The second-level revelation series has unwittingly reached its final chapter. The entire series has been discussing tight reasoning and logical structure. But in the last article, we will touch on the most challenging, profound, and also the most intriguing thing: the counterintuitive in the market. This article will encompass all asset types in the capital market, not limited to cryptocurrencies. Friends from different backgrounds are welcome to take a look!

The secondary unveiling series revolves around market trading. Trading is a three-dimensional structure:

• The first dimension is technical analysis. Just like the sentences in an article. It is a fundamental skill. Mastering technical analysis is considered an entry point. You can then become a Twitter influencer who consistently profits from calls. These influencers usually lose money in trading. However, relying on commissions and advertisements can indeed lead to consistent profits.
• The second dimension is position and system management. Having good technical analysis skills and good position management can be considered as being a professional trader. We all know that humans have two emotional organs. One is the stomach and the other is the position. If your stomach is disturbed or your positions are opened and closed chaotically, it indicates that your mindset and emotions have been disrupted. We often hear that maintaining a stable mindset in trading is crucial. This actually reflects on position management. I hope to clarify the seemingly mysterious management of mindset for you.
• The last dimension is the understanding of the capital market. Mastering solid technical analysis fundamentals, stable position management, and a deep understanding of the market can lead you towards becoming a trading legend like Eagle, Banmuxia, Bitcoin King, or even the former Livermore and Wyckoff. The same technical analysis pattern can yield completely opposite conclusions across different cryptocurrencies and timeframes. Those who can buy are the apprentices, those who can sell are the masters, and those who can rest are the experts. Knowing when to buy, sell, or rest is all related to market understanding.

The second-level revelation trilogy is entirely about the last dimension, which is the understanding of the capital market. Because technical analysis can be learned from textbooks or videos on YouTube. Emotional management requires the honing of character, which varies from person to person and cannot be taught. Only market understanding is genuinely built through hands-on experience in the market, accumulating expertise as one of the core competitive advantages. The difference between top traders is not really in their ability to read charts. Just like in the Kingdom of Heaven, where Sultan Saladin and King Baldwin IV of Jerusalem faced off, the duel between the two kings did not involve sword fighting.

Saladin: “I pray you pull back your cavalry and leave this matter to me.”

Baldwin: “I pray you retire unharmed to Damascus. Reynald of Chatillon will be punished, I swear it. Withdraw, or we will all die here. Do we have terms?”

Saladin: “We have terms.”

Cognition is the most powerful weapon. I hope everyone enjoys the secondary revelation series. Without further ado, let’s start the main feature.

1. Illogical

Retail investors have a bad habit. They love to ask: why is it rising? When you ask why it is rising, you subconsciously assume that this matter is logical. It is something that can be attributed immediately. This is a cognitive bias that everyone has towards the capital market.

The truth is that, many times, the initial rise in asset prices is illogical. It’s not just illogical for small retail investors; it is also illogical for the vast majority of participants in the market. The development process of a market trend often goes as follows:

• A stock suddenly begins to rise during a certain period. No one can find the reason. They can only watch the stock price continue to rise. Major financial news organizations will start to report on this stock (they do react quickly to fluctuations). However, the media will not provide any insightful conclusions. They simply report the striking fact that this stock’s price is soaring. This is the illogical phase that is sexy, beautiful, dangerous, and mysterious.
• With the extensive media coverage and eye-catching price increases, this stock has suddenly become a market hotspot. Everyone is desperately trying to find reasons. I call this behavior futile. This is because such attributions are often not quality inductions, but rather the emotional anxiety of retail investors who have missed out. People just want to give themselves a reason to buy this stock. They are simply afraid of missing further gains.
• When a large number of participants start this attribution, one or several mainstream consensus will gradually emerge in the market. After all, the market is made up of people. The more reasons everyone finds, the more likely it is that one or two will be recognized and accepted. At this point, stock prices often continue to rise. And because retail investors have found an explanation for the rise in stock prices, the resonance feedback loop of fundamentals and sentiment drives stronger gains.
• The development of Phase 3 is dangerous. Because the rising prices confirm the reasons for the rise imagined by retail investors. This self-fulfilling prophecy often inflates a very large bubble. Moreover, it deepens the misconceptions that retail investors have about their own understanding. At this point, people usually believe that we have entered a new era. Or that a new age is beginning. The current increase is just the starting point. A scene of frenzy and confidence. The story reaches this point, and the turning point should be here.
• An overheated market cannot be sustained indefinitely. Stock prices often experience a decline after being overheated. This is tormenting for retail investors, as they have just obtained what they thought was a validated truth. The reality, however, slaps them in the face. At this time, the voices in the market can be very complex. Some feel that the bubble has burst, some believe it is a normal situation, and others think it is an opportunity to increase their positions. The market often continues its trend amid these divergences. Here I refer to the decline.
• Has the story ended with the stock price dropping? Not at all. Public companies, funds, and ultra-high-net-worth individual investors have been calmly observing in this game. They are evaluating the pricing logic very rationally. If they truly believe that this stock has the potential to rise, they will gradually build their positions when the bubble dissipates, and then drive a new wave. This phase is the change in valuation/pricing logic, which has a long-term impact.

