Everybody Wants to Moon but Nobody Willing to Study Rockets

TLDR: None. A summary would require its own TL;DR. Read time: 8 minutes. Grab a coffee and have a seat.

I’ve been active in this sub for the past few months trying to share my approach on how I’ve been navigating the financial markets for the past few decades. I’ve been welcomed by many of you who are open-minded and willing to listen to alternative perspectives. Thank you for that.

I respect everyone’s opinion even when they differ from my own. No amount of negativity or cynicism will deter me from continuing to share these ideas and analysis. To put it bluntly: I am tired of seeing people lose their hard-earned money by following the herd to the slaughterhouse.

A History of Helping (and Being Drowned Out)

I’ve been actively trading cryptocurrency since 2017. For any Canadian crypto OG’s out there: I was one of the first people who warned that QuadrigaCX was showing early signs of insolvency—one full year before the exchange went bankrupt. I helped prevent those around me from losing their life savings. I also like to believe that many more investors were persuaded to take their business elsewhere before the company went belly up. In the end, the debacle left $250 million owed to investors across the country.

National news headlines, 1 year after my infamous post in 2018

Story Time! Remember When Bitcoin Was Only $25?

Many, many moons ago (before Moons existed) at the local Toys R Us, your friend mentioned a new digital money called ‘Crypto Currency’ and ‘blog-change’ technology. Something about a gold coin with a ‘B’ on it for $25. You aren’t interested in magic internet money (already using PayPal) and quickly change the topic to the upcoming release of the 5th Gen iPod Touch MP3 Player. So much hype!

A month later, your barber brings up his latest investment tip: Bitcoin, which has since quadrupled in price and is now trading at $100! You think to yourself: this guy is a sucker—he’s always getting fooled by the latest scam. Stick to cutting hair, Sam!

Next week, you login to MySpace to see your social circle posting about $200 Bitcoin on their profile pages. You can’t believe your eyes! This thing has doubled before your fresh fade has even lost its crisp lines.

You call up your friend and demand to know where you can buy this so-called ‘Bid Coin.’ He tells you the address and you drive to the nearest (only) crypto ATM in town. By the time you get there, the price has already risen to $225 (before 10% fees, of course). But you buy anyways because it will surely double again, right?

By the time you get home, the price has already surged to $250. You are a genius! To the moon, Alice! Then, you refresh your Blackberry’s internet browser application to see the price drop to $225. Well, that’s normal—this thing can be pretty volatile. Suddenly, it pumps back to $260. Phew, just a dip! You decide to take a nap before the Charlotte Bobcats vs. New Orleans Hornets game comes on at 6 PM, in full 1080p glory.

You wake up a couple of hours later and check the price again. You can’t believe your eyes: Bitcoin has fallen to $100 and is dropping even further! This must be an error. You call up your friend again. He is also in disbelief. Throughout the night, you exchange BBM instant messages as the price dips as low as $70. Somehow it recovers to $125 by sunrise. You pass out.

A couple of hours later, you jump out of bed to start your shift at Blockbuster. You look up Bitcoin and it appears to have stabilized at $100. Unable to check your phone during working hours, you try to keep your mind occupied while restocking DVDs of Django Unchained and Life of Pi.

By the time you clock out, you see that Bitcoin is selling off worse than yesterday. It touches $70 and finally breaks below to $50. You call up your friend and offer to sell him your bag since he was the one who got you into this mess. Chad agrees. The very next day, Bitcoin jumps back to $100. Shoot! But who cares; you are just glad to be out. This cryptography stuff is pure gambling, man…

Over the following months, you try to keep your mind off the -80% loss. Nobody is talking about Bitcoin anymore. It has disappeared from MySpace and even that new ‘Face Book’ website. It won’t be until December that you hear the word ‘Bitcoin’ again. This time it’s on every news channel as the price shoots over $1,000. You are flabbergasted. And also heartbroken that Chad is now your wife’s new boyfriend.

2013 Bitcoin daily chart (log scale) – From $13 to $260, drops to $50, then back to $100. Went on to hit $1150 in December (not shown).

You, my friend, just witnessed the complete Market Cycle play out before your eyes. And you experienced every emotion on that rollercoaster ride: indifference, greed, uncertainty, and fear. In case you are wondering, the prices from the fictional story do line up with the chart above.

