The dip vs. bear market is explained.
In the middle of the bull market, the volatility tends to spike and go in every imaginable direction. Let’s take a rational look at why the markets dip.
A dip means an unexpected ( and sharp ) downwards price move. Usually, most people don’t see it coming. And this is precisely why it catches so many people off guard. To a leveraged trader, a dip is a disaster, while to a holder with a broad time horizon, the drop is a godsend during the bull market. Many new crypto investors have joined the party. They enter the market with high hopes and expectations while usually ignoring the most common risks. While this is, of 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 highly prevalent. Let’s take a sharp knife and try to cut away the layers of complexity. Do you want more info about the psychology of the dip? Stay with Insights to the end.
What is the psychology of the dip?
WheneveWe’s dealing with a dip whenever news a sudden, fast, and violent price move to the downside. We’re essential 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, skilled car mechanic and a master of the wrench. He can even fix your old monstrosity 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. 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 was investing.
Psychology of the dip for DOGE
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. He returned to work expecting to retire as a multi-millionaire in 2 months. 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 the hope of “at least recovering something.” After a few beers, finally deafening the painful sting of defeat, Chad decided never to do anything as foolish as investing in cryptocurrency. Sounds familiar? You undoubtedly 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?
What happened to Chad is very common and will happen to many more people as the bull market starts to feed on itself and suck up an avalanche of new liquidity. Our poor friend Chad got caught in the psychology of the 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 goes up in a straight line. Consider the market a living, breathing organism populated by millions of tiny cells, giant 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 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. 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. Naturally curious, 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 the psychology of the dip is only temporary. It usually gets “eaten up” by the market very quickly. He’s not worried about it and even welcomes it. Tom always has a secret stash of stablecoins to buy his favorite coins at lower prices, just like his wife buys new shoes during sales.
It wasn’t always like this, and Tom learned everything hard. 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 worry about the bear market, though. Like any good movie, a bull market comes to an end.
Jump to a recognizable period
Usually, this period is very recognizable 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 request stops, the asset has to depreciate to more “bite-sized” levels to attract eager investors and speculators alike.
An extreme lack of intelligent behavior also characterizes this period. In short, people do a lot of stupid and irrational things so that they can buy cryptocurrency. This was the same for stocks right before the great crash of 1929, during the dotcom bubble in the 1990s, and it’s the same right now. The technology might change. Human behavior, never.
Numerous other factors usually cause a dip. In Chad’s case, he got caught between the hammer and the anvil of irrational exuberance and greed. The mass media is always happy to splash gasoline on a burning flame during these periods, making a giant fireball that 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 blow the whole damn thing out of proportion every time. Why wouldn’t they? After all, it’s all about the eyeballs and attention of the news consumers that eventually drives the quality of the content. Sensational news sells. In the case of the cryptocurrency space, it’s a bottomless pit of inspiration for the news networks. It’s filled with intrigues, pseudo-Satoshi’s suing the living hell of anyone who calls them a fraud, and the 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 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., will ban cryptocurrency.”
“New regulations are coming! President Vladimir Biden Xi declared that you must comply with new anti-money laundering regulations and provide your great grandfather’s dental records 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! Even a Bitcoin obituary web page 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 uses renewable ( and often wasted ) energy. You also understand that the crypto space could care less about what politicians say about it. It’s open and accessible to one and all, even Chad, who’s filling in a sell order for his Dogecoin as we speak.
The more time you learn about the technology breathing fire into this great 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 shout imaginary horror stories from the TV screens, Tom 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 expected moments where we can witness a significant dip in price is off course during the launch of any new project. The pattern is always similar, no matter how good or bad the project is. 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 often risk-averse. The toddlers 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. 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 of 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 to bring a fantastic crypto project that will create long-term value for thousands ( if not millions ) of people.
How to find significant psychology of the dip
Another significant Dip causing component in this space comes from the leveraged exchanges. Leverage means borrowing money to buy cryptocurrency. As you might imagine, this is a terrible 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 never forget 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 huge successes and screwups. No ossified keyboard banging bureaucratic office plankton in sight. Not yet, at least.
Every day something interesting happens here. There are hacks, brilliant contract exploits, leveraged liquidations, scammers, failures, and frauds. On the other hand, there are also massive pumps, unique 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 nowadays, 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 world. You won’t even have to register to use it. It’s all possible, and it’s all happening now as we speak. So, finally, what is the psychology of the dip? We show you in this post.
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 considerable risk and violent, volatile price action as a result of that risk. There is no way around it. We must live with it, and just like taxes at the end of each year, we have to expect it. It’s not the dip itself that is important, but the strategy used 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 analyze the psychology of the dip and what we can do when it inevitably comes.
The bros, 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 bros 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. A small amount of stable coins is 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 drop always comes fast and hard. When it does, we use stablecoins to ” fatten up the already existing positions.”
Blockchain seriously and the crypto space
After a few beers, the gu agreed that Chad needs to study Blockchain seriously and the crypto space to 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 decentralized finance and 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 motivation. Now Chad’s friends can say that “you just got lucky” and “you came at the right time” into Crypto, but it all comes down to knowledge and trial and error. Chad is ready to learn, to make mistakes and never give up.
During any small dip (which happens very often ), the uneducated investor ends up panicking, selling, and making the situation worse for himself and everyone in the space. The people make the final decisions. 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 success in this space, we spent 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.
Risk note about psychology of the dip:
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