The first two stages of the above process are price increases without logic. And I believe everyone has felt the importance of such illogical trading this year. Next, let’s take a recent hot example: Circle (CRCL)

Circle gave us a very clear opportunity to observe market sentiment. The stock price skyrocketed by 90% within three days of its listing. Everyone can look up the news from that time. During this period, people around the world were in a state of shock. People in the crypto space felt that this broken company shouldn’t be worth so much money, while people in the stock market couldn’t understand what this broken company was doing. However, the insane stock price indeed attracted the attention of the entire market.

This is the stage of irrational surges. You can’t find a reason. You don’t understand the business. You also don’t dare to buy. So you often miss out. It’s actually like a first love in your youth. You feel a rush of emotions. You don’t know if the relationship can last. You don’t know if they will like you. You don’t dare to invest, so you often miss out.

After that, Circle’s stock price consolidated for several days. Surprisingly, it did not drop. Everyone was collectively observing during this stage. As the stock price continued to rise, various theories emerged.

Everyone can see the second upward arrow drawn in the picture. During this period, there have been many statements. What stablecoins, decentralized payments, replacing the banking system, new American hegemony. Including the recent viral video of Mai Gang investing in Bitcoin, which was released during this time. It is very obvious. Everyone is starting to find reasons. These reasons are certainly not all self-deceptive statements. There are even some logics that will become serious considerations for institutional investors. However, at this stage, the market presents a situation of mutual reflection. The logic of attribution and the rising stock prices are stepping on each other’s toes, continuously pushing forward.

The budget behind has overheated and started to decline. What happens next is not the focus of this article. However, this illogical surge that comes out of nowhere is something everyone must adapt to in this era. It is a market trend that we must learn and strive to master as much as possible.

At least we need to change one habit first. Don’t just ask why it has risen when you see an increase. If our fundamental analysis only stays at the business level, without considering capital flows and market sentiment, and if we treat rigorous quantifiable logic as the only fundamental aspect, then there are too many things in this world that cannot be explained.

2. No pricing

From Aristotle 2300 years ago to the atomic clocks used on spaceships today, humanity has a strong preference for certainty. First, let’s clarify. Certainty is indeed very useful. For example, cesium atoms have a characteristic: when they transition between their two hyperfine energy levels, they emit electromagnetic waves at a specific frequency. This radiation is incredibly precise and stable at that frequency. For me, this has no practical use at all; I still need to drink three pounds of water every day. It’s just a characteristic of each individual. What’s worth studying? But the issue lies in certainty. The characteristics of cesium atoms are very certain. Based on this single point, scientists have made atomic clocks used on spaceships, with an error of less than 1 second per year. Bitcoin is also very certain, with only 2,100,000,000 units generated by a definite algorithm. Thus, this invisible and intangible result of a series of calculations by computers will become a global pricing system.

It’s a bit off-topic. But the first point I just want to make is that certainty is really useful for the development of human society. However, the focus of this article is actually on uncertainty. When everyone is unsure about how to price something, there often arises a huge range of potential profits and losses. So if an asset has the potential to enter a price range that cannot be priced, people won’t know which logic to use to assess its value. At this point, one must be cautious. There are often huge opportunities.

No pricing means no restrictions

The examples given in this article will be very wide-ranging. At the beginning, it was mentioned that it will include the entire capital market. In this chapter, we will give an example where “news” cannot be priced. It is also an ancient fear in the crypto world. 312.

On March 11, 2020, the World Health Organization (WHO) officially declared the novel coronavirus (COVID-19) a global pandemic. This is the first global pandemic in a decade since the H1N1 swine flu in 2009. The capital markets were completely unable to price this news. The world has changed too much in these 10 years. The destructive power of this pandemic on the human body, the economic damage, and the potential death toll were unimaginable in the early stages, as the virus is man-made and uncontrollable, making it difficult to predict. The results estimated by several models were horrifyingly absurd. If anyone remembers the beginning of 2020, it truly felt like a biohazard crisis.

For the capital market, first, this is bad news. It should drop. Second, we don’t know how to price this news. It means we don’t know how far it will fall. So where will it fall to? The answer is that it will fall as far as the sentiment can go.

