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Crypto value discovery from Black Friday to NFTs 

When Bitcoin surges higher, buyers suddenly seem to appear and jump on board.

Search engine activity on how to buy Bitcoin follows.

There is a rush to exchanges and crypto-asset trading platforms to open accounts and get in on the action.

And the process of BTC going higher becomes a positive feedback loop driven by advance, search, and new buy orders. Then the advance spills over across the cryptosphere into ETH, DOGE, LTC, XRP and others.

And yet, when a leverage bomb goes off and BTC gets clubbed, things get quiet quickly.

Volumes dry up, search activity fades, and things go back to a sea of calm.

Why is that?

Cryptocurrency is software with clear mathematical boundaries. It’s rational and makes sense on so many levels.

And yet, it is the interaction with human beings that drives its activity and value discovery.

Human interaction shapes the value discovery process through buying and selling. The mechanisms of the market, like leverage and other financial instruments, guide that process.

But underpinning it all is how people respond to the stimulus in front of them.

If you are a trader, you will be on the hunt for new trading ideas and opportunities.

If you are an enthusiast, you may want to understand why Bitcoin or Ether move the way they do.

An institution or large holder may be looking for signals and places to add more inventory.

And in all instances, we can reflect on the quirkiness of human behaviour for insights.

Beyond technical and fundamental analysis, there is a treasure trove of insight from observing human behaviour in different settings.

Three interesting places to gather some insights are Black Friday shoppers, NFT trends and trading rooms.

Black and Blue Friday

Black Friday is a good place to get some trading insights on human behaviour and market activity. Motivated people are competing aggressively, and there is money involved. The entire event is a demonstration of emotionally charged decision-making.

On Black Friday, people line up outside of shopping malls, getting ready for the competition bell to go.

Then, they run, push, shove and fight for that next possession.

There’s anticipation.

Triumph.

And a story when it’s all over.

Then the surge of dopamine fades…

Door crasher sales provide an incentive through the perception of scarcity. And it also gives the buyer a great story to tell their friends and loved ones about. The story becomes a triumph and fulfills emotional needs.

Some companies exploit the pent-up demand and anticipation by having their sales ahead of Black Friday. Others cater to the increased trust of digital commerce and the desire to avoid the mob at the store and in the parking lot with Cyber Monday.

Yet, the same principles of scarcity, a time limit, competition and emotional fulfillment apply.

The other side of Black Friday

Now, as Black Friday fades into the rearview mirror, the deals remain. That thing that seemed so crucial will seem less appealing. The chase, since passed, will no longer reward you for the purchase or desire.

There will always be another sale. There will always be another deal.

The buy was never about the thing. It was about the chase.

It was about the desire, driven by perceived scarcity and the abdication of reason to a sense of need.

As a trader, you will experience a series of internal emotional demands like these at times. These emotional reactions will require acknowledgement and a structure to keep them in their appropriate place. Only then can you use them as informed data points.

So as you look at moves in Bitcoin, or Ether, or hear about some hot ICO or token, think of Black Friday.

How many elements of the experience are present? And based on what follows Black Friday, what could the equivalent outcome in your market be?

And more importantly, how can you use a trading plan, rational thinking, and awareness of your emotional responses to profit from this type of situation?

Speaking of other crypto products, let’s have a look at price discovery in NFTs.

Ideas from NFT price discovery

NFTs are finally hot. They have been in development for several years, started by the original Crypto Punks and followed by Crypto Kitties.

Today, OpenSea, the leading marketplace for NFTs, is a multibillion-dollar company and a microcosm for activity in the space.

Record NFT prices were booked early in 2021, while record NFT revenue continues through the year.

And looking at NFTs, we can get some insight into how a value discovery process works.

One of the interesting things about NFT pricing is that while the media presents it in dollars, the buyers often pay in ETH. The perception of these two valuation measurements is different.

While the prices in dollars suggest eye-watering values, the buyers, loaded with ETH gains, perceive their buys differently.

One aspect is that rather than millions of dollars, it represents x amount of a cryptocurrency that has risen in value.

Then there is the history-making potential.

A big buy cements a buyer’s name in history. Some people want the omnipotence of the guy who bought pizza with BTC, but with the cache of top tick prints for NFT art. A buyer will even take a tweet from Jack for $2.9 million in ETH.

That kind of personal branding is expensive, but it mints your name in the cryptosphere for eternity. So it may also be priceless.

Other buyers are clamouring for various NFTs based on the growing demand from an expanding cryptocurrency audience. The more people who hold ETH or BTC, the more inside the system they feel.

And that drives participation and upside in various NFTs.

Price discovery in NBA Top Shots

An interesting value discovery environment in the NFT space is NBA Top Shots.

Here, buyers buy moments in limited edition NFTs or others that are more wide scale.

If you are a hockey card collector, you will recognize a part of the experience here, except that it is more elaborate. The site combines the experience of collecting cards, an experience similar to watching a game, and a marketplace with exclusive replays as collectables.

