#14 Deep Dive - Reflexivity & Trends
Let's explore how reflexivity drives crypto market and its trends
Welcome fellow investooors! It’s crypto time so let’s dive right in. To access more content find us here on Twitter. Enjoy!
Today, I want to share some thoughts that have been coming back to me like a boomerang over the past few weeks as I analyzed the market situation. Those of you who have spent more time in crypto than the average enthusiast will understand the importance of such reflections in the coming months, especially considering how much more challenging the market has become.
Listing A Few Facts
I don't need to convince any of you about the volatility of the crypto market, both in terms of unpredictable price surges and drops as well as the constantly changing narrative—or 'meta,' as some might call it. But why is it so hard to adapt to changes and predict what will come next? Why does reflexivity play such a significant role, and is the current cycle the best example of reflexivity in practice?
Let's start today's discussion by stating a few facts that might seem obvious at first glance, but often prove elusive when we start making investment decisions. Incidentally, the problem with implementing and sticking to simple rules often stems from the informational chaos we bring upon ourselves, complicating decision-making and often resulting in capital losses. So, try to simplify everything around you as much as possible. Less is more.
Assets vary in reflexivity both among themselves and over time.
The amount of capital in a given market affects the reflexivity of assets.
Logic and emotions drive markets, while market movements influence logic and emotions.
Price becomes relative when an object or asset gains intangible value.
The greater the reflexivity, the less tied to reality the asset becomes.
Considerations on Reflexivity
Alright, we have our facts; now it's time to delve deeper into their impact on the market and how to use them to our advantage.
#1 Assets differ in their reflexivity both among themselves and over time.
This is a basic description of the cyclical nature of trends and their overlap over the years and successive market cycles. When structuring your portfolio, you need to carefully consider its composition, because diversification between tokens and narratives is not the same as diversification of the risk associated with reflexivity. If you are more risk-tolerant and have already mastered risk management in your portfolio, you might opt for greater reflexivity. However, this is not something I would recommend to newcomers, especially those who have not yet experienced a full cycle.
Most of you might think that reflexivity doesn't bother you, as it's just temporary price spikes or drops that you can wait out. Well... not quite. The risk associated with increasing reflexivity that you take on is the risk of either: a) a sudden collapse of a project after a crazy rally, or b) a strong correction after which the project will not ever recover. While in case a) you might rely on a accidental blessing of common sense and cash out some positions in time, in case b) even the greatest patience won't help, as reflexivity has killed your chosen project, which won't be able to get back up. The same applies to projects, trends, and even narratives, which also vary greatly in terms of reflexivity, which can sometimes destroy even the most promising trend.
The conclusion here is that you should be mindful of the percentage of your portfolio made up of highly reflexive projects compared to the percentage of assets like BTC or ETH, which will form a less volatile base. Of course, holding a significant portion of capital in BTC or ETH won't multiply your capital x100 or more, as some of you dream of over a single cycle. But the truth is, if you haven't experienced at least one full cycle, chasing x100 profits will ruin you faster than you think.
Emotional stability and relatively steady price growth may seem unexciting, but that's how you build capital that doesn't disappear overnight.
#2 The amount of capital in a given market affects the reflexivity of assets.
This sentence perfectly summarizes the cyclicality of markets, where bull and bear markets are primarily characterized by differences in liquidity and capital availability. Compare the capitalization of even the hottest trends during a bear market or a 'bear rally' at the beginning of 2023 to the valuations you see now. The more capital available, the greater the reflexivity of the market, and in the case of the hottest trends, you can multiply it by another x5, which can be both a blessing and a curse.
Pay attention to how highly reflexive moves are made by top trends—or low reflexive moves, as this will clearly indicate the moment of overheating and apathy. This way, you will be able to get close to the bottom and peak of the cycle or intra-cyclical correction, thus securing most of your profits and positioning yourself for the next moves.
#3 Logic and emotions drive markets, while market movements influence logic and emotions.
Greed is what creates speculative bubbles. Fear is what bursts them. It's the combination of emotions like fear and greed that gives markets momentum in one direction or another, but it's up to logic to take the first steps.
An ideal example of this is the bottoms of bear markets and the peaks of bull markets, where emotions act with a delay in relation to logic. Even after hitting the bottom, emotions remain extremely negative, just as extremely positive feelings still accompany the market after it reaches its ATH. This may be the most important lesson from this newsletter, because just as reaching the bottom of the cycle is a process, so too is reaching the peaks. Assuming no 'black swan' event occurs, you'll have a margin of several days to wake up from the emotional trance and close positions—not at the ATH, but still very close compared to the drops that await you in the following weeks. The same situation applies to bear markets.
Don't worry about losing a few percent in a situation where soon you'll face drops of 70-80%.
