When operant conditioning fails:
The stock market has smoother and more consistent returns returns because it’s linked to something that is concrete and consistent: the health and dominance of the U.S. economy and multinational firms–but Bitcoin has no such anchoring. It’s tied to sentiment, combined with whatever value is derived from being a ‘store of value’ and a currency.
This is not one of those things that is going to get better. It will keep falling until it bottoms out , like it did in 2011, 2014-2015, and mid-2013. Human psychology being what it is, many people will throw in the towel at the lows. It may come back. It may not. Odds are, based on past performance, it will, but it may be years before that happens.
The good news is Bitcoin is 50% off the highs, which means maybe ‘only’ 50% more downside is left (around $5000) until it forms an asymptotic bottom. When that happens, historically, is when you want to buy. If, like most late comers, you went ‘long’ Bitcoin and or other currencies in late 2017 or early 2018, you have to prepare yourself for the high likelihood of not seeing a positive return for at least 2-3 years, until Bitcoin finally bottoms out and rises again.
Analysis will not lose their jobs for being wrong. Being a financial analyst is the only job where you get paid to be wrong. This bozo Tom Lee says it’s a buying opportunity, but based on what? The assumption of a past trend continuing. That is all. The headline says “Tom Lee Says BTC Will Hit $25,000 in 2018, Advises ‘Aggressive’ Buying At Market Low” As if he has any way of knowing. The ‘low’ is ONLY knowable in retrospect, not in real-time. Other fools include Nassim Tooleb and his $100,000 price target. The same guy who faults bankers and the fed for making overly optimistic projections about the housing market, is doing the same regarding Bitcoin. And then there is this clown and his $1 million Bitcoin bet, which is assuredly deep underwater now.
Here’s another fallacious article that went viral a few days ago: I’ve simulated the bitcoin price for the whole 2018. You won’t believe the result! This just goes to show that one of the best ways to go viral is to code up some crappy simulation and people will be awestruck, as if because it was generated by a computer and has the pretense of advanced math, it cannot be wrong. This is literally how people felt about TV in the 1950’s-90’s: “If it’s on TV, it must be true!” Except now it’s coding simulations that are basked in a similar aura of infallibility.
The author Xoel López Barata writes:
Basically, in a Monte Carlo simulation in finance we assume that the future behavior of the price of an asset will be similar to its past behavior, and we generate a lot of random versions of that future, called random walks, similar to the past. That’s done taking random samples from the past and stacking them together to build each one of those random walks.
But it’s not truly random, because he is basing the simulation on Bitcoin’s 1000% gain in 2017. This introduces a strong positive drift into the simulation, which no longer makes it random, but biased instead. A zero-drift random walk has an expected value equal to the present value. This can be shown by integrating the CDF (cumulative distribution function) times the random variable, with the parameters of integration set to the domain. For the long-normal, the domain is between zero and infinity.
Disclaimer 2: Some of you have pointed out that there is no guarantee that the future returns will be like past returns; past performance doesn’t indicate future performance. I know. Have I already mentioned this is just for fun? Don’t take this that seriously; if I wanted to write rigorous science, I’d go and publish a paper, not a Medium post with gifs and memes. Relax! 🙂
It’s funny how people get defensive when they are shown to be wrong, and then pretend it’s all fun and that their work is not to be taken seriously. No, you created a fallacious simulation and people rightfully called you out on it.
People who are wrong and use sloppy logic need to be made aware of their wrongness. No, you cannot just nonchalantly pretend nothing happened, which is what financial analysts do when they are wrong, in the hope no one notices. We are keeping an eye on you. You will be held accountable for being wrong, for being stupid, and for using fallacious logic in your arguments.
 The bottoming out process resembles a shallow basin, which takes a year or longer to complete, as shown below for 2014-2016:
The time to re-enter is when the exponential decay function reaches its asymptotic limit, which may not occur for a year or longer. So this means there is potentially much more downside until that happens.
The odds Bitcoin bucking this trend and suddenly rocketing to $20,000 again are about nil. It would require a sustained infusion of a ton of capital for that to happen, but people are tired of Bitcoin for now.