Understanding Crypto Market Psychology and Buying Low

Long-term readers know I’m cautious about calling a crypto market bottom. The market is still up big from one year ago, and these things tend to overshoot up and down.

But… I’m starting to see signs of “capitulation.” Capitulation occurs when the last big batch of “fence sitters” finally surrender and sell.

Markets are ultimately about psychology. In crypto, there are really only two prominent “groups” of owners…

  • Longer-term “hodlers” who believe a monetary revolution is possible (retail and professional)
  • Shorter-term speculators (retail and professional).

The capitulators are (by definition) the short-term speculators. These investors usually wait for the price to return to near the all-time high so they can sell. They calculated their gains back during the highs and want that money “back.”

When the market doesn’t bounce back within a few months, capitulators get frustrated and sell en masse. They think they may never get a chance to sell higher. (This is most people’s default reaction. It has to be overcome consciously – hence hodl.)

Capitulation causes a cascade of panic selling (like we may have seen this week).

I’ve seen more real fear on Twitter and Reddit this week than I’ve seen in years. A lot of messages are along the lines of, “OMG I’m selling it all, I hate this market.” Or, “OK, I’m done. It’s over.”

If the asset is desirable, savvy investors step in and buy at this point. And crypto (especially bitcoin) is desirable.

I feel for the folks watching crypto prices dive – especially for the first time. These cycles are brutal, and you have to withstand the pain to experience the gain.

Only Quality Coins Will Bottom

I want to be clear about one thing: Bitcoin and a few select altcoins are the only cryptos I see bottoming anytime soon. There are still a lot of overvalued projects out there.

But bitcoin and other coins that will attract institutional investment? Oh no – those are not overvalued.

The bitcoin community has expanded in cycles for the last nine years. Every cycle we hit a new high and reach a record number of hodlers. A few altcoins are following similar patterns and building strong communities.

We also have a series of major near-term positive catalysts. The big story is we’re seeing the birth of regulated, institutional-grade cryptocurrency firms. Some of the biggest names in traditional finance are finally integrating crypto into their offerings. We’ve shared many examples of this with you recently.

But here are a few specific items I’m watching closely.

  • 14 crypto ETFs awaiting approval
  • Regulated custody solutions for institutional investors (Bakkt, Coinbase, others)
  • China’s possible reversal of the crypto ban (it’s had a year to get the legal framework in place now)
  • Andreessen Horowitz’s new $300 million fund (a16z is a thought leader in the venture capital space, and other firms are almost certainly launching competing funds).

And every week we’re seeing the launch of innovative new crypto infrastructure. Ledger, the hardware wallet maker, recently announced institutional custody solutions. Index funds that offer investors a diversified basket of crypto (bitcoin and certain altcoins) have launched, and more are coming.

Perhaps 2% of regular investors in the U.S. currently own cryptocurrency. Approximately 0.01% of institutional investors own it.

Yet some of the best investors in the world are pumping billions into crypto infrastructure. Just recently, funding for startups building institutional solutions has exploded.

High-quality cryptos are teed up for a great year. The crypto market will soon be open for business to every big firm in the world.

Have a great weekend, everyone!

Adam