Psychology of the dip

The dip vs bear market explained

In the middle of the bull market, the volatility tends to spike and go into every imaginable direction.  Let’s take a rational look at why the markets dip.

A dip simply means an unexpected ( and sharp ) downwards price move. Usually most people don’t see it coming and this is exactly why it catches so many people off guard.  To a leveraged trader a dip is a disaster, while to a hodler with a broad time horizon, the dip is a godsend. During the bull market many new crypto investors join the party.  They enter the market with high hopes and expectations, while usually ignoring most common risks.  While this is off course by no means financial advice, let’s take a closer look at the phenomenon of high volatility and market dips.  You might be surprised, but in many cases it’s a game of poker, rather than a simple mathematical calculation of risk and rewards.  This market is young and temperamental.  The emotions tend to flare up and irrational exuberance is extremely prevalent. Let’s take a sharp knife and try to cut away the layers of complexity. 

What is a dip? 

 

Whenever we witness a sudden, fast and violent price move to the downside, we’re dealing with a dip.  It’s important to mention that at this moment we are in a bull market ( May 2021 ). Expectations are very high and people from far and wide are plunging head first into this market, usually without proper education, preparation and resilience.  If anything, the new and unprepared investors in the crypto space usually get hurt the most during dips.  Look, there’s one now!  Introducing Chad Peterson. 

Chad is a young, very skilled car mechanic and a master of the wrench.  He can even fix your old monstrocity that’s rotting away in the furthest corner of your backyard.  A few weeks ago he saw the news reports about some mysterious billionaire extraordinaire promoting some “DOGE” coin and of course he saw a few of his buddies become rich overnight.  Naturally the greed took over and Chad decided to jump into this market without knowing anything about what he’s actually investing in. 

After a hassle free registration process ( on an exchange that didn’t let him control his private keys ) he finally bought some of this mysterious DOGE coin and went back to work expecting to retire as a multi millionaire in 2 months time.  You can guess what happened next, right?  After another twitter war, the price of DOGE plummeted by 42%.  Chad was at work that day and didn’t look at his phone.  He failed to see the red hot notifications, so he eventually panicked and tried to sell every bit of his DOGE in hope to “at least recover something”.  After the painful sting of defeat was finally deafened by a few beers, Chad decided never to do anything as foolish as investing in cryptocurrency.  Sounds familiar?  No doubt you know many people who got left holding the bags from 2017.  They hiss and snarl at any mention of the “crypto space” and sure as hell they don’t want anything to do with it. 

What happened to Chad is very common and it will happen to many more people as the bull market starts to feed on itself and sucking up an avalanche of new liquidity.  Our poor friend Chad simply got caught in a dip AND a lack of knowledge.  This is why your journey through the turbulent and immature crypto space should always begin with education.  This Wild West of a market is as temperamental as a Spanish girlfriend and will prey on people’s emotions. Remember this. Nothing just goes up in a straight line. Consider the market to be a living breathing organism populated by millions of tiny cells, huge parasitic worms and many different organs and systems. The upwards price action is an inhale.  The downward price action is an exhale.  A bull market is a marathon, while a bear market is a 100 meter sprint to the exit, followed by an exhausting “Tour De France” ride to the bottom.  Nothing happens by accident and all the integral parts of the market ( yes even the parasitic worms too ) are there for a reason. It’s all a big game and you start by learning the rules. 

How is a dip different from a bear market? 

A bear market is a prolonged period of declining price action and in the crypto market this tends to be an exceptionally long, brutal and bloody period that can shatter the faith of even the most avid crypto OG’s.  Chad’s long term friend Tom Brown knows this better than anyone.  Tom has been in the crypto space for years now.  Being a naturally curious person, he wanted to learn everything about the tech and the market before even putting one dollar of his hard earned money into the damn thing.  Fortunately Tom also witnessed the brutality of the 2018 bear market and he stayed in the game learning and keeping up with the latest developments. 

Tom knows that a dip is only temporary.  It usually gets “eaten up” by the market very quickly.  He’s not worried about it and even welcomes it.  You see, Tom always has a secret stash of stable coins in order to buy his favourite coins at cheaper prices, just like his wife buys new shoes during sales.  It wasn’t always like this and Tom learned everything the hard way.  Even after a few setbacks he got back into the saddle and plowed through the mistakes.  Now he’s more educated and experienced than ever.  Tom doesn’t fear the dips.  He does fear the bear market though.  Like any good movie, a bull market comes to an end.  