Bitcoin, which is now thriving, once fell 60% in just two days.

The eternal bull market saw the S&P drop 9% in a single day. During the digestion period of the pandemic news, it dropped 35%. I remember there was a meme at the time saying that Buffett experienced a stock market circuit breaker once in his first eighty years. In 2020, he experienced four circuit breakers within two months. So Buffett said, “It seems I am still too young.”

Let me give you another tangible example. One of the hottest trades for 2024-2025 is gold. We can clearly see that gold has been hovering around the red horizontal line, which is the previous historical high point, for a very long time. In the absence of any obvious driving factors, the pricing logic at this time is actually based on the prior high. People will feel that we have reached the historical high, and they might think, “Oh, I should sell and wait a bit.” However, once the price breaks above the historical high, we suddenly don’t know how to price it anymore. How much should gold be worth? Everyone looks confused. Readers should not think that the meaning of pricing must involve a rigorous formula or something similar. As long as you can find a convincing reason for yourself, then you are still within a range where pricing exists. However, for something like gold, it has already entered a no-pricing zone. At this moment, it is rising the fastest and the most.

The current situation of Bitcoin is very similar. We have been hovering around the historical high of 70,000 for a long time in 2024. Once it breaks through, it will surge straight to 100,000. This is a psychological price point for most people. This number looks good. But how should we price Bitcoin after it officially breaks through 100,000? Right now, there is no answer. Various imaginative theories all seem to make sense.

• Historical factions believe that the peak of this cycle is at 120,000.
• The pricing school links Bitcoin to gold. According to the leader’s law, the market value of Bitcoin should be one-third of that of gold. In fact, many financial institutions view it this way.
• Early geeks and fundamentalists might have thought the peak was at 1 million. For example, Kong Zongbao II.
• Narrative schools believe that Bitcoin is the anchor for the future US dollar. There is no cap.

Anyway, there is a reason for everything. Everyone just pick a flavor you like. I just want to say that if something is hard to value, it often has great upside and downside potential.

3. Desperate Reversal: “Surprise Upset” in Capital Markets

There is a saying that goes, “Buy when no one is asking, sell when everyone is talking.” This phrase actually illustrates the counterintuitive nature of the capital market very well. Big opportunities often arise in unpopular areas that no one is optimistic about, while the popular opportunities that everyone loves are actually limited.

Especially those moments of reversal in despair can yield significant returns. Let me give you two examples. The first is the 1998 World Cup final. Are readers feeling confused? What is Dave talking about? First, I have to be clever and explain what the definition of virtual economy is. The virtual economy includes not only the financial industry and real estate that we are familiar with, but also sports economy, gambling, and collectibles. So, in essence, sports are very much like finance; they are also a form of virtual economy. The 1998 World Cup final is a classic example of an “upset.”

Before the match, the whole world unanimously believed that Brazil would win against France by a large margin. At that time, Brazil had a super luxurious lineup. Stars like Ronaldo, Carlos, and Taffarel left no weaknesses in any position of the team. At the same time, the team’s main player, Ronaldo, was the best performer in that year’s World Cup, with four goals and three assists. Moreover, historically, Brazil has never lost once they entered the World Cup finals.

The hot consequence of this is that everyone is betting heavily on Brazil to win. It is rumored that the odds at that time reached one to six. This match alone took away 25 billion USD from the Asian betting market. This means many retail investors were going against the bookmakers. At the same time, the bookmakers continued to open rolling odds every time the French team scored a goal. This means that the odds for Brazil not scoring a goal would increase significantly. The global betting funds followed the bookmakers’ rolling odds. In the end, the French team won 3-0 against Brazil. The team’s core player Ronaldo was in a daze throughout the match. The team doctor later admitted that “a mistake in drug use” led to adverse reactions in him. The entire team was in very low spirits.

Of course. Subsequently, the French Parliament investigated this match-fixing case. The final conclusion was that there was no match-fixing. Everyone also came out to clarify a series of points. However, this betting incident remains a classic to this day. You can still see the 1998 scene in the series of movies about gambling gods and gambling heroes.

So it’s said to bet against football. The villa is by the sea. Old iron, don’t be caught in a trap set by capital.

To put it simply, let me give you a tangible example. Ethereum. After a long decline and quite poor price performance, the vast majority of market participants, including myself, as a professional researcher in speculation, have lost confidence in ETH. At this point, using the word “despair” is absolutely not an exaggeration. A niche asset in despair may not necessarily rise, but if it does, it will be earth-shattering.

