VictorCobra

Bitcoin - The Psychology Behind Asset Growth & Leverage

Long
COINBASE:BTCUSD   Bitcoin / U.S. Dollar
With crypto, it can often be very unnerving and confusing as to where the market might move next. Currently, we have no idea which direction the next big move will take us. However, since Bitcoin and the rest of the cryptocurrency market can be representative of people's belief in something over time, we can expect that as more people believe in its value, it should continue to increase. But this may not always be the case, and I think it's important to understand why. Fundamentally, it's because nothing lasts forever. And this fear is always hidden in the back of our minds. In this post, I discuss the psychology behind asset growth and why thinking about leverage (and its relationship to fear) in markets is important. Towards the end, I also provide some analysis based on the trends drawn in the above chart.

Full disclaimer: I am not a professional economist, and much of what I'm writing is my own perception/opinion. I even use my own definitions. I am in graduate school for social work, so I have some understanding of the socioeconomic picture, as well as its impact on our feelings/behavior. But that's it. My work should not be taken as financial advice.

Let's begin. Obviously, if someone buys something, they hope it will either provide utility (intrinsic value), or it will increase in cost over time. But often people make poor decisions, and buy something for too high a price. So, how do we know when something is a fair price? There are only a few things that matter in the long term, to determine the price of something: Supply, demand, and leverage.

Supply and Demand
Bitcoin is scarce. If demand increases over time, price should also increase, since there are only 21 million Bitcoin that will ever exist. Belief is part of that demand. But Bitcoin isn't exactly a resource , is it? It's just a borderline abstract representation of ownership. That's generally what blockchain is. With the NFT craze, we can see how digital ownership of scarce digital assets has created some value and wealth. But these aren't true resources that can be used to survive (water, food, medical care, etc.). So we shouldn't expect the demand for digital assets to always increase, especially during times when the demand for true resources increases. And what does one need to acquire those resources? CASH.

As I mentioned above, belief is a kind of demand. If people believe demand will increase over time, it simply becomes a self-fulfilling prophecy, and cryptocurrencies continue to increase in value against fiat currencies. This isn't necessarily because they are currencies, but records of unique ownership.

Why is unique ownership so important, and why is everyone clamoring to get their hands on digital assets, Pokemon cards, etc? Well, the value of labor has stagnated. Since the 1970's wages have hardly increased, especially relative to inflation and relative to wealth inequality. From a psychological standpoint, I believe this leads to a devaluation of the self and of self-importance, and an increase in the belief of material (or immaterial) objects to create value, uniqueness, and wealth. The demand for these assets increases so much that it cannot keep up with the supply, or cannot be financed by the amount of resources available, so people feel compelled to purchase things with leverage, or debt.

Anyway, what is leverage? It's essentially using something you don't own to increase your own resources. It doesn't come from you - it comes from someone else. More leverage means more risk. The important thing to understand about leverage, in its relationship to market behavior, is that the more leverage there is, the scarier that little voice in our heads fearing for the end becomes. The more risk you have on the table, the sooner the bell of death or loss is likely to come ringing. This is basic psychology.
Leverage can come in different forms:

Debt - People borrow money to increase their purchasing power of an asset. This usually means more risk is assumed. If someone trades on leverage and borrows 20x the amount of money they actually own, the price only has to move a small amount in the wrong direction before the loan servicer needs the individual to pay off their debt immediately. This is how one gets liquidated in trading. For traditional loans, banks will charge interest in order to mitigate some of that risk. And credit card companies will charge much higher interest rates.

Legal/Regulatory Risk - This is a big one, and not a lot of people will think of this first when considering "leverage." But generally speaking, a lot of money can be made by doing something that can be seen as illegal, even if it isn't necessarily "wrong." There are probably a lot of activities occurring in the crypto space that would fall into this category, since there isn't much of a regulatory framework. When there is more regulatory risk, the market is a lot more emotionally and systemically fragile. We can see this in Bitcoin's reaction to China's crackdown. The elephant in the room here is USDT. To some regulators, it may look like the largest counterfeiting operation in history.

