As a continuation of yesterday's topic about HODLers who handle bull markets worse than bear markets, I thought I should follow up with "the other way", a discussion about contrarian investing.
A contrarian investor takes the opposite (contrary) position compared to the majority in the market. But there are different ways of interpreting this.
Be fearful when others are greedy, and greedy when others are fearful.
is a famous quote attributed to Warren Buffett. That's the definition of contrarian investing. Sell when the hype is high during the bull markets, and buy when there's "blood on the streets" during the bear markets.
Let's look at this from a different angle. All markets have cycles, not just the crypto market. We find them in stocks, bonds, real estate, business, etc.
In crypto, the 4-year duration makes us likely to catch multiple cycles and have the experience of previous cycles fresh in our minds. When the cycle is 20-30 years long, it isn't as easy, as probably few investors catch more than 2-3 cycles in their lifetimes and at different stages in their lives.
Given long enough periods, markets fluctuate in a predictable manner, bar a butterfly effect happening. When they heat up and the hype is over the roof, it's more likely to turn and start to cool off. A contrarian investor would take advantage of that and sell. An aggressive contrarian investor would open a short position too, but that's very risky if the top isn't in yet and the market is highly volatile.
On the other side, when the market has dropped enough, assets become undervalued. While the majority of investors are still fearful, contrarians accumulate, anticipating the market (or certain assets) will eventually start to grow because of the discrepancy between the value offered and the price in the market.
Investors may have a contrarian position on the market (asset class) in general, or on one company or coin.
Given that the majority of investors are bulls, some contrarians have a permanent bear stance. That is counterintuitive since there is a natural progression in the market based on added value, new technologies, etc., but it is consistent with the definition of a contrarian, which takes the opposite position compared to the majority in the market. Since the majority expects the markets to grow over long enough periods, these "pure" contrarians consider it natural to take the bear side.
We have to keep in mind contrarians are a minority and not all of them are successful in their strategies and definitely not all the time. Betting against a hyped-up market is very risky, and some of them do that, besides selling the support assets.