets love good news. Markets can handle bad news. What markets absolutely despise is fear, uncertainty, and doubt. Buyers and sellers, investors and producers, need to have an idea of what the future will look like so they can make decisions. Think of it like this: if you can only take either a pair of sunglasses or an umbrella with you, but you don’t know whether the weather will be sunny or rainy, then you might just decide to stay at home. Since the middle of June, the market for Cryptocurrencies has been dominated by uncertainty. But on August 1, that all changed.

Bitcoiners didn’t know for certain whether the coin would undergo a hard fork or a soft fork or an upgrade or nothing at all. The uncertainty leads many people to imagine the possibility of the worst possible outcome – a failure of the coin and panic. The same principle leads to runs on banks: depositors doubt that they will be able to withdraw their money tomorrow, so they all rush to withdraw it today, and the bank runs out of funds and collapses. Rather than deal with the uncertainty, Bitcoiners simply sold their BTC and stored their wealth in fiat. The price fell nearly $1,000 in a month.

Then Segwit was approved, and, unexpectedly, a hard fork was announced as well at nearly the last minute. Now, the weekend after the August 1 event has passed, Bitcoin just reached a new all-time high. The fork didn’t collapse Bitcoin, the market supported Bitcoin Cash, and fear of missing out drove investors back into cryptocurrencies in a feeding-frenzy. Even Ethereum is climbing again after losing 50% of its all-time high of $400. The rising tide lifts all boats.

If the outcome of an event at a known date is uncertain and news relating to that event continually coincides with decreases in the price of the related asset, then you should consider buying low, unless you expect the outcome to be severely negative. People almost always overreact to uncertainty, they always fear the dark more than they should, it is basic nature and psychology. We try to avoid loss as much as we can, and we’ll forego gain and success if we have to risk a little to get a lot. “Be greedy when others are fearful.”

This was predictable and predicted.┬áThe only real downside risk was a true black swan, wherein the Bitcoin mining community splintered into a thousand factions. But there was simply too much money at stake for irrationality to triumph over the profit incentive. Bitcoin’s future looks bright today, so grab those sunglasses, but there still might be storm clouds far off in the distance.

Leave a Reply

Your email address will not be published. Required fields are marked *