A lot of people like to invest in cryptocurrencies because of astronomical returns that these instruments offer. And for sure a lot of early adopters have benefitted from the meteorical rise of some of them. Similarly, a lot of people by investing at the wrong time have lost their hard earned money. So why do some people make money while others lose money on their investments? The answer lies in a very simple fact that any financial market (Read stocks, forex, commodities or cryptocurrencies) is a machine of converting “Dumb money into Smart Money”. Any financial instrument forms a structure in charts because of the speculation amongst its early investors driven by emotions of Greed and Fear. Once speculation is rife, it lures masses into investment bringing in more money and hence liquidity to any instrument. The prime example of this has been the meteoric rise of Bitcoin and the huge fluctuations that has seen its price rise from few cents to 70,000$ and the subsequent fall which at the time of the writing of this article is around 17000$.
So what is Dumb Money and what is Smart Money?
When individual just wants to gain money by speculating price (by being Greedy) irrespective of understanding the price structure of the particular asset, it’s called Dumb Money, as in the long run the chances of you making profitable transaction by simply speculating diminishes. Whereas when you invest in the asset by understanding the correct price structure of the asset, you reap benefits by the appreciation of price and it’s called Smart Money.
Market undergoes various cycles of price often determined by the trend. When price moves in an uptrend, it makes a series of higher highs and higher lows. Similarly, in a downtrend, market makes a series of lower highs and lower lows. In order to make a profitable transaction, we must buy low and sell high. As easy as it sounds, it is not so simple to determine if the price is cheap or expensive.
Take example of Bitcoin. When the price was rising, people were ready to buy even at the price of say 50,000$ whereas it has no takers in the falling market at current market price of 17,000$. The only thing that has changed is emotions, the outlook and sentiment of the masses towards BTC. What one must understand is when everyone (retailers or dumb money) are selling it, then who is buying it (Smart money)? Does it ring the bell? Institutions which hold huge quantities in their portfolio need forces of greed and fear to fill their huge quantities. This is buying low and selling high. This is just an example and must not be construed that we have hit the low on BTC.
Market Structure
So, how is the price of Bitcoin determined? How does anyone decide if they are buying it at the correct price? If the value at which they are buying is the correct value of the instrument?
What determines the price of any instrument? Before digging deep, let’s understand the participants in the markets. When we enter in to a market, we hear a lot of stories of ordinary people not being able to make money. That market is rigged and retailers cannot make money. In order to address this, we must also understand who are we competing against in the market?
Amidst all the chaos, there is always an absolute order in markets and they are run in a very organized by market makers.
1. Governments
2. Hedge funds
3. High Net-worth Individuals
4. Institutional Investors
5. Retailers
So as a retailer, you are always fighting against the very best in the business. People who have got
a. Better skills
b. More money
So if you want to win this game, you have to think like an institution. Almost every retailer directly deep dives into markets without much work, thinking they will pull money out of it. Sometimes you are lucky but most of the people lose hope after blowing up a few accounts and losing it all. And they will have an excuse that market is rigged. Markets are not rigged but they are deceptive. If you are a retailer, hoping to make it big in the market, sharpen your skills and gear up to the most rewarding business there is.
PRICE IS EVERYTHING!:
Macro Price Story of the Rise and the fall of BTC
Let’s get down to the analysis of Bitcoin, what has it done on the charts in the past (Marked in chart as HISTORY). What is it doing in currently (marked as PRESENT) and what can it do in times to come (Future). For further study, see chart.
History
A. All time high created. Speculation has taken price to a never seen before level of 19600$. Price would retrace to the last decision point at B. Goes into downtrend. As the price starts to fall, the unsuspecting retailers start selling their positions.
B. Price touches the green zone and breaks the downtrend, indicating it is ready to go up.
C. It retests the strength of the break by revisiting the decision to break downtrend. The intensity of this fall freaks people into giving away their good long positions to experienced institutional traders.
1. Accumulation.
According to Wykcoff's theory, this phase of fall from the sub 19000$ level upto 3000$ level was accumulation by big institutions. They could foresee the huge upsurge in the price valuation as more and more people across the world were lured into buying Bitcoin.
2. Markup, is the second phase of Wyckoff's theory which essentially represents the rise in participation of retailers. When the previous all-time high got broken, more people got involved. The price was getting expensive but everyone wanted a piece of it, resulting in a new All-time high.
3. In the middle of 2020, the world was truck with COVID-19, resulting in a mark down and testing a weekly demand zone marked in green. The price respected the demand zone. As US Fed decided to print more US dollars, the investor sentiment turned positive and more money was pumped in to the markets and the price would begin on another uptrend, the only thing that was different here was this was the last round of rally, which the institutional investors would use to start dumping their positions.
4. Price breaks the new All-time high but does not close above it on monthly chart. This was the first signal that the price might be ready to spiral into a new trend, the down-trend. Since the price was making new all-time high, the retail participation was rife and people did not realize they were buying at a really expensive price also, there were many who were HODLing their positions who would think the price would go to the moon. The story for the down trend was written.
PRESENT
5. Distribution, represents the dumping of their long positions gathered by institutional investors in the accumulation phase (Profit booking). Those who have taken long positions during the rise of the price and have been HODLing their positions are forced to giveaway their positions to the very experienced institutional investors. The fall is always ferocious, the intensity of which makes you think the price is going to the ground. But only what falls, Rises again!
