Secondary Revelation: Anti-Intuition (Things That Gain from Dislogic)

Written by: Dave

The second-level revelation series has unknowingly reached its final chapter. The entire series has been discussing close reasoning and logical structure, but in the last article, we will touch upon the most tricky, profound, and also the most alluring aspect, which is the counterintuitive nature of the market. This article will encompass all asset types in the capital market, not limited to cryptocurrencies, and friends from different backgrounds are welcome to take a look!

The Level 2 Revelation 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 the basic skill. Mastering technical analysis is like entering the field, and you could become a call-out master on Twitter who always makes money. These masters usually lose money in trading, but they can indeed earn forever through rebates and advertising.

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 upset or your positions are being opened and closed chaotically, it indicates that your mindset and emotions have been disrupted. We often hear that one should maintain a stable mindset in trading, which actually reflects on position management. I hope I can clarify the somewhat mysterious concept of mindset management for you.

The last dimension is the understanding of the capital market. By mastering solid technical analysis fundamentals, stable position management, and a profound understanding of the market, one can step towards legendary traders like Eagle, Semi-Wood Summer, Bitcoin King, or the likes of Livermore and Wyckoff. The same technical analysis pattern may yield completely opposite conclusions across different cryptocurrencies and time periods. Those who can buy are students, those who can sell are masters, and those who can rest are experts. When to buy, sell, or rest is all related to the understanding of the market.

The second-level revelation trilogy is all about the last dimension, which is the understanding of the capital market. Technical analysis can be learned from textbooks or videos on YouTube, while emotional management requires the honing of one's character, which varies from person to person and cannot be taught. Only market understanding is a core competency that truly needs to be built through hands-on experience in the market. The difference between top traders is not 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 these two kings did not involve swords or weapons:

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 likes the secondary revelation series. Without further ado, let's get started with the main content.

1. No logic

Retail investors have a bad habit of asking: Why is it rising? When you ask why it's rising, you subconsciously assume that this is a logical matter, something that can be immediately attributed. This reflects a common misconception about the capital markets.

The truth is that many times the initial rise in asset prices is illogical, not only for small retail investors but for the vast majority of participants in the market as well. The development process of a market trend often goes as follows:

A stock suddenly starts to rise during a certain period, and no one can find the reason; they can only watch the stock price continue to climb. Major financial news institutions will begin to report on this stock (they do react quickly to fluctuations), but the media will not provide any insightful conclusions, only reporting the striking fact that the stock price is soaring. This is the sexy, beautiful, yet dangerously mysterious phase of illogicality.

With the extensive media coverage and eye-catching price increases, this stock has suddenly become the market hotspot, and everyone is futilely searching for reasons. I call this behavior futile because such attribution is often not a quality induction 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 consensuses will gradually emerge in the market. After all, the market is made up of people, and as more reasons are sought, one or two that are widely recognized will gain traction. At this point, stock prices often continue to rise, and since retail investors have also found a reason to explain the rise in stock prices, the resonance feedback between fundamentals and sentiment drives stronger gains.

The development of the third phase is dangerous, as the rising prices confirm the reasons for the rise imagined by retail investors. This self-fulfilling prophecy often inflates a very large bubble and deepens the misconceptions held by retail investors. At this point, everyone usually believes that we have entered a new era or that a new age is beginning, and the current increase is just the starting point, creating a scene of frenzy and confidence. With the story reaching this point, the turning point should be coming.

An overheated market cannot be sustained indefinitely; stock prices often experience a decline after overheating, which is agonizing for retail investors, as they have just come to believe in a truth that turns out to be a slap in the face. At this time, the market's sentiment is very complex: some believe that the bubble has burst, some feel that this is normal, and others see it as an opportunity to increase their positions. The market often continues its trend amid these divergences, and here I am referring to a decline.

Has the story ended now that the stock price has fallen? Not at all. Public companies, funds, and ultra-high-net-worth individual investors have been observing this game calmly. They are evaluating the pricing logic very rationally. If they truly believe that this stock has the potential to rise, they will gradually accumulate positions as the bubble dissipates, thus driving a new wave. This stage represents a change in valuation/pricing logic, which has long-term implications.

