The Capital
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The Capital

What is consensus on the market and why is it dangerous?

By Your Crypto Boss on The Capital

Market consensus — is the agreement of most market participants on the prospects of an asset.

In a bullish consensus situation, most participants expect the growth of an asset and are buying it. In a situation of bearish consensus, on the opposite, the majority of participants sell the asset.

If this term is applied to Bitcoin, a vivid example of bullish consensus is waiting for growth after the launch of CME futures in 2017. Less striking but real examples of bullish consensus are the expectation of growth before Bakkt starts in September 2019 or the expectation of Litecoin growth before its halving in August 2019.

All these examples have something in common — expectations have not met. After the expected events, there was not growth, but a powerful decline. An example of a bearish consensus is the fall of Bitcoin to 3200 at the end of 2018 or its failure below 7000 in November-December 2019. In the first case, the majority of market participants were waiting for a further fall by 2000–1500, while in the second case, the majority of participants were going to buy Bitcoin somewhere around 5200. It all ended with a reversal and a transition to growth. As you can see, when there is a consensus on an asset in the market, everything happens the other way around. The bullish consensus ends in a fall, and the bearish consensus ends in a growth.

Why does this happen and how does it work?

The number of buyers on the market is always equal to the number of sellers. If you bought Bitcoin, it means someone sold it to you. And when they say that “the market is dominated by bears,” it means that there is an oversupply in the market, willing to sell more than willing to buy.

Those who want to sell more, they put up bids for sale, but the deal will only happen if there is a real buyer on the asset. Therefore, when there are significantly fewer sellers who want to buy, sellers have to put up ever lower prices until the price of the asset becomes interesting to the buyer and they start buying. When the market is dominated by bulls, the opposite happens. Those who want to buy more, and to interest sellers, they put up higher prices.

So, the price of an asset depends on the number of market participants who place orders for sale and purchase. At the same time, they are guided by different motives — someone buys in long term and for him, the price fluctuations of 10–15% are not decisive, someone expects the asset to grow due to some events, someone owns an insider, someone looks at the chart and thinks that he sees indications to buy or sell the asset there.

In a quiet market, the number of buy and sell orders is in approximate balance, and then the market stands still or is in range. But there are situations when some idea is mastered by the majority of market participants. For example, the idea of Bitcoin growth after the launch of CME futures in December 2017. Those who want to buy more and more, and the supply less, as Bitcoin holders also expected that after the launch of the futures will begin to grow.

Prices are flying up at an unrealistic rate, money has been pouring into the crypto market, and many people have taken out loans in the expectation that if there is such growth before the futures launch, then what will happen afterward. The launch took place. Happy buyers of Bitcoin 15–18K are waiting for the flight to 30K and above. But to fly Bitcoin to 30K, there must be those who want to buy it at 20K. And they weren’t. The situation is “everyone bought it earlier and is waiting for profit.” The same bull consensus, everyone was talking about further growth. But after a month, Bitcoin was already below 10K. (Now we don’t discuss the role of CME), we talk about the market mechanism itself.

The end of 2018 and the beginning of 2019 is the opposite situation. There are fear and terror in the market, the crowd is waiting for the Bitcoin price of 2,000…15,000…1,200. Saw the forecasts for $600). But there were not especially those who wanted to sell at such prices, so in a few months, they moved from these levels to long-term growth. The meaning is the same: everyone talks about further decline, but the situation “all sold.” There are no new sales, so let’s move on to growth.

This is how the market works — for an asset to continue growing, it must be bought.

To keep falling, you must sell. And if 70–80% of market participants have already bought an asset, who will buy from them and ensure growth? No one will buy and the asset will start to fall; the same applies to sales. That is why the crowd is doomed to feed the earning minority with their money. Consensus in the market is rare, the market is in uncertainty for the most part. But when it comes, the market’s prospects are clear.

What conclusions should be drawn from understanding the consensus mechanism?

  1. The emergence of certainty about an asset in the market — is a sign that this asset will soon go the other way. When everybody is sure of a rise or fall, it’s time to do the opposite.
  2. Options “ to wait for trend confirmation, and then to enter into a deal” — not good idea.

Firstly, as the market is in range most of the time, strong movements in one direction do not occur as often.

Secondly, when the direction of movement becomes confirmed and obvious to everyone, it’s a sign that it’s time to catch the price in the opposite direction and to look for entry points in the opposite direction.

3. Good ideas- are those that support the main principle of proper trading — to buy cheap and to sell expensive. To identify a movement at its very beginning, or to enter against the market consensus is the right idea, capable of bringing good profits with the right execution.

4. Turn off your emotions. The main reason for all trader losses- is loss of control over your own brain.

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