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The Animal Spirits in Crypto – Irrational Exuberance & Crypto Bubbles

Three times.

Three times this week I was asked the following question:

“Why are the prices still low when the fundamentals seem so strong?”

Fortunately, there’s a two-worded answer:  Animal Spirits 

It’s not a simple answer – not by a long shot. But it is, indeed, a short answer that encompasses the intricacies of greed, fear and human behaviour.

To understand this, let’s first question if prices are really low? Or are we simply benchmarking prices at their all time high  –  prices that were guided by the animal spirits of crypto investors.

John Maynard Keynes, a famous economist, used the term “Animal Spirits” to describe the irrational decisions investors make in an uncertain environment.

But today the phrase “Animal Spirits” seems to be used primarily in environments of high confidence.  Confidence & optimism, however, aren’t the only byproducts of Animal Spirits. Fear & pessimism play an equal share in the phenomenon.

Irrational Exuberrance. Irrational Anxiety

Should it not then make sense that irrational confidence be followed by equally irrational fear? Optimism that drove prices to exuberant highs should follow with a similar anxiety that would drive prices to irrational lows. For if it does not follow, eventually at least, then perhaps the optimism was not irrational after all. In a way, this explains the driving mechanism of “bubbles” (and also why it’s claimed impossible to forecast)

Nobel Laureate winner Robert Shiller defines a ‘speculative bubble’ in his book ‘Irrational Exuberance’ as follows:

 I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase…”

Shiller akins a bubble to that of an epidemic virus – something that can “catch” and get out of control very easily. Similar to their virus counterparts, speculative epidemics can result in massive losses when culminated with doubt, fear and anxiety.

But the key question here is: Are we already past the irrational anxiety?  Or is it yet to play out?

Recurrence of Epidemics . Reflating of Bubbles.

Interestingly, Robert Shiller makes sure to emphasise that “speculative bubbles” don’t simply burst and disappear. Rather, they tend to inflate and deflate in accordance to the accepted narrative.

A viral epidemic can reappear if a new environmental factor reignites the contagion rate.

Similarly, a deflated speculative bubble can “re-inflate” if a new narrative is strong enough to ignite the animal spirits of investors.

Ah, but this poses yet another tricky question for the crypto space.  Have we already “re-inflated”? After all, prices did surge to an all-time-high of $1000 before deflating to $200.

Have we already re-inflated?!

Is it possible that we see another epidemic spark the animal spirits to a point irrational confidence?

A Great Time To Be Alive

A strong argument can be made in favour of another speculative bubble – a larger one. In his definition of a “speculative bubble”, Shiller goes on to explain what follows the price increase in a speculative bubble:

...The price increase brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement”

The crypto market allowed for a new class of investors to be first entrants. They consisted mostly of people who were young & technologically sophisticated. But they were by no means the “large class of investors”. Those are yet to come in mass.

Already we hear  reports of new & larger entrants into the market. Will their success draw the envy of other institutions? And will that, in turn, lead to an environment of overconfident gambling and exuberance that we have seen in the past?

Only time will tell. But one thing is certain, never before have we seen events play out at this rapid of a pace. Ahh, what a time to be alive.

Related Readings:


The Myth Of The Rational Market - A history of risk, reward & delusion by Justin Fox

Irrational Exuberance by Robert J Shiller

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You can get both of these books for free on Scribd:  Simply use my invite link.

You will get free unlimited access to all their audiobooks & eBooks for two months. Simply cancel after the second month. 😉

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Bitcoin’s Arrival In The Institutional Market – What It Means In The Long Run

Ever since Bitcoin was created in 2009 by Satoshi Nakamoto, it has largely been pushed aside by the traditional financial services industry and the institutional space. A similar attitude has been displayed towards most cryptocurrencies and digital assets, based on fear and the fact that very little was known about these new “actors” in the industry. Now that they are gaining traction and have received the attention of millions of investors, lawmakers and governments are beginning to address the question of regulation for these virtual currencies.

This war between the institution and the new wave of digital assets has been going on for years. However, it seems like we are noticing a shift in mentality and approach from the institutional space towards bitcoin. More and more financial organizations are changing their opinion about the first-ever virtual peer-to-peer currency and have developed interest in these new forms of potentially lucrative investments for their loyal customers.

