Markets are also narratives. AND these narratives may or may not be a reflection of reality. In most cases, they are interpretations and (subjective) perceptions of a social group about something specific. The funny thing is that, in the world of finance, illusions can become reality. Because expectations have the power to become self-fulfilling prophecies. So the false can be made true with a leap of faith (temporarily). Thus, markets are very prone to delusions.
The investor has no choice but to look to the future. Before making any decision, he must make a forecast. We well know that the profit lies in buying today at one price to sell tomorrow at a better one. I mean, the forecast must predict that tomorrow’s demand must be greater than today’s demand for the investment to make sense.
Now suppose a person makes a bullish forecast. Suddenly, the bullish narrative gains popularity due to the promotion. Like it or not, it is not necessary that the narrative in question find a foundation in reality. The important thing here is that such a narrative is attractive enough to capture the attention of a large number of people. This is a victory by acclamation. Once initial skepticism is broken, enthusiasm spreads like wildfire. The individual gains strength by being part of a group. Confidence in numbers is acquired. And the pressure to follow the group largely eliminates dissent. Can so many people be wrong?
What usually happens in the crypto space is that the truth of the tribe becomes the truth of the universe. The world is divided into two: friends and enemies. Ideology prevails creating its very marked upward bias. Thus, all skepticism is interpreted as part of an evil conspiracy of the enemy against the tribe. It is us against them.
The press? The influencers? Industry CEOs? All of them must please the masses. Because the masses only accept what the masses want to hear. So, the pressure to become just another propagandist is very great. Because? Well, because a critical and objective voice will not be very popular. And, without popularity, there is no profitability. The influencer who appeals to emotions and fantasies will always have more followers than the honest and sincere analyst. ORAn inconvenient truth will always be less popular than a convenient fantasy.
Now, the bullish narrative gains many adherents due to promotion. And then the shopping begins. These purchases raise the price. Suddenly, the bulls were “right”. After all, his forecasts came true. Which, in turn, implies that the skeptics were wrong. Those hikes are interpreted by the tribe as validation of the original bullish narrative. The bulls said that the price would go up and the price did indeed go up. Clairvoyance! I mean, they were right from the start. In the process, the opposition loses credibility. Which drives more purchases. Hence, more hikes.
Ups generate more ups. Because one rise motivates the other. Buyers feel confident, because they catch the general sentiment. However, as valuations rise, the market becomes increasingly irrational. Or, put another way, the sense of reality is lost. Because? Because the valuations are no longer being based on an objective analysis of reality. They are basing themselves on something much more subjective. It is based on the circular logic that the price would continue to rise simply because it has risen. That, of course, cannot be sustained for long, because sooner or later the money will run out. At that point, the market recognizes its hype. Investors panic. And a strong correction occurs.
Human beings are biologically designed to rely on the support of numbers. Trust the other. AND assumes that in the numbers lies the truth. faith in the group is more powerful than the truth seen with our own eyes. Because often the official truth of the tribe is the only truth that matters. Everything else is the falsehood of the enemy. Bitcoin? Of course.
What is Bitcoin? Well, Bitcoin is code on a computer network. It is a series of letters and numbers in a database. What happens is that that code is used as a currency exchange rate. In other words, the code represents an exchange parity. It is an abstraction that, for a group of people, symbolizes a monetary value. So, its price cannot be infinite or totally independent, because it depends closely on the demographic, monetary, social, political and cultural reality of the participants.
In other words, the narrative can pose chimeras and fauns. You can even generate big raises by selling illusions. However, sooner or later, reality will remind us of the limitations of the physical world. Imagination can present a world of unlimited resources. However, the real world does not have unlimited resources. This contradiction between the subjective and the objective is the great creator of fluctuations in the markets. Illusion and disappointment. Optimism and pessimism. Faith and doubt.
To a large degree, the investor’s profit is obtained from the delusion of the mass. Profit is achieved by monetizing market mistakes. The market is usually quite irrational in the short term, but it tends to be much more rational in the long term. When an asset is being undervalued by the market, there is a buying opportunity there. On the other hand, when an asset is being overvalued by the market, there is an opportunity to take profit there. But, To achieve this success as an investor, we must rely more on our own personal judgment than on the supposed wisdom of the masses.
The mass errs more than the individual. Although the market may be right at the time due to the power of a passing narrative, the market tends to be more wrong over time thanks to the power of factors that dominate reality.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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