Can investors face euphoric market conditions safely?

The following is a guest post from Evgeny Filichkin, an Investment Advisor at Keytom neobank.

When Bitcoin cleared the $69,000 level and established a new all-time high, it resulted in the so-called ‘euphoria zone’ — a phase in the market cycle characterized by extreme optimism and speculative frenzy among investors.

With the upcoming April halving just around the corner, all the hype around it only serves to drive the exuberance further. This sentiment causes the BTC rate to grow as more investors rush to buy into the market, perpetuating a self-reinforcing cycle of optimism and price escalation.

But what can we expect to happen when the event hits the market? Halvings have historically heavily affected investor behavior patterns, and we’re already moving ahead of the curve this year. So, how should investors change their strategies amidst the current surge? Let’s take a closer look.

Halving 2020 vs 2024: How Has Bitcoin’s Background Changed?

This halving will be the fourth in BTC’s history. Since the previous event in 2020, Bitcoin has made great strides towards mainstream adoption, which are underscored by notable advancements in regulatory frameworks and technological infrastructure.

Among the more recent events, the introduction of Bitcoin ETFs into the market has also contributed greatly to driving positive investor sentiment to new heights. The US SEC’s approval of them marked a significant milestone in Bitcoin’s acceptance as a legitimate investment asset. Furthermore, ETFs have broadened access to BTC for new investor segments, including financial advisors and capital market allocators. This broader access invites substantial capital influx.

As Bitcoin continues to gain traction among institutional investors and retail traders alike, the anticipation surrounding the 2024 halving event is heightened, with expectations of its potential impact on the market dynamics.

How Can the Timing of the New All-Time High Affect Investor Stance?

Historically, Bitcoin has experienced notable price fluctuations in the wake of halving events, as the reduction in block rewards has led to a decrease in the supply of new BTCs entering the market. With increasing demand and limited availability, Bitcoin’s appeal is amplified, driving further investment interest.

However, the lead-up to the 2024 halving has already differentiated itself in a unique scenario where Bitcoin reached the new all-time high of $73,000 well in advance of the event itself. This departure from past patterns suggests that the market sentiment is running ahead of historical patterns, and the dynamics after April’s halving may differ significantly from previous cases.

The old trading adage “buy the rumor, sell the news” may prove appropriate in the context of this year’s Bitcoin halving. Fueled by the anticipation of the event, investors are actively accumulating Bitcoin, thus “buying the rumor.” However, once the event passes, they may engage in profit-taking instead of driving the prices further and, in doing so, “sell the news.” 

Given that the market dynamics are taking place faster this year than during the previous cycles, once the halving event passes, the BTC price will likely have no more room to grow around that news. If investors choose to take the profit-taking road, it would reflect the market’s ability to price in future events and adjust accordingly, resulting in a period of price correction and recalibration

Being Careful About Succumbing to the Euphoria Zone

Investors need to exercise caution and maintain a balanced approach to Bitcoin investment, particularly during periods of euphoria like the one we’re seeing now. While feeling excited about the potential for significant returns is natural, the euphoria zone is also characterized by heightened volatility. Many investors may overlook the fundamental factors driving Bitcoin’s value, instead focusing solely on short-term price gains, which can lead to unsustainable market dynamics.

Meanwhile, price corrections are a natural and necessary part of any asset’s upward trajectory for a number of reasons. Rapid and sustained increases in price can lead to overvaluation, where the price of the asset exceeds its intrinsic value. This can create a speculative bubble, fueled more by investor exuberance than anything else. Price corrections help to deflate such bubbles, bringing the asset’s price back in line with its true value and restoring market equilibrium.

As for when that correction will take place this time, it’s hard to say with any measure of certainty. Traders should remember that markets generally don’t have fixed peaks or troughs. Just because an asset’s price has already reached a high point doesn’t necessarily mean it must go down again. And the opposite is also true. This underscores the unpredictability of markets and the need for caution in trading decisions.

As investors navigate the opportunities and uncertainties presented by the 2024 halving, a proper understanding of market dynamics and risk management strategies will be essential for maximizing potential returns. If you’re planning to invest in BTC, make sure that you’re doing it for the right reasons, after having properly considered its long-term viability and the risk factors involved.