Luna – recently in the top 5 cryptos – has imploded to almost nothing. It was broken with a disastrous plan to use it to back the UST stablecoin. Both are in shambles.
Yet the number of people I see say that some variations of this are sky-high, both online and in my real life.
That doesn’t mean it can’t go from 1 cent to 10 cents. Money can be made in any type of market.
The biggest lesson is that trying to catch a falling knife is a terrible habit.
This is a psychological flaw in almost all new traders. As humans, we compare things. We have an idea of the price of gasoline, the price of an apple and hundreds of other things. When things “are on sale,” we tend to want to buy them because humans have a deep-rooted fear of scarcity.
Who among us hasn’t thought of ways to store gasoline in the dip of 2020?
In real life, these are usually good instincts and habits.
The problem is that we then transpose this to financial assets, especially those that have no intrinsic value.
Currencies are one of the most powerful examples of this. For a generation, traders relied on the cable hovering at 1.60. When it’s too high, it’s time to sell, when it’s too low, it’s time to buy. If you were offside, you could fall back and wait.
It worked from the mid-1980s to the mid-2010s…a 30-year period.
In the currency market, there is a basis for this kind of thinking. Relations between strong and developed economies rarely change radically in a few years. There is some built-in mean reversion. But the combination of Brexit, economic malaise in continental Europe and US dominance in technology appears to have broken the regime.
In assets with no intrinsic value, or with a solid floor, betting on mean reversion is disastrous. Just because something fell doesn’t mean it will bounce back. It’s like the weird buying times we’ve seen in failing companies.
In a stock, you can find a price-to-earnings ratio level (hopefully forward earnings), where there is a floor. Cash flow is cash flow and it is intrinsic value.
But far too often traders think that just because something fell from 200 to 100 it will bounce back, even if the economic situation has changed.
Trading is often a matter of habit and the best habit is to sell things that go down and buy things that go up. If something is at its highest or its lowest, there is a reason.
This seems like a lesson that new traders need to learn over and over again. The trend is your friend. Resist any urge to buy “cheap” things unless you have a solid, reasonable basis of value or a reason to change. Even then, what’s the rush? Let it stabilize first. Let the other guy have the first leg of the gains.
It’s an emotional market right now. Don’t fall for this classic trap.