Wealth Inequality - This is a particular kind of leverage that is more insidious. When wealth inequality is too great, the amount of risk an individual is willing to assume in order to "make it" increases. Loans become cheap because the demand for debt is high, with interest rates remaining low. This also eventually affects wealthy individuals negatively, because much of the increase in asset prices has to do with the low demand for cash. On top of that, the wealthy themselves are so used to seeing enormous balances in their accounts, that they really don't want to see all those gains evaporate. They fear losing it all just as much as the little guy. The market then becomes very top heavy, and ends up in a self-perpetuating cycle with ballooning debt. Essentially, it "cannot fail", so the government goes into even more debt to boost asset prices so the wealthy stay happy. This is leverage. It can end with inflation , and with some sort of shock that tests the market's resolve. Once resources become more expensive, assets need to be sold for cash, and interest rates will need to go up as the demand for debt decreases. The first things to go up drastically in price during inflation are those resources needed to survive (medical care, supplies, food, water, etc.). It also makes sense to see an increase in food prices because there is a whole re-emerging economy for traveling and going out.

Those are generally my thoughts on leverage, and why you can see that there is a LOT of it across markets at the moment. Here is the fractal I've been watching in the DJI, that shows us that we may be in a final blow-off phase in a much larger economic cycle . Zoomed in, and you can see an enormous bearish divergence on the monthly, as well as what could happen if we got a precise repeat of 1929. A bearish divergence is when the oscillator (red) makes a lower high while price makes a new high. "The crash" probably won't happen exactly like that, but I'm just showing that it's within the realm of possibility. I drew that yellow hypothetical trajectory back in September 2020, and the market has only gone up since then. We could even be near the top now. No one knows.
Bitcoin Trend Analysis
This sets us up for observing the beautiful trendlines for Bitcoin . They really are beautiful, and they tell us the tumultuous story of an asset backed by the belief in an alternative financial system. On my Coinbase chart, it's pretty easy to see that Bitcoin has reacted to these trendlines . There are of course more trendlines that can be drawn, but these seem fairly legitimate, since they have many touches across different timeframes. Currently, Bitcoin is holding just above a pretty important one. Here it is zoomed in. You can see that BTC can actually fall pretty heavily if it's broken - towards the lower purple trendline, and the low-mid $20k zone.
On the upside, if Bitcoin breaks the current downtrend (I have an earlier downtrend broken on my Gemini chart), we can finally see a breakout towards $40k+ levels:
I think the main levels to watch for bull market continuation are the $41-42k and $46k levels. Above there, and the the pink channel on the main chart for this analysis should create strong resistance near the recent all-time high. After taking out my initial risk earlier this year, I have already repurchased some crypto inventory at these levels, so I'm in a great position if the market moves up from here. I'm setting a potential target for another leg up at roughly 2x from the recent all-time high. If I see one further drop to a new low, I may add more, particularly if I see ETH under $1000 and Bitcoin below $20k. I am seriously considering taking some long-term profit from the market if I see Bitcoin in the mid-$40k range. This is because I see a lot of leverage in markets. I'll be carefully assessing volume and market conditions to determine whether or not this would be a good move. Regardless, profit is profit, and I'll score a good win for myself even if I cashed some out at current levels.

Let's see what happens! i'll reiterate: This is not financial advice. This is intended for entertainment, speculation, and education. These are purely my thoughts. I intend to produce more engaging content via podcast. I'll continue to talk about it on my posts until it comes to fruition. Stay tuned!

-Victor Cobra



Comment: My DJI snapshot was cut off on the left, so here's the full picture:
Comment: I will also add:

Greed ----> Leverage ---> Fear ---> Conflict ----> Extreme Fear ----> Deleveraging/collapse

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