The Capital
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The Capital

(Image of model generated from GAN Karras; Graph from Coindesk)

Bitcoin Is A Keynesian Beauty Contest In An Irrational Market

What makes them so irrational?

It is the hype cycle where everybody hears something, and they want and then jump the bandwagon. That was the narrative of 2017 when BTC (Bitcoin) was reaching an ATH close to $20K. Then 2018 came, and the support dropped as weak hands exited and FUD set in, eventually leading to a very large correction. BTC fell by 65% during the month from January to February 2018. It seems to be a cycle that has now been an observed pattern. Just when BTC was reaching a new ATH, it would correct and fall back down to a lower level of support. Then it suddenly surges after a bearish cycle.

The Narrative Has Changed

By the end of 2020, BTC began a similar trend to 2017. This time, however, the price surge surpassed expectations as ATH continued into 2021. As a result of many factors, including stimulus from the US government due to the COVID pandemic, zero interest rates, and a hedge against inflation, the narrative in 2021 is much different. It is not so much about retail investors now. Institutional investment into Bitcoin has become a prime mover as PayPal, Square, MicroStrategy, Grayscale Investments, BlackRock Capital, and Tesla have entered the space. This wall of capital was what was missing after the 2017 ATH. BTC even reached $60K as the sentiment has turned more bullish than ever, leading some analysts to indicate the start of a parabolic bull run is in the works.

New capital is flowing into Bitcoin (Photo Credit Photo by David McBee)

Who is judging the “Beauty Contest”?

It appears to be the likes of Michael Saylor, Raoul Pal, and Chamath Palihapitiya. You can include Elon Musk in the mix, but are they really doing something rational when it comes to investing? Here is the idea, as explained by Michael Saylor in the decision for MicroStrategy to put their cash into BTC:

Education, Not Speculation

If most people are following Michael Saylor by putting money into BTC, then why are they irrational? The difference is in their way of thinking. When the market dips, there is a psychological factor that many cannot handle. Emotions usually run high, and the most natural reaction among many of these people is to pull back and exit. That is a very poor choice to make since price dips are very much a common occurrence in the volatile cryptocurrency market. A pullback leads to more losses because the prices could just as suddenly rise. People then go back in, but this time they “buy high” as the price rises but do not realize that they now have less BTC than what they had before the price dipped. It is like a rinse, dry, and repeat the cycle.

More education leads to better understanding and knowledge of cryptocurrency (Photo Credit by Oladimeji Ajegbile)

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Vincent Tabora

Editor HD-PRO, DevOps Trusterras (Cybersecurity, Blockchain, Software Development, Engineering, Photography, Technology)