Treat emotions as a driving force and logic as a direction. However, as the trend gains strength, emotions will take on the role of both driving force and direction indicator, as even logic will be distorted by them. So, be cautious of trends that are not fully developed or when the market has not yet returned to its positive sentiment after a correction—then logic still plays a significant role, and relying on emotions may bring you considerable disappointment and losses.
#4 Price becomes relative when an object or asset gains intangible value.
What is Bitcoin? What is Tesla? What is Nike? What is a Rolex? Are they just objects and lines of code? Or is it something much more?
Why do you decide to buy a Rolex when you can just as well check the time on a $20 watch?
Why do so many people buy Apple smartphones and other devices? Is it because they understand the technology and can appreciate and fully utilize the potential it offers?
Why do so many people take out loans to buy sports cars when they know they'll almost never drive them outside the city? Is it because they are car enthusiasts and can squeeze as much as possible from its potential while driving in the city?
Bitcoin is not just lines of code. Bitcoin is an idea. For some of you, this may seem funny, but tell me, why did Bitcoin change its narrative during each bull market? Why did it shift from a revolutionary technology aiming to overthrow the world of traditional finance to a hedge against inflation, and now the future of TradFi? All because Bitcoin, as an idea, is highly adaptable to the most pressing needs of the current cycle. When an asset or object becomes more than just lines of code or a collection of materials, price becomes relative. Then 2+2 no longer equals 4; the outcome depends on the emotions and narrative associated with the object.
A similar situation exists with Tesla, which transformed from a mere electric car into an icon or even a meme (in a positive sense) thanks to all of Elon Musk's marketing efforts. When you buy a Tesla or Cybertruck, you're not just buying any car, but becoming part of a community, part of a cult. The previously mentioned Rolex is not just a watch, not just an investment, but also a symbol of life success and social status. Do such values have a clearly defined price?
So how do you price something that cannot be assigned a price based on logical indicators? How do you price meme coins? How much will a meme of a dog with a hat be worth, and how much will a cat with gloves meme be worth? How much will Bitcoin be worth depending on what narrative we attach to it?
When price does not adhere to logic, the market starts a game. Everyone tries to guess what others are thinking and how far they will go in their valuations, while the others wonder how far the price will go before something breaks. Add to this the groups blindly believing in continuous growth, those guessing when something will break, and many others. In other words, everyone tries to predict the movements of the other side, leading to a situation where one side subconsciously starts influencing the other. Everyone wants to be right and everyone wants to profit from being right.
#5 The greater the reflexivity, the less tied to reality the asset becomes.
The most disconnected from reality and promising golden mountains projects will be the ones that achieve the greatest success—at least in the short term, whether we are talking about the crypto market or the world of social media and pop culture.
The more capital on the markets, the greater the reflexivity, and with increased reflexivity, the asset starts to detach more from its physical constraints. This is when the narrative, hype, and strong desire to own a particular object are created, regardless of its price. However, one extreme must be balanced by another. The greater the number of fans, the greater the number of haters, and nothing is more engaging than incorporating controversial content into our product to increase its reach. A perfect example can be the recent events related to the new edition of Assassin's Creed Shadows, where one of the characters is black, and the other is a woman. The internet was flooded with criticism and widespread outrage, but the truth is that thanks to this, many more people heard about the game, which in itself constituted almost free marketing for Ubisoft. This is how communities are played, and this is how the endless reserves of haters are used.
Final Thoughts
Money has become likes on social media, and likes have become money. In other words, social media today creates what is desired; social media creates demand and narratives that can ruin or promote companies. Twitter, Instagram, or YouTube have taken on the role of Wall Street in deciding which company will survive and which will go bankrupt.
To see it for yourselves, I recommend checking what happened to Stanley in recent months and how Stanley cups gained iconic status—there was even a meme coin that made a lot of money for early birds. I also recommend checking what happened to a company after one video by Marcus Brownlee, who reviews tech innovations and has built a huge following on social media. This shows how much power social media, individual people, have today, and how much influence they can have on the success or failure of projects, both in the crypto world and beyond.
Link to the video - link
"Everything else can satisfy only one desire; money itself is absolutely good, because it is not merely a specific satisfaction of one particular need; it is the abstract satisfaction of all." - Arthur Schopenhauer
That’s all for today, thank you all for reading this week’s Deep Dive and see you in two weeks time! To access more content find us here on Twitter. See you there!
~ ModernEremite & Crypto o’Clock Team
This newsletter is provided for educational purposes only and does not constitute investment advice. It is not intended as a solicitation to buy or sell any assets, and readers are strongly advised to conduct their own research and seek independent financial advice before making any investment decisions. The authors and publishers disclaim any liability for any direct or consequential loss arising from any use of the information contained herein.