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 recently popular example: Circle(CRCL).

Circle provided us with a very clear opportunity to observe market sentiment. The stock price skyrocketed by 90% within three days of its listing. Everyone can go and search for the news at 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, where you can't find a reason, can't understand the business, and don't dare to buy, which often leads to missed opportunities. It's actually like young love; you feel a rush of emotions, you don't know if the relationship will last, you don't know if they will like you, and you hesitate to invest, which often results in missed chances.

After that, Circle's stock price went through several days of consolidation and surprisingly did not drop. Everyone was collectively observing during this phase. With the further rise in stock price, various theories began to emerge.

Everyone can see the second upward arrow drawn in the picture. During this period, there have been many discussions about stablecoins, decentralized payments, replacing the banking system, and the new American hegemony. This includes the recent viral video by Maigang investing in Bitcoin, which was released during this time. It is very obvious that everyone is starting to find reasons. Of course, these reasons are not all self-deceptive claims; some of the logic could become very serious considerations for institutional investors. However, at this stage, the market presents a situation where the reasoning and the rising stock prices are in a spiral, each pushing the other continuously.

The budget began to drop after the overheating, but 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 must be learned and mastered as much as possible.

At least we need to change one habit first: do not ask why it has risen as soon as we see an increase. If our fundamental analysis only stays at the business level, without considering capital movements and market sentiment, and we treat rigorous and quantifiable logic as fundamental analysis, then there are too many things in this world that cannot be explained.

2. No fixed price

From Aristotle, who lived over 2300 years ago, to the atomic clocks used in today's spacecraft, humans have a strong affinity for certainty. First and foremost, it is important to clarify that 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 of a specific frequency, which are emitted very precisely and stably. For me, this serves no purpose at all; I still need to drink three jin of water every day. It's just a characteristic of each thing; what is there to study? But the issue lies in certainty. The properties of cesium atoms are very certain, and based on this point, scientists have developed atomic clocks for use in spacecraft, with an error of no more than 1 second per year. Bitcoin is also very certain, with only 2,100,000,000 units, generated by a deterministic algorithm. Therefore, this string of invisible and intangible calculations will become a global pricing system.

It's a bit of a tangent, but the first point I want to make is that certainty is truly useful for the development of human society. However, the focus of this article is actually on uncertainty. When people do not know how to price something, there is often a huge space for profits and losses. So if an asset has the potential to enter an unpriceable range, and people do not know which set of logic to use to measure its value, it is essential to be cautious, as there can often be significant opportunities.

No pricing means no limits

The examples provided in this article will be very broad, and at the beginning, it was mentioned that it would include the entire capital market. In this chapter, we will give an example of a "news" that cannot be priced. It is also the ancient fear of the crypto circle, 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 ten years since the H1N1 influenza outbreak in 2009. The capital markets were completely unable to price this news; the world has changed too much in these ten years. The destructive power of this epidemic on the human body, the economic toll, and the potential death toll were unimaginable at the outset, as the virus is uncontrollable by humans and difficult to predict. The results projected by several models were terrifyingly 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 fall. Second, we don't know how to price this news, meaning we don't know how far it will drop. So where will it drop to? The answer is that it will drop as far as the sentiment allows.

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

The eternal bull market saw the S&P drop by 9% in a single day, and during the digestion of pandemic news, it fell by 35%. I remember there was a meme at the time that said Buffett experienced a stock market circuit breaker only once in the first eighty years of his life, but in 2020, he experienced four circuit breakers within two months, so Buffett said it seems I am still too young.

Let me give you a tangible example, one of the hottest trades in 2024-2025, gold. We can clearly see that gold has been hovering around the red horizontal line, which is the previous historical high, for a very long time. In the absence of any significant driving events, the pricing logic at this point is actually based on previous highs; people feel that it's reached a historical peak, and think, oh, I should sell or wait a moment. However, when 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 pricing must be based on a rigorous formula; as long as you can find a reason that persuades you, then you're still within a pricing range. However, with gold, it has already entered a no-pricing zone, and at this moment, it is rising the fastest and the most.

