Wednesday, January 16

Is greed still good? Lessons from cryptocurrency trading

Google+ Pinterest LinkedIn Tumblr +

“Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.” Doesn’t it?

It’s 30 years since Michael Douglas uttered those famous words in the 1987 film “Wall Street”. The film that made thousands of young hopefuls slick back their hair, wear clip-on braces and scour the ads for a second hand Porsche 944. Flash forward 30 years and greed is not only alive and well but threatens to move to epidemic proportions.

A year ago, if somebody came along and invited you to invest in a thinly-traded, high-risk penny stock which might make you money but will fail for most – you would probably run for the hills. The problem is the salesman would describe the penny stock as the next high-growth win and you will make your money back many times over. Trust me!

There have been enough newspaper columns written on the subject to make most people who are not experienced traders stay away. Thinly-traded means relatively few of the claims are believed – unless of course it is endorsed by a celebrity who is a brilliant actor or singer. So, if they have an opinion on a subject they know next to nothing about, they must be right!

Okay, so relatively few people are believing the hype about penny stocks – so what the hell is happening to cryptocurrency that has made the value of something that is inherently worthless go crazy?

The problem is there are facts that on the face of it appear to be true but if looked at differently are a complete distortion. The basics are all over the news. At the time of writing there were no fewer than 7 articles and advertisements in the business section of the Independent newspaper alone. 1,000 GBP invested in January 2017 was worth more than 20,000 GBP in December. At least until 19th December.

Do you think the Bitcoin crash that reduced the size of the whole market by 30% kept people away? Not a bit of it. The recovery has not only been quick, it has been quick-to-crazy, stupid stratospheric proportions. Incredibly the crypto market as a whole has increased more than 50% to $648 billion in just 2 weeks.

Individual cryptos have grown at incredible rates. If you had invested in Stellar, the 7th largest cryptocurrency, 2 weeks ago (from time of writing) you would have quadrupled your money. 10,000 GBP would have been worth 40,000 GBP. In just one week – at least on paper! Then it declined by more than 30%.

It’s not just the hard figures, it’s the opinion of savvy, respected business people. In a December interview, dollar billionaire venture capitalist Chamath Palihapiya reported Bitcoin value could hit a million dollars in 20 years. In case you have not heard of him (he is very well-known stateside) Mr Palihapiya was the youngest VP in AOL’s history, then joined Facebook pre-IPO, and then started Social Capital. He invested in Bitcoin at $100 and he said that at one point in 2013 he and two of his friends owned 5% of the entire Bitcoin float!

Think about it: a move from a $1,000 a coin a year ago to $100,000 per coin in 3 or 4 years to $1,000,000 in 20 years.

Has this got some of you thinking what if? Could I do it? Maybe I should look at it? Would a small punt be really that silly a thing to do? After all I am not talking about investing very much. Can’t do much harm – can it?

Do you see what’s happening? Gauge the thinking patterns. If you don’t react with complete disbelief, then the chance is you are experiencing an emotion that is as natural as life itself – greed. I am not arguing (at least not here) that greed is completely a bad thing. Some psychologists argue that “greed” is programmed into our genes and is the single most consistent motivation driving economic and social outcomes.

I am, however, suggesting that it can drive normally rational people to make irrational and life-changing decisions – and not in a good way. Let me illustrate.

You decide to go for it. You don’t invest very much. Let’s say 1,000 GBP. Next day was a winner – it’s moved upwards 22%. You have made 220 GBP in a day on what was a relatively small sum to start with. The crypto is a bit volatile, you know that, but by the end of the first month you have increased your stake by 50%. Remember this was half the figure that the top ten players made in this last week so it’s hardly unlikely.

What does greed do to you next? It’s obvious: invest more. Do you add another 500 GBP, 1,000 GBP or do you do for it and go much higher? You decide. You must admit it’s tempting. At the back of your mind, you might be saying – if it starts to turn downwards I may lose 10% or 20% – no problem – I can always get out.

What is the reality? I don’t have a clue. Moreover, nobody else has either. Your belief is not a reality – it’s nothing more than your opinion on the world. The chances are you will be wrong and very wrong.

If 93% of traders fail. 5% of the total volume of traders control more than 90% of the market. The chances are the amateurs will almost all fail, disappear and never re-emerge.

Newspaper articles, expert opinions, trading indicators are all opinions and distortions.

  • Expert opinions are often driven by people who have a vested interest in getting people to do something.
  • Even the view that says, “if I invested in January and sold mid-December, I would have made 20 times my initial investment” is a distortion.

Here is why:

  • If you had bought on 1st December 2013 you would have spent $1,122 per Bitcoin. By 11 May 14 you would have lost 60% of your investment.
  • What emotion would have been prevailing then? It would certainly not be greed. It would be fear!

What does fear make the inexperienced do? Run for the hills!

Who would be sitting on the other end of that trade? Probably an experienced player. Because it takes a great deal of experience to buy a product when it appears to be in freefall territory. What the amateur does not know was the price was entering wholesale or cheap territory and the buyer at the end is probably an institution and already knew that.

The one thing that cannot be predicted is the future. When people trade they trade based on their beliefs. If their beliefs are driven by their emotions they are completely manipulatable. Who takes advantage of that? The people who control the markets. The market makers.

This is why greed and fear are so dangerous – they often bear no resemblance to reality.

The only thing that a trade can control is their risk. The money making 7% are all experts at controlling risk. They know the odds just as a casino knows the long-term odds on their Black Jack table. On a Blackjack table when both the gambler and the croupier “go bust” – it appears both lose. Only the gambler loses. To a casino, Blackjack is an investment – long term. To everybody else (except the card counters) it’s a gamble.

If you want to invest in an asset that has no inherent value such as most cryptocurrencies then the only sensible strategy is:

  • Invest in the best education available
  • Trade only tiny amounts until you have mastered your trade
  • Become the best risk manager in the business
  • Banish decisions based on emotion (greed/fear) from your strategy forever

Greed and fear are dangerous bedfellows. They make us weak, they make us irrational, they make us manipulatable. They make people do things they would never normally do.


About Author

Founder & CEO. Charles is an acknowledged leader in customer-driven performance change using both best practice and emerging next practice perspectives. He leads, mentors and coaches in both strategic and operational initiatives. A strong believer is the potential for "supercompany performance" he innovates using next practice thinking and methods to enhance the business. He researches heavily to retain his reputation as a thought leader, which he has applied across 40 countries, multiple sectors and companies such as Citibank, Nielsen, Microsoft, Vodafone, Tracker and governments in Middle East and Asia. Contributes to business journals and often invited as a speaker or chairman to events all over the world.

Leave A Reply