One factor that helps drive this space is the ability to use fiat for purchases. That, of course, means a specialized wallet. But it also increases accessibility to the cryptosphere.

The pricing of NFT packs is uniform, but the pricing of the individual NFTs is fluid.

Even though an NFT series is identical except for the number, pricing is determined by arbitrary metrics.

For example, number 1 in the digital series is more valuable than number 50.

And if the player’s number on the NFT is 43, number 43 in the series for that player is more valuable than number 1.

So part of the perception is the belief that a value is determined by scarcity, and part is on a collective idea about what that value is.

All of which can be useful when thinking about new tokens and altcoins.

For example, what is the value discovery process taking place?

How might that process replicate in other crypto assets?

And is the process the same, or does learning accumulate and leapfrog in the next value discovery process?

Then think about adoption and the widening of participation in crypto. Crypto involvement makes you feel like an insider. A part of something unique and special. Something you can contribute to. The community element concentrates people with a common goal or interest in one place.

How might this help drive value discovery and prices?

Then comes the trading room.

The psychology of a crypto trading forum 

Many crypto traders today are on forums making friends and looking for ideas. I was reminded of an article I read about a crypto trader who wrote about his experience on a forum.

He talked about how he made predictions on the forum to a group of other traders. He then started trading and was cheered on by the other forum members.

He felt the need to be consistent even when he could see the market conditions changing. So encouraged by the forum, he basked in the glow of consistency.

And had his head handed to him.

It was an expensive lesson. But if he sees it in the right way, it was tuition.

These are the kinds of things you used to learn in trading rooms in person. Online, the body language and progression of thought are harder to access than in person.

So let’s look at a trading room in a physical environment to see what we can learn about trader behaviour.

The trading expert for the day

Trading is a mix of volatile and quiet trading periods. In the quiet periods, traders may not be making any money as they try to figure out the new pattern or adjust their strategy.

During a period like this, one trader in the group will nail a winner. The other traders in the room, desperate for a win to rebuild their confidence during a slump, will go from depressed to needy.

As a result, the trader with the one win becomes the “expert for the day.” This win, in some way, appears to provide them with the authority to provide their “expert” opinion on the next winner to help their buddies. After all, they may feel a little guilty about having the only winner recently.

Now, bear in mind that the expert for the day never mentioned when they put on the winning trade.

Why didn’t they mention it? Because they were uncertain when they put it on. That meant they kept checking, looking for positives and negatives. They were following a plan or a thought process. The winner was a result of making those observations and executing a plan, and maybe getting a little lucky too.

But their advice to the rest of the room after the winner isn’t shaped just by a method. Now it is shaped by overconfidence from the win.

Extraneous emotional inputs will form their next pick and all the decisions around it.

Winning trades are often uncomfortable

Unlike their previous winner, where they were uncertain and open, their next pick will be confident and certain. After all, they have a win under their belt, which has been hard to come by. As a result, they will now be invested emotionally in the outcome and therefore need to be consistent.

The result? Their next trade will likely be a loser.

The other traders in the room are now relying on this confidence to rescue them from their slump. By abdicating responsibility for their own trading decisions and results, these traders will lose twice.

In the first instance, they will lose money on the trade. In the second instance, they will lose because by not following their own thinking, they will get no useful information about the market from the loss.

Although they will be able to derive comfort because several members of the room all lost together, they didn’t lose alone.

The more certain the call, the less likely it is to be based on analysis and following a plan. Tops occur during periods of maximum confidence, not periods of uncertainty. Bottoms come during periods of maximum pain and uncertainty.

It means that big calls, bold predictions, and displays of certainty are comforting for the trader. But they fail to respect the necessity of process, thought, rules and flexibility that are the hallmarks of successful trading.

When you are in a digital trading room with people you haven’t met and whose activity you cannot confirm, how often have you seen this? And how have these big calls played out?

The need to be consistent in the face of changing market conditions is a false paradigm shaped by forum interaction.

Ask yourself if you can afford to outsource your trading to someone else’s opinion. More importantly, if you do, how will you know what to do when the trade is on? Because the expert for the day doesn’t know either.

You don’t have to learn the hard way like the guy on the crypto forum that had his head handed to him.

How can you use these interactions on forums more as signals and information than advice? And can you avoid the predictable neediness it creates?

Looking at Bitcoin, Ether or another altcoin, how are the narratives out there shaping the value discovery in forums you are on?

Real-life gives ideas into crypto trades

There is a pervasive belief that technical and fundamental analysis or a combination is the only thing you need for trading. But if you look around everyday life, insights into human participation abound.

Black Friday shows us the irrationality of a myopic focus on the deal in the moment.

NFTs show us how the perception of value can be shaped by the currency used, growing participation and seemingly arbitrary elements.

A trading room shows us how the influence of others shapes our decisions. And these decisions are not always in our best interest.

From these observations, there are numerous potential trading lessons. New ways to develop trading ideas and hypotheses to test in the markets ahead.

The secret is to be open to seemingly unrelated information. Be willing to see the world as an observer. And then convert that into profitable trading positions and measure the outcomes.

 

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