The current situation with Bitcoin is very similar to when we hovered around the historical high of about 70,000 in 2024 for a long time. After breaking through, it shot straight to 100,000, as 100,000 is a psychological price point for normal humans, and this number looks appealing. However, after Bitcoin officially breaks through 100,000, how should we price it? Right now, it's hard to find an answer. Various imaginative theories seem to all make sense.

The historical school believes that the peak of this cycle is at 120,000.

Pricing schools link Bitcoin with gold, and according to the leader's law, Bitcoin's market value should be one-third of gold's. In fact, many traditional institutions view it this way.

Early geeks and fundamentalists might think that the peak is 1 million.

The narrative school believes that Bitcoin is the anchor of the future US dollar, with no upper limit.

Anyway, it makes sense no matter how you say it. Everyone can just choose a flavor they like. I just want to say that if a thing has everyone unsure about how to price it, then it often has huge upside potential.

3. Despair Reversal: "Surprises" in the Capital Market

There is a saying that goes, "Buy when no one is asking, sell when everyone's talking." This statement actually illustrates the counterintuitive nature of the capital market very well; big opportunities often arise in unpopular areas that people do not have high hopes for, while the highly sought-after opportunities are actually limited.

Especially those moments that reverse in despair can yield great returns. Let me give you two direct examples. The first is the 1998 World Cup final. Are readers feeling confused about what Dave is talking about? First, I have to be clever and explain what the definition of virtual economy is. The virtual economy, in addition to the financial and real estate industries we are familiar with, also includes sports economy, gambling, and collectibles. So, sports essentially behave like finance, and it is also a type 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, with players like Ronaldo, Carlos, and Taffarel ensuring that the team had no weaknesses in any position. Meanwhile, the team's star player Ronaldo was the best performer of that year's World Cup, with four goals and three assists. Moreover, Brazil has never lost whenever they reached the World Cup finals in history.

The popular consequence of this is that everyone massively bet on Brazil to win in the betting market, with rumors that the odds reached one to six at that time, and this match alone took away 25 billion USD in the Asian betting market, meaning a lot of retail investors were going against the bookmakers. At the same time, the bookmakers would continue to offer rolling odds every time the French team scored a goal, meaning they would increase the odds to bet that Brazil would not score a single goal, and global betting funds moved along with the bookmakers' rolling odds. In the end, the French team won 3-0 against Brazil. The team's star player Ronaldo was absent throughout the match, and the team doctor later admitted that "a medication usage error" caused him to have adverse reactions, and the entire team's state was very low.

Of course, the French Parliament later investigated this match-fixing case, and the final conclusion was that there was no match-fixing, and everyone came out to clarify a series of points. However, this betting incident remains a classic, and you can still see the 1998 scenario in a series of movies about gambling gods and heroes.

So they say to buy football in reverse, and villas by the sea. Friends, don't be fooled by the capital's schemes.

To put it simply, let's take a tangible example: Ethereum. After experiencing a long decline and a rather poor price performance, the vast majority of market participants, including myself, as a professional speculator, have lost confidence in ETH. At this point, using the term "despair" is absolutely not an exaggeration. A niche asset in despair may not necessarily recover, but if it does rise, it would be earth-shattering.

The cryptocurrency "Er Bing" has risen by 44% in three days, leaving even the annual dark horse SOL dumbfounded. This is the powerful effect of a desperate reversal. Buffett said, "I am greedy when others are fearful, and fearful when others are greedy." This insight profoundly reveals the secret of unexpected surges and drops.

4, Buy the expectation, sell the reality

This is what we often refer to as the realization of expectations. Positive news turns into negative outcomes, while negative news turns into positive outcomes. If one cannot understand this counterintuitive aspect of the capital market, they often find themselves confused by certain phenomena related to price information linkage, such as why a good piece of news causes stock prices to drop. The reasoning actually lies in the quantum shift from expectation to reality. Expectations are the most alluring thing; if I could leave just one word for the secondary market, I would choose the word "expectation." Reality is not alluring; it is often stark and unappealing. Therefore, when expectations become reality, when something alluring turns into something unappealing, we need to interpret the news in reverse.