The ‘Groundhog Day’ Movie on Repeat

Today I want to discuss the foundational concept behind understanding markets: the Market Cycle. This idea does not involve any fancy indicators, trendlines, or predictive models. It simply describes human nature and our emotions when it comes to speculation (i.e., investing and trading).

Any instrument that is traded on an open market—whether it be AAPL, BTC, USDEUR, Gold, Oil, Real Estate, Pokémon cards, or NFTs—exhibits similar chart patterns and cycles. Why? Because humans are creatures of habit, and we tend to repeat the same things over and over (just look at my post history). This is especially true when it comes to attempting to profit off the price change of an asset. Again, why? Because at the root of every trade are two core emotions: fear and greed.

When grouped together into aggregate buyers and sellers, the market’s actions become observable through a phenomenon called Mass Psychology. It is simply the supply and demand relationship for an asset at certain prices. Too much supply pressure and price will drop. Too much demand pressure and price will rise. Economics 101.

The Four Stages of the Market Cycle

Over 100 years ago, Richard Wyckoff developed a theory to explain how and why markets move. And over the last century, his Market Cycle has played out millions (billions?) of times, on thousands of assets, over and over again. The Four Stages of this cycle are as follows:

Four Stages of the Market Cycle and the dominant emotion during each phase.

• Stage 1: Accumulation – nobody cares about an asset—or has even heard of it—but institutions (Whales), early adopters, and insiders are starting to build up positions.
• Stage 2: Markup – price breaks out of a range and enters an uptrend. There are pullbacks (dips) and consolidations (crabs) along the way. Everyone is happy because they are making money.
• Stage 3: Distribution – we reach a top where price fails to break higher, but it can’t go lower either. Anxiety looms in the air as the last buyers are getting in (FOMO); early entrants are starting to get out if they haven’t taken profit already.
• Stage 4: Markdown – price finally cracks and there is a panic sell-off. Each dump is followed by a short rally (pump) as we enter a downtrend. Professionals are actively shorting and this helps drive the price down (shorting involves borrowing shares and selling into the market).

We Just Went Through a Complete Cycle Together!

No, I’m not talking about $BBBY. Compare the above image with the Ethereum chart below. Ask yourself—and those around you—what were you thinking during the recent 1-month rally? What were people in this sub saying when we broke out from Stage 1 into Stage 2 (over $1280). How about during the pullback from $1650 to $1350? Or when we ripped up to $2k. Or when we broke out to $2030 last weekend only to be rejected? And finally, now that we’re down 27% from the recent highs?

Ethereum daily chart with recent Market Cycle

Seriously: I would like you to reflect on your emotions and compare them to the Market Cycle. Were they aligned or were they conflicting. Does the following quote, from the greatest trader who has ever lived, resonate with you at all?

The market is never obvious. It is designed to fool most of the people, most of the time. -Jesse Livermore

Chartception – The Market is Fractal in Nature

As discussed in previous posts, the Market Cycle appears on every single timeframe that humans—and the algos they have programmed—trade on. This is how we can be rallying on a 1-min chart, while in a downtrend on the 1-hour chart, inside of an uptrend pullback on the daily chart, which is just a Bear Market retracement on the weekly chart, all during a decade-long cyclical Bull Run.

Below are some examples that show the Market Cycle on macro and micro timeframes. Stage 1, Stage 2, Stage 3, Stage 4. Rinse and repeat.

Ethereum weekly chart showing the 4 phases playing out over and over

Zoom into each Stage. Enhance. You will see Stage 1, Stage 2, Stage 3, Stage 4 happening at this layer, too. Zoom in again. Enhance. There it is again: Stage 1, Stage 2, Stage 3, Stage 4. There’s levels to this.

Bitcoin 3-minute chart from yesterday demonstrates the Market Cycle at the micro level

On the nano timeframes, each Stage 2 Markup is merely a rally for ants! Scalpers and day traders who operate at this level don’t care that $BTC is selling-off on the bigger picture. They are happily surfing the waves in their own little world. They know their timeframe; do you know yours?

Mission Statement

My goal in this community is to awaken some curious minds to begin approaching crypto investment/speculation in the traditional sense: treat it like any other asset class in your portfolio. I understand that many of you are not interested in actively managing your positions. At the very least, please understand the Market Cycle so you have a framework to make your financial decisions within.

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Disclaimer: Not financial advice. For educational purposes only. Do your own due diligence. Only invest with money you can afford to lose. The typical passive investor is better off with DCA over a longer time horizon (assuming your assets are stable and align with your personal risk profile/tolerance).