Bitcoin and the “Pain Trade” Revisited
As an investor, when searching for direction in a volatile market, a useful heuristic to use is what traders lovingly referred to as “The Pain Trade” indicator. This indicator was described to me originally in 2007 by a New York Wall Street stockbroker this way, “The market will move in the direction to hurt the maximum number of people.” While everyone’s definition of the “Pain Trade” varies, they all address the tendency of markets to deliver the maximum amount of punishment to the larger consensus. This is especially true when the underlying asset is a high profile asset such as shares of Apple, or in this case, Bitcoin. High profile public “pain” is especially more painful than low profile private “pain” and the market reacts accordingly.
At Sarson Funds, Bitcoin’s current rally and its refusal to settle is a great example of the “Pain Trade” principle in action. Thanks to the continuing and sustained efforts of industry leaders like Fidelity, Goldman Sachs, BlackRock, Intercontinental Group, CME, JP Morgan and others, Bitcoin is being normalized into existing financial frameworks and investors are getting caught flat-footed. When will the rally stop? According to the “Pain Trade” indicator, not until a drop in price delivers an aggregate punishment that is greater in total pain than what those uninvested in Bitcoin are currently experiencing.
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