Some classic examples include upgrades to public blockchains. When the news of a public blockchain upgrade is announced, there is an expectation about the performance of the upgraded blockchain, which drives up the price of related tokens. However, when the public blockchain officially completes the upgrade and we see the high-speed and efficient features we anticipated come to fruition, the token prices actually fall.

One of the most classic examples is the approval of the Bitcoin ETF on January 10, 2024. At that time, I was interning in Shanghai and really set an alarm for 3:00 AM to catch the news. During the expectation phase from the end of 2023 to the beginning of 2024, the price of Bitcoin rose from about $30,000 to around $48,000, driven by strong "buy expectations." On January 10, 2024, the SEC announced the approval of the ETF. Then:

4, Buy the expectation, sell the reality

This is what we commonly refer to as the landing of expectations. Positive expectations turn into negative realities, while negative expectations turn into positive realities. If one cannot understand this counterintuitive phenomenon of the capital market, they will often feel confused by certain phenomena related to price information linkage, such as why a good piece of news happens but stock prices still fall. The reason actually lies in this quantum transformation from expectation to reality. Expectations are the most attractive things; if I could leave only one word for the secondary market, I would choose the word "expectation." Reality is not attractive; reality is often very stark. Therefore, when expectations become reality, when an attractive thing turns into an unattractive thing, we need to interpret the news in reverse.

Some classic examples include the upgrades of public blockchains. When the news of a public blockchain upgrade is announced, people tend to have expectations about 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, efficient features we were expecting are finally realized, the token price actually drops.

One of the most classic examples is the approval of the Bitcoin ETF on January 10, 2024. At that time, I was interning in Shanghai, and 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 rose from about $30,000 to around $48,000, a strong "buy expectation." On January 10, 2024, the SEC announced the approval of the ETF. Then:

Those who are interested can search for themselves why Bitcoin's price dropped after the ETF was approved. Everyone has done a detailed causal analysis of this event, and it's been articulated very well. However, if we only look at it intuitively, we cannot comprehend it. Before the ETF was approved, there was no inflow of off-exchange funds; after the ETF was approved, off-exchange funds could flow in. Why did the price rise when there was no inflow of funds, but started to drop after the inflow began? Expectations, it's all about 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 goes up. If it is expected news, it should be interpreted in the opposite way. For instance, when the gold ETF (GLD) was launched in 2004, the price of gold also experienced a short-term pullback after the launch because the market had already priced in the positive news.

Conclusion:

The entire series of Level 2 Reveals revolves around rigorous reasoning and logic, but this article departs from the usual writing style to discuss 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 significant uncertainty: the Russia-Ukraine war, China's 20th National Congress and pandemic policies, ongoing conflicts in the Middle East, and Trump's return to the White House. These trends have injected considerable, uncomfortable turbulence into the macro economy.

Irrational markets are not a new concept. The idea of market reflexivity was introduced in Soros's book "The Alchemy of Finance," which challenges the rational market hypothesis that has persisted for a century. However, in today's world, the explosive 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 worldview of the new generation of consumers—all three different factors interact and resonate with each other, amplifying the impact of emotions, leading to a significant deviation of the market from rational valuation.

The subtle changes in asset trading development models actually reflect the structural changes among market participants. Throughout the history of the financial market, it seems we have transformed from classical investors with an artistic flair, like those graduating from the Philosophy Department at Cambridge University, to modern investors with a technical vibe, like those graduating in Statistics from MIT, and now into personality-driven investors who drop out of HKUST to pursue rock music. From Buffett to Ken Griffin to labubu.

These several transformations force us to face human nature, the primal human nature. It is so complex, so vague, so inscrutable, yet it contains such great opportunities. It's as if a pirate crew encounters Treasure Island, Qin Shi Huang encounters the elixir of immortality, and Bai Suzhen meets Xu Xian. It is the path to enlightenment amid perils that one may die by evening. This article aims to use simplistic words to unveil a small part of this vast topic.