Take the Bitcoin Rally with a Grain of Salt, the Wisdom of the Crowd is Often Wrong
Bitcoin sentiment has turned bullish over the past weeks. But how much of it is based on fundamentals, and how much of it is pure hype?
“Be fearful when others are greedy, and greedy when others are fearful” – so goes Warren Buffett’s most famous investment advice. It’s as true today as it was 20 years ago.
Today, after Bitcoin has entered a bullish cycle and recovered from its December-low, euphoria is again all over the crypto news. This morning, the price stood at $8,830, about $2,000 more than in December.
With Bitcoin recording its best start to the year since 2012, the market is celebrating. But investor beware, hype has never been a reliable indicator.
Bullish indicators are no guarantee for rising prices
The good mood is not utterly unjustified. Several indicators point to a bullish cycle: The Bitcoin halving in Mai will reduce Bitcoin supply, which should increase prices. 2019 has also seen a range of institutional investors entering the market. As regulations and crypto market infrastructure have matured, institutions feel more at ease leaping into the new asset class. Institutional demand could accelerate in 2020, further driving prices and Bitcoin liquidity.
But experts recommend caution. “Several indicators point to a rising Bitcoin price in 2020,” says Frank Wagner, CEO of Blockchain Investment Manager INVAO. “However, we don’t know how much of these effects are already included in today’s Bitcoin price. Investors should remain cautious and focus on risk management in 2020.”
Besides, the recent Bitcoin surge is partly due to temporary effects, such as the US-Iran conflict and the launch of CME’s bitcoin options. Both resulted in increased demand for crypto assets, but both could also fade away in the coming weeks.
Risk management should be the top priority of crypto investors in 2020
A Twitter survey by the investor and economist Alex Krüger found 75% of survey participants believe Bitcoin would double in price this year. Nearly half of the participants think it would breach $20.000.
When everyone believes in a bullish prediction, the alarm bells should be ringing, because the wisdom of the crowd is often wrong when it comes to investing. That’s even more true for retail investors. Many got burned in the 2017 crash – and the same happened again in December 2018, when Bitcoin bottomed at around $3,000 and the overall media sentiment was negative. Weeks after, Bitcoin soared and ended its bull run at $14,000 in June.
Another reason to take the recent hype with a grain of salt: CNBC has turned bullish on Bitcoin! Throughout the bear market of 2018, CNBC became notorious for making some of the worst crypto market predictions. The media outlet has now called for Bitcoin reaching $16,000 by year-end. If history repeats itself, it may be a good idea to countertrade CNBC’s calls.
Whether or not CNBC’s lackluster track record serves as a bearish signal, the overall message is clear: Be fearful when others are greedy, and greedy when others are fearful! Risk management should be the primary focus of crypto investors in the months ahead.