Financial Analyst: Loss Aversion Will End The Relentless Bitcoin Rally

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May 31, 2017

In the past few months, bitcoin had experienced a major rally. As for an example, within the period of one week, the cryptocurrency’s price went from $1,700 to $2,700. However, a large trend move like this results in a bigger correction as normal, therefore, the price of bitcoin dropped to $1,900 and, later on, it stabilized at $2,200. In overall, the value of BTC increased by 125 percent in 2016, and further gained 124 percent in 2017.

Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management, wrote an article in Bloomberg View on the topic expressing his opinion. The financial analyst also wrote the book “Organizational Alpha: How to Add Value in Institutional Asset Management”. According to Carlson, once loss aversion begins to be “felt again” in the price of BTC, it will likely end the “relentless rally” of the cryptocurrency. The financial analyst added that it is unknown where this turning point will happen since “predicting a change in market direction has almost no rhyme or reason”.

“But my guess would be that the current Bitcoin rally will start its downfall once the daily returns are more evenly balanced out between up and down days,” Carlson wrote.

Loss aversion, by its meaning in economics and decision theory, refers to a person’s tendency preferring to avoid losses to gaining equivalent gains. The research of behavioral psychologist Daniel Kahneman shows that losses hit us twice as much as gains make us feel good.

Carlson wrote that he thinks that the reason behind the persistent uptrend of bitcoin is that the currency is “turning into something of a self-fulfilling prophecy”.

“Momentum begets momentum and buying begets buying when gains begin to come hard and fast,” Carlson wrote in the article.

Statistics show that bitcoin’s price was up four out of five days in May and seven out of ten days in 2017. According to Carlson, such gains will attract people’s attention along with “performance chasers” and speculators, who do not want to miss out of the action. The continuous rise of the cryptocurrency’s value will increase investor confidence, and many people would think that such gains will last indefinitely, the financial analyst wrote.

Comparing bitcoin’s movement to the performance of S&P 500 from 1926 to now, the numbers will show that it’s almost a 50-50 situation, with the positive performance presenting 54 percent and the down days 46 percent of the stock. Carlson wrote that despite there is a huge bull market since 2009, the daily returns followed a similar pattern.

At the stats, we can see that the S&P 500 showed mostly a positive performance. However, according to Carlson, this slight difference decreases the confidence of the investors, counting the days back when the end of the current rally will be.

Featured image from Shutterstock.