The cryptocurrency “Erbing” has risen by 44% within three days, leaving even the annual dark horse SOL dumbfounded. This is the powerful effect of a desperate reversal. Buffett said, “Be greedy when others are fearful, and be fearful when others are greedy.” This profoundly reveals the secret behind unexpected surges and drops.

4. Buy the expectation, sell the reality

This is what we commonly refer to as the realization of expectations. Positive news turning into negative news. Negative news turning into positive news. If one cannot understand this counterintuitive aspect of the capital market, they may often feel confused by certain phenomena related to price information linkage. For instance, why does a good piece of news lead to a drop in stock prices? The answer actually lies in the quantized transformation from expectation to reality. Expectations are the most attractive things. If I could only leave one word for the secondary market, I would choose the word “expectation.” Reality is not attractive. Reality is often very stark. So when expectations turn into reality, when something attractive becomes something unattractive, we need to reverse interpret the news.

Some classic examples include the upgrades of public blockchains. When the news of a public blockchain upgrade is announced, everyone has expectations for the performance of the upgraded blockchain, which drives up the price of the associated tokens. However, when the public blockchain officially completes the upgrade and the high-speed and efficient features we anticipated are realized, the token price actually falls.

One of the most classic examples is undoubtedly January 10, 2024. The Bitcoin ETF was approved. At that time, I was interning in Shanghai. I really set an alarm for 3:00 AM to check the news. During the expectation phase from the end of 2023 to the beginning of 2024, the price of Bitcoin climbed from around $30,000 to about $48,000. A strong “buy the expectation.” On January 10, 2024, the SEC announced the approval of the ETF. Then:

Those interested can search for it themselves. Why did the price of Bitcoin drop after the ETF was approved? Everyone has already conducted a detailed attribution analysis of this event. It’s well stated. But if we look at it purely intuitively, we cannot understand it. Before the ETF was approved, there was no influx of off-market funds. Only after the ETF approval could off-market funds flow in. Why was the price rising when there was no influx of funds? And why did the price start to fall after the influx? Expectations. It’s still expectations.

Make a brief summary. If it is unexpected news, it can be interpreted logically. For example, if the Federal Reserve suddenly announces a rate cut, which is unexpected, the market rises. If it is expected news, it should be interpreted in the opposite way. For instance, when the gold ETF (GLD) was listed in 2004, the price of gold also saw a short-term pullback after the listing because the market had already priced in the good news.

Conclusion:

The entire series of secondary revelations revolves around rigorous reasoning and logic. However, this article deviates from the usual writing style and discusses the irrationality in the market. It is necessary for us to recognize the paradigm shift from a macro perspective. Since the turning point of the economic cycle in 2020, the world has entered a state of immense uncertainty: the Russia-Ukraine war, China’s 20th National Congress and pandemic policies, the ongoing conflicts in the Middle East, and Trump’s presidency. These trends have injected considerable and uncomfortable turbulence into the macro economy.

Irrational markets are not a new phenomenon. The concept of market reflexivity was introduced as early as in Soros’s book “The Alchemy of Finance.” This challenges the rational market hypothesis that has prevailed for a century. However, in today’s world, the explosion of information brought about by technological advancements, political uncertainty and polarization, and the changes in economic fundamentals since the Third Industrial Revolution that have altered the consumption perspectives of the new generation all interact with each other. These three different levels of factors resonate together, significantly amplifying the impact of emotions. The market deviates significantly from rational valuation lines.

The subtle changes in the asset trading development model actually reflect the structural changes of market participants. Throughout the history of the financial market, it seems that we have transformed from classical investors with an artistic air, graduating from the Philosophy Department of Cambridge University, to modern investors with a technical flair, graduating from MIT in statistics, and now to individualistic investors who dropped out of Hong Kong University of Science and Technology to pursue rock music. From Buffett to Ken Griffin to labubu.

These multiple transformations force us to confront human nature. The primitive human nature. It is so complex. So vague. So unfathomable. Yet it contains such great opportunities. It’s like a pirate crew encountering Treasure Island. Qin Shi Huang discovering the elixir of life. Bai Suzhen meeting Xu Xian. It is the perilous journey of enlightenment that could lead to death by evening. This article aims to unveil a small part of this vast topic with superficial words.

Statement:

1. This article is reprinted from [0xDave852]. Copyright belongs to the original author [0xDave852]. If there are any objections to the reprint, please contact Gate Learn Team. The team will process it as soon as possible according to the relevant procedures.
2. Disclaimer: The views and opinions expressed in this article are solely those of the author. They do not constitute any investment advice.
3. Other language versions of the article are translated by the Gate Learn team. Unless otherwise stated.GateUnder no circumstances may translated articles be copied, disseminated, or plagiarized.