Future
6. I expect price to go down to the 12600 level and also if the price action permits, to the 10600$ level from where would begin the new bull market. The same story of the accumulation-markup- all-time high would be repeated again. Afterall, price repeats the same story over and over again!
Analyst_Ankit
So what is Dumb Money and what is Smart Money?
When individual just wants to gain money by speculating price (by being Greedy) irrespective of understanding the price structure of the particular asset, it’s called Dumb Money, as in the long run the chances of you making profitable transaction by simply speculating diminishes. Whereas when you invest in the asset by understanding the correct price structure of the asset, you reap benefits by the appreciation of price and it’s called Smart Money.
Market undergoes various cycles of price often determined by the trend. When price moves in an uptrend, it makes a series of higher highs and higher lows. Similarly, in a downtrend, market makes a series of lower highs and lower lows. In order to make a profitable transaction, we must buy low and sell high. As easy as it sounds, it is not so simple to determine if the price is cheap or expensive.
Take example of Bitcoin. When the price was rising, people were ready to buy even at the price of say 50,000$ whereas it has no takers in the falling market at current market price of 17,000$. The only thing that has changed is emotions, the outlook and sentiment of the masses towards BTC. What one must understand is when everyone (retailers or dumb money) are selling it, then who is buying it (Smart money)? Does it ring the bell? Institutions which hold huge quantities in their portfolio need forces of greed and fear to fill their huge quantities. This is buying low and selling high. This is just an example and must not be construed that we have hit the low on BTC.
Market Structure
So, how is the price of Bitcoin determined? How does anyone decide if they are buying it at the correct price? If the value at which they are buying is the correct value of the instrument?
What determines the price of any instrument? Before digging deep, let’s understand the participants in the markets. When we enter in to a market, we hear a lot of stories of ordinary people not being able to make money. That market is rigged and retailers cannot make money. In order to address this, we must also understand who are we competing against in the market?
Amidst all the chaos, there is always an absolute order in markets and they are run in a very organized by market makers.
1. Governments
2. Hedge funds
3. High Net-worth Individuals
4. Institutional Investors
5. Retailers
So as a retailer, you are always fighting against the very best in the business. People who have got
a. Better skills
b. More money
So if you want to win this game, you have to think like an institution. Almost every retailer directly deep dives into markets without much work, thinking they will pull money out of it. Sometimes you are lucky but most of the people lose hope after blowing up a few accounts and losing it all. And they will have an excuse that market is rigged. Markets are not rigged but they are deceptive. If you are a retailer, hoping to make it big in the market, sharpen your skills and gear up to the most rewarding business there is.
PRICE IS EVERYTHING!:
Macro Price Story of the Rise and the fall of BTC
Let’s get down to the analysis of Bitcoin, what has it done on the charts in the past (Marked in chart as HISTORY). What is it doing in currently (marked as PRESENT) and what can it do in times to come (Future). For further study, see chart.
History
A. All time high created. Speculation has taken price to a never seen before level of 19600$. Price would retrace to the last decision point at B. Goes into downtrend. As the price starts to fall, the unsuspecting retailers start selling their positions.
B. Price touches the green zone and breaks the downtrend, indicating it is ready to go up.
C. It retests the strength of the break by revisiting the decision to break downtrend. The intensity of this fall freaks people into giving away their good long positions to experienced institutional traders.
1. Accumulation.
According to Wykcoff's theory, this phase of fall from the sub 19000$ level upto 3000$ level was accumulation by big institutions. They could foresee the huge upsurge in the price valuation as more and more people across the world were lured into buying Bitcoin.
2. Markup, is the second phase of Wyckoff's theory which essentially represents the rise in participation of retailers. When the previous all-time high got broken, more people got involved. The price was getting expensive but everyone wanted a piece of it, resulting in a new All-time high.
3. In the middle of 2020, the world was truck with COVID-19, resulting in a mark down and testing a weekly demand zone marked in green. The price respected the demand zone. As US Fed decided to print more US dollars, the investor sentiment turned positive and more money was pumped in to the markets and the price would begin on another uptrend, the only thing that was different here was this was the last round of rally, which the institutional investors would use to start dumping their positions.
4. Price breaks the new All-time high but does not close above it on monthly chart. This was the first signal that the price might be ready to spiral into a new trend, the down-trend. Since the price was making new all-time high, the retail participation was rife and people did not realize they were buying at a really expensive price also, there were many who were HODLing their positions who would think the price would go to the moon. The story for the down trend was written.
PRESENT
5. Distribution, represents the dumping of their long positions gathered by institutional investors in the accumulation phase (Profit booking). Those who have taken long positions during the rise of the price and have been HODLing their positions are forced to giveaway their positions to the very experienced institutional investors. The fall is always ferocious, the intensity of which makes you think the price is going to the ground. But only what falls, Rises again!
Future
6. I expect price to go down to the 12600 level and also if the price action permits, to the 10600$ level from where would begin the new bull market. The same story of the accumulation-markup- all-time high would be repeated again. Afterall, price repeats the same story over and over again!
Analyst_Ankit