Bitcoin BT*1 bulls have always been exuberant – that’s table stakes in crypto land. But lately their enthusiasm has morphed into something even more fanatical. It’s one thing to hype a market that’s making people rich, and another thing entirely to scream about its superiority while investors are getting hosed.
To their credit, the recent hype does look a little different. It isn’t littered with rocket-ship emojis any more, which used to symbolize the crypto sector’s astronomical growth. The goal now is to restore confidence by calling a bottom for the market’s ferocious downturn.
Bitcoin and ether, the two most popular cryptocurrencies, have tumbled in waves since November, and every time a new swell hits, the believers swear this one will set a floor.
“Feels like we have hit max pain and uncertainty in the crypto market,” Barry Silbert, the founder of Digital Currency Group, wrote last week on Twitter, which serves as a public message board for the sector. “We’re buying BTC here,” he tweeted, using bitcoin’s symbol. “Let’s go!”
These can be comforting words for anyone trying to make sense of the downturn, particularly so for unsophisticated retail investors. But the truth is it’s nearly impossible to call a bottom. Anyone suggesting a floor has formed is delivering marketing lines rather than any real analysis.
This isn’t something specific to the crypto sector. Analysts and investors have tried to call bottoms for stocks for many decades. There is an entire industry of technical analysts, sometimes referred to “chartists,” who make fancy graphs that try to show when the market is set to turn.
But for crypto the task is so challenging that’s there’s arguably no point in trying. The sector is so young that there are hardly any established norms.
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While the stock market is prone to bouts of exuberance, there are at least ways to measure its degrees of madness. The price-to-earnings ratio, or P/E, may be too blunt of a tool to make day-to-day trading decisions, but it is invaluable for a data set that spans decades. Over time we have learned that stocks valued at more than 15 times their earnings can be considered expensive, and anything trading below that level is cheap – though some industries have their own idiosyncrasies.
The psychological role such benchmarks play is often undervalued, because the behavioural-finance field, which helps to explain why humans make such irrational decisions, is still in its infancy. But the research is compelling enough to know that these markers are crucial when panic sets in, because they provide investors with a map of sorts.
The crypto sector, meanwhile, has yet to endure a full business cycle. And while bitcoin was created in 2009, so it has technically been around for more than a decade, it never really went …….