In this brief overview, we will see how the tide is turning for bitcoin and how it is becoming one of the most sought-after assets by large and reputable financial firms all across the globe. In turn, we will demonstrate how this could eventually lead to the crypto markets regaining their strengths and how we might be on the cusp of one of the largest bitcoin bull runs in history.

Bitcoin & Institutional Investors - The SEC, ETF's and More

Some recent events and news have been very positive for bitcoin and its slow but steady breakthrough within the institutional space. Institutional investors refer to large entities such as banks, hedge funds, insurance companies, investment groups and more. The first major news that has been affecting the space as of recently and that showcases bitcoin’s growing position within the institutional markets is the upcoming (and recently delayed) decision by the U.S. Securities and Exchange Commission (SEC) regarding the approval of a bitcoin exchange-traded fund (ETF).

An ETF is a fund that represents an asset’s value and that is traded directly on the stock market. They are considered passive investments.

In the recent weeks, the cryptocurrency community, as well as actors in the institutional space and even some members of the SEC, have been strongly advocating for the creation of a bitcoin ETF. This truly shows that there is a heavy desire from financial firms and large investors to join the cryptocurrency trend.

Another recent report by Forbes has stated that the Northern Trust, a financial services firm that has close to $10.7 trillion in assets under custody, has opened their doors to companies involved in the crypto space. In addition, the firm is supporting multiple blockchain-based projects. Moreover, Northern Trust’s President, Pete Cherecwich says he believes in a tokenized economy and future.

The Launch Of 'Bakkt' - A Global ecosystem for digital assets

The Intercontinental Exchange (ICE), parent company of the New York Stock Exchange, has announced that it will be launching a new company called Bakkt which aims “to create an open and regulated, global ecosystem for digital assets”. It will enable big organizations to purchase, sell, and safely store virtual currencies and other decentralized assets. With large companies such as Microsoft and BCG involved in the project, this shows how blockchain-based applications and crypto-assets are gaining in popularity and are making their way through various industries. The ICE also plans to initiate a one-day physical bitcoin futures contract when Bakkt launches.

NBER Analysis - Cryptocurrency Forecasts

Furthermore, the National Bureau of Economic Research (NBER) recently published a 70-page-long report on the “Risks and Returns of Cryptocurrency”, analyzing three major coins: bitcoin, ripple, and ethereum. The fact that this paper is being published already shows that cryptocurrencies are actively being discussed by institutional investors. The NBER explains a “strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns”. The report even goes as far as recommending investing in digital currencies with “1 or 4 or 6 percent in bitcoin”.

First Cryptocurrency Index Fund?

Lastly, popular cryptocurrency exchange Coinbase has recently announced the launch of the Coinbase Index Fund. It allows institutional investors, with a minimum investment of $250,000, to place money and bet on the performance of the Coinbase Index. The Coinbase Index is composed of all the coins listed on the American giant’s platform. We clearly see that the desire to invest in cryptocurrencies is not strictly one-sided, but that the crypto space is also eagerly waiting for these institutional investors.

Long Term Upward Trend

As many have said over the last months, institutional money is on its way and it could be extremely positive for bitcoin and its value. Although the markets have been experiencing bearish trends and severe downturns in the past months, bitcoin and other major cryptocurrencies such as ethereum, litecoin, or ripple still show a lot of potential for growth and progress. With all the new excitement and innovations in the crypto space, in addition to the institutional investors finally joining the movement, the market has a lot to look forward to. Banks, financial organizations, hedge funds, and large investors are now less hostile towards these new digital assets, which are nothing short of programmable money. Coins and tokens have become more attractive and offer incredible potential, and institutional investors are aware of it.

Bitcoin & The Institutional Market - Summing It Up

In conclusion, there has been a shift in the way digital currencies, especially bitcoin, are viewed in the institutional space. Previously considered scams, frauds, and even fake, they are now starting to be looked at as real financial assets with considerable potential and upside. In this article, we have seen that numerous events have cemented the belief that opinions are changing, and so has the place of bitcoin in larger investors’ hearts. As a result, we can probably assume that the crypto markets will be positively impacted by the increase of institutional investors in the near future. 

About the Author

mati-greenspan-etoro

​Mati Greenspan

Market Analyst @eToro

Senior Market Analyst at eToro; a man very up-to-date with the goings on of the Crypto markets. Follow him on twitter and other mediums at the links below.

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