Usually this period is very recognisable and can be accurately predicted by people who spend their time in this jungle.  A bear market starts at the point when no more new liquidity enters the market.  The upwards trend is promptly broken and we start the long rollercoaster ride down.  It’s all a matter of supply and demand. When the demand stops, the asset has to depreciate to more “bite sized” levels in order to attract eager investors and speculators alike.  This period is also characterized by the extreme lack of intelligent behavior. In short, people do a lot of stupid and irational things just so they can buy crypto currency. This was the same for stocks right before the great crash of 1929, during the dotcom bubble in the 1990’s and it’s the same right now. The technology might change. Human behavior, never. 

A dip is usually caused by other numerous factors.  In Chad’s case, he simply got caught between the hammer and the anvil of irrational exuberance and greed.  The mass media is always happy to splash some gasoline on a burning flame during these periods, making a huge fireball that literally burned up millions of dollars of value in a blink of an eye. Let’s focus on a few common culprits of the dip. 

Fear Uncertainty and Doubt ( FUD )

 

The mass media loves to get on board with sensational news or outright scandals and of course blow the whole damn thing out of proportion every time. Why wouldn’t they? After all it’s all about the eyeballs and attention from the news consumers that eventually drives the quality of the content.  Sensational news sells.  In the case of crypto currency space, it’s literally a bottomless pit of inspiration for the news networks. It’s filled with intrigues, pseudo-Satoshi’s suing the living hell out of anyone who calls them a fraud and latest ransomware attacks. There are hard forks, community splits and outright mutual mud slinging. 

No wonder this space is so immature and fascinating. Even the best Mexican soap opera with nerve shattering cliffhangers is no match for what happens in the crypto space on an average day.  And just like a moth attracted to a burning flame, our poor friend Chad fell victim to Fear, Uncertainty and Doubt ( or FUD ).  It’s very strange, but when the gods of the crypto bull market are merciful and grace us with a long upwards moving trend, the media trolls come out of hiding.  Usually out of nowhere the latest barrage of FUD enters the cyberspace and assaults us with the same old stories again and again;

“Bitcoin is bad for the environment because it uses too much electricity”. 

“China, Russia, India etc is going to ban cryptocurrency” 

“New regulations are coming! President Vladimir Biden Xi declared that you will need to comply with new anti money laundering regulations and provide your great grandfather’s dental records in order to comply with the new laws” 

“Study shows that only dirty rotten criminals use cryptocurrency!”

You’ve seen these stories time and time again. All of them have just one thing in common; FUD! There is even a Bitcoin obituary web page that displays every news article that declared Bitcoin as “dead” over the years.  The cure against FUD is education!  When you know about how mining works,  you automatically know that crypto mining actually uses renewable ( and oftentimes wasted ) energy.  You also know that the crypto space could care less about what politicians say about it.  It’s open and accessible to one and all.  Even to Chad who’s filling in a sell order for his Dogecoin as we speak. 

The more time you actually learn about the technology that’s breathing fire into this amazing bull market, the more resilience you build up.  No FUD can penetrate a thick furry hide of pure knowledge and facts about the crypto and blockchain.  Tom Brown ( Chad’s friend ) knows this better than anyone.  During the times when the saliva splattering news anchors shoute imaginary horror stories from the TV screens, Tom just makes the best use of this situation and goes shopping for good quality coins.  Aside from FUD, what else can cause a dip? 

Coin launch and leveraged liquidation

 

One of the most common moments where we can witness a significant dip in price, is off course during the launch of any new project. No matter how good or bad the project is, the pattern is always similar. In the first few hours of launch the price tends to jump up violently, only to retrace and even go lower than the listing price. This pattern continues until the natural price discovery takes over. Why does this happen? 

When the hot headed speculators have had their fair share of trading, the long term value investors start to scan the market, sniffing for great bargains. These guys and gals are careful, meticulous and oftentimes risk averse.  The hodlers love to “marry” their coins and hold them for months and even years.  When the hot new ICO gets a stamp of approval from these people, we usually start to see the natural price discovery and natural buying pressure. They take small positions and carefully watch the price action over a long period of time.  Therefore our friend Tom usually waits to see what the price of any new hot listing will do.  Usually he would wait for weeks and watch when the dip reverses.  Tom has oodles op patience and won’t get easily distracted by something that’s just “going to the moon” for the sake of hype. Tom loves to see a great team that’s wringing themselves out in order to bring an amazing crypto project that will create long term value for thousands ( if not millions ) of people. 

Another major Dip causing component in this space comes from the leveraged exchanges. Leverage simply means borrowing money for buying crypto currency. As you might imagine this is a very bad idea for anyone who hasn’t been through the meat grinder of trading for at least a few years.  In our example, Chad has been struck by greed and now he decided to buy Dogecoin with leverage.  He puts in 1000 usd of his own money and borrows 5000 usd from the exchange.  By now you can probably already predict what can go wrong in this equation. 

