Has investor psychology changed since Dot.com era? Will Bitcoin benefit?

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Updated: 06 November 2019

It is very common for technical analysts to get caught up in their lines and patterns and basically forget about the forest for the trees, so to speak. In the case of Bitcoin, we still have an emerging asset class, which tends to dance to the beat of its own drummer, often ignoring the technical imperatives that instruct it where to head. But technical analysis is the only “tool” we have at present to give us any indication of what to expect, but with a decade under its belt, investor psychology still rules the day.

The traditional approach would be to start with market cycles that are common in financial markets, including cryptocurrencies, although it remains to be seen how Bitcoin and many token programs will react when the eventual recession comes to town. There is also an entire area of study that focuses on human psychology, then applies it to trading, in order to gain insights that could impact price behavior. Emotions do play a critical role. Fear, greed, anger, euphoria, and depression have not changed that much.

If understanding human psychology is a necessity for viewing cryptos fairly in both the short and long term, then is there an example in any other asset class that comes close to telegraphing how Bitcoin might act down the road? Researchers have already reached back to the Internet boom and bust cycle for this example, and comparisons generally focus on Amazon, as a case in point:

This chart, courtesy of Messari, attempts to map similar 4-year periods in time for both Bitcoin and Amazon. For the latter, the time period is for the wild speculation mania that pervaded markets in the late nineties. For those of us that witnessed this wild ride, the entire notion of valuation mechanics was turned on its head. There were no earnings. All was speculation. When the bubble burst, “AMZN” deflated down to $12. It is now $1,800, but there was a rather long ranging period of seven years or so before the real fireworks.

Fast forward to the present, and Bitcoin is experiencing a similar speculation-driven scenario. Despite several well-intentioned attempts at valuing Bitcoin based on anything from network nodes to transaction activities across its network, Bitcoin refuses to give up its secrets at this early date in time. The same was true for Amazon, as well. The value for now gets back to measuring investor sentiments, and those sentiments are driven by the nature of the prevailing narrative, which is always being rewritten.

Tony Spilotro over at NewsBTC makes the following observation: “The charts shared demonstrate that human psychology rarely changes, and thus, markets typically behave in similar manners. As is the case with Amazon, so long as the underlying asset still has value, after a long period of consolidation, the asset can go on to rally once again, making the initial peak look like a mere blip on a price chart.”

Cointelegraph recently quizzed a few investment industry participants on their recollections of how the Internet historical record compares to the present day:

  • Adam Back, Blockstream CEO: “Bitcoin has come much further and much faster than people expected. There was a saying in the early dotcom era about ‘Internet time’, and […] bitcoin time […] seems to be moving even faster.”
  • Peter Brandt, veteran trader: “Following 2001-02 tech collapse, dotcoms with real value exploded. The ‘alt’ .coms went bankrupt.”

Brandt’s comment is a not too subtle reminder that a similar “culling process” might very well take place with the thousands of altcoin programs in existence today. Several industry insiders have postulated that a major consolidation is inevitable. Spilotro has this to add: “The majority of the companies, however, died during the collapse after the dot com bubble popped, and from the ashes rose today’s giants like Amazon. But even Amazon was once nothing more than a bookstore, and not the digital powerhouse that it is today.”

At the end of the day, the market will determine how Bitcoin and its altcoin brethren will thrive and prosper, or crash and burn. There may be similarities that can be drawn from prior events, but no one knows how this market, which is barely older than a decade and much less when considering programs other than Bitcoin, will react to future events.

It is still, however, a fun pastime to consider the Internet and Amazon experiences and apply them to Bitcoin. In another ten years, will cryptos be impacting the lives of 50% of the world’s population, as with the Internet? Will BTC values receive a “150X” multiple, as did Amazon over the last eighteen years? Time will tell us all!