Some speculate that the leveraged exchanges deliberately cause very sharp and violent price moves that trigger the complete liquidation of many inexperienced traders like Chad. At this time there is no way of proving this . The avid TA guys ( technical analysts ), can usually very accurately spot these “liquidation” events by the different irregular price patterns. One of these is called the “Bart Simpson pattern”. There is a lot to be said about leveraged liquidations. It’s a whole article on its own. The newcomers in the crypto space should always remember that playing with leverage is the same as juggling live fragmentation grenades and hoping none of them will fall and explode. It’s an accident waiting to happen. 

Digital Wild West

 

Let’s face it, dips happen in every market. What makes the crypto space so damn unique, is that it’s so young, fresh and immature. This market is ruled by memes, guys in t-shirts that call each other “Bro” and of course a countless number of gargantuan successes and screwups.  No ossified keyboard banging bureaucratic office plankton in sight. Not yet at least. 

Literally every day something interesting happens here. There are hacks, smart contract exploits, leveraged liquidations, scammers, failures and frauds.  On the other hand there are also huge pumps, amazing partnerships, moon missions, airdrops and a community that helps each other in need.  Crypto is wild and unpredictable.  It’s still not touched by the hand of the regulators and these days literally anything goes.  A Finnish programmer from Kauhava can suddenly wake up with a massive hangover and alone in his underwear create the next killer app that will bring value and prosperity to the whole world and you won’t even have to register in order to use it. It’s all possible and it’s all happening now as we speak. 

This is why this space is growing at an exponential rate.  Anything is possible when we are a bit crazy and optimistic.  With this freedom of expression comes the huge risk and violent, volatile price action as a result of that risk.  There is no way around it.  We just have to live with it and just like taxes at the end of each year, we have to expect it.  After all is said and done, it’s not the dip itself that is important, but the strategy that’s used in order to make the dip work in favour of the investor.  Let’s check back on our friends Chad and Tom?  They have been drinking a few cold ones and exchanging words of wisdom. Let’s analyse the psychology of the dip and what we can do when it inevitably comes. 

 

The bro’s, the beer and the human factor

 

Remember Chad? The poor guy! After his investments were wiped out, he ended up calling Tom for a meet and greet.  Tom was kind enough to explain all of Chad’s mistakes and helped him to formulate a plan to profit from the dips.  Let’s see what the two bro’s came up with. 

First of all no more leverage trading.  That’s non negotiable.  Chad is now only using small amounts of money for his crypto wheeling and dealing. No matter what happens, he will remain in the market and won’t get liquidated by leveraged exchanges. Why? Because now he’s using money that he can actually afford to lose.  Not only is there no leverage at play, but it will also help Chad to get a good night sleep without any negative emotions. 

Second, Chad is working on having “dry powder” at all times.  There is a small amount of stable coins ready to be strategically deployed whenever the dip presents itself.  Now we know that nothing ever goes up in a straight line and just like clockwork, the dip always comes fast and hard.  When it does, the stable coins will be used for “fattening up the already existing positions”. 

After a few beers the guys agreed that Chad needs to seriously study about the blockchain and crypto space in order to better understand what he’s investing in.  Now he knows about private keys, wallets, exchanges and the basics of blockchain.  He’s dipping his toes in decentralised finance and he’s following this blog series.  The guys also agreed that whenever Chad becomes too lazy, his friend Tom would show up at his doorstep and slap him with a rolled up newspaper for the sake of motivation.  Now Chad’s friends can say that “you just got lucky” and “you came at the right time” into crypto, but it actually all comes down to knowledge, trial and error.  Chad is ready to learn, to make mistakes and never give up. 

During any small dip ( and they happen very often ) it’s the uneducated investor who ends up panic selling and making the situation worse for himself and pretty much everyone in the space.  The final decisions are made by people and as many of us know, people are irrational and emotional.  Our knowledge of this space makes us more immune to short term volatility and helps us to profit from these predictable dips.  It helps to be as fluid as possible and sniff out the trends and social media channels.  Crypto moves at lightning  fast pace.  By the time the prehistoric media publishes news on an important event, it’s already yesterday’s news for the quick and mobile crypto OG’s.  If we are serious about being successful in this space, we have to spend time learning and be genuinely curious about it.  This is the only way to turn the dip into an advantage and ensure you keep your nose with the wind and sniff out the trends before they are shown on the 6 ‘o’clock news. 

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