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

We will touch on the most tricky, profound, and also the most seductive thing, the counterintuitive in the market.

Written by: Dave

The secondary revelation series has unknowingly reached its final chapter. The entire series discusses close reasoning and logical structure, but in the last article, we will touch on the most tricky, profound, and also the most seductive aspect, the counterintuitive in the market. This article will cover all asset types in the capital market, not limited to cryptocurrencies, and friends from different backgrounds are welcome to take a look!

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

• The first dimension is technical analysis, just like the phrases in an article, it is a fundamental skill. Mastering technical analysis can be considered as an entry point, and one can become a call-out trader on Twitter to earn indefinitely. These traders usually lose money in their transactions, but relying on rebates and accepting advertisements can indeed lead to continuous earnings.
• 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 gastrointestinal tract and the other is the position. If your gastrointestinal tract is disturbed, or if your position is mismanaged, it indicates that your mindset and emotions have been disrupted. We often hear that one must maintain a stable mindset in trading; this is actually reflected in position management, and I hope to clarify the somewhat mysterious concept of mindset management for you.
• The last dimension is 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 becoming a trading legend like Eagle, Banmuxia, Bitcoin King, or the former Livermore and Wyckoff. The same technical analysis pattern can lead to completely opposite conclusions for different cryptocurrencies in different time periods. Those who can buy are apprentices, those who can sell are masters, and those who can rest are experts. Knowing when to buy, sell, or rest is all related to market understanding.

The second-level revelation trilogy is all about understanding the last dimension, which is the capital market understanding. Because technical analysis can be found in textbooks or videos on YouTube, emotional management requires honing one’s character, which varies from person to person and cannot be taught. Only market understanding is one of the core competencies that truly has to be accumulated through hands-on experience in the market. The difference between top traders is not actually in their chart-reading ability, 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 swordplay:

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 reveal series. Without further ado, let's begin the main show.

1, No Logic

Retail investors have a bad habit of asking: Why is it rising? When you ask why it is rising, you subconsciously assume that this matter is logical and can be attributed immediately, which is a cognitive bias that many have regarding the capital market.

The truth is that, often, the initial rise in asset prices is illogical, not just for small retail investors, but for the vast majority of participants in the market, who also cannot find any logic. The development process of a market trend often goes as follows:

1. A stock suddenly starts to rise during a certain period, and no one can find a reason for it, only able to watch the stock price continuously increase. Major financial news organizations will start reporting on this stock (they do react quickly to fluctuations), but the media will not provide any enlightening conclusions, only reporting the striking fact that the stock price is soaring. This is the sexy, beautiful, yet dangerously mysterious illogical phase
2. With the extensive media coverage and eye-catching price increases, this stock has suddenly become a 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 after missing out. Everyone just wants to give themselves a reason to buy this stock; they are simply afraid of missing further gains.
3. 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 composed of people. As more reasons are sought, if one or two are recognized, they will gain acceptance. At this point, stock prices tend to continue to rise, and as retail investors also find an explanation for the rise in stock prices, the resonance feedback loop between fundamentals and market sentiment drives stronger gains.
4. The development of the third stage is dangerous, as rising prices validate the reasons for the rise imagined by retail investors. This self-fulfilling prophecy often inflates a very large bubble and deepens the misguided perceptions of 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, depicting a scene of enthusiasm and confidence. At this point in the story, the turning point should be here.
5. An overheated market cannot be sustained indefinitely; stock prices often drop after overheating, which can be torturous for retail investors, as they have just convinced themselves of a supposed truth, only to have reality slap them in the face. At this time, the voices in the market are very complex; some believe the bubble has burst, some think it’s a normal situation, and others see it as an opportunity to increase their positions. The market often continues its trend amid these divergences, and here I refer to a decline.
6. Does the story end when the stock price falls? Not really. Public companies, funds, and ultra-high-net-worth individual investors have been observing the game calmly. They are rationally assessing the pricing logic. If they truly believe that this stock has the potential to rise, they will gradually build their positions when the bubble dissipates, thereby driving a new wave. This stage signifies a change in valuation/pricing logic, which has long-term influence.

The first two stages of the aforementioned process are illogical price increases, 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 gave us a very clear opportunity to observe market sentiment. The stock price surged 90% within three days of listing. You can look up the news from that time; during this period, people around the world were in a state of shock. People in the cryptocurrency circle felt that this broken company shouldn't be worth so much money, while those in the stock market couldn't understand what this broken company was doing. However, the crazy 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 are hesitant to buy, so you often miss out. It's actually similar to young love; you feel a flutter in your heart, you don't know if the relationship can last, you don't know if they will like you, you're afraid to invest, so you often miss out.

After that, Circle's stock price went through a few days of consolidation and surprisingly did not decline. Everyone was collectively observing during this phase. With the further rise in stock price, various theories emerged.

You can see the second upward arrow drawn in the picture. During this period, there have been many discussions, such as stablecoins, decentralized payments, replacing the banking system, the new American hegemony, including the recent viral video by Maigang investing in Bitcoin, which was released during this time. It is very obvious that everyone is starting to look for reasons. These reasons are certainly not all self-deceptive claims; some of the logic could become serious considerations for institutional investors. However, at this stage, the market presents a situation of mutual reflection, where the logic of attribution and the rising stock prices are stepping on each other's feet in a spiral, continuously pushing each other forward.

The focus of this article is not on what will happen after the overheating budget starts to decline. However, this illogical spike that comes out of nowhere is something everyone must adapt to in this era, something we must learn, and something we need to strive to master as much as possible.

At least we need to change one habit first: don't just ask why when prices go up. 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 the fundamentals, then there are too many things in this world that cannot be explained.

2, No Pricing

From Aristotle, who lived 2300 years ago, to the atomic clocks used on today's spaceships, humanity has a strong preference for certainty. First, it must be clear 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 at a specific frequency, which is very precise and stable. For me, this has no use at all; I still need to drink three pounds of water every day. It’s just a characteristic of the substance; what’s there to study? But the problem lies in certainty; the characteristics of cesium atoms are very definite. Just based on this point, scientists made it into the atomic clock used on spaceships, with an error of no more than 1 second a year. Bitcoin is also very certain, with only 2,100,000,000 of them created by a definite algorithm, which is how this invisible and intangible series of computations becomes the global pricing system.

It's a bit of a digression, but the first point I 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 people don’t know how to price something, there is often a huge profit and loss space. Therefore, if an asset has the potential to enter a range that cannot be priced, and people don’t know which set of logic to use to assess its value, one must be cautious at this time, as there will often be significant opportunities.

No Pricing Means No Limits

The examples presented in this article will be very broad. At the beginning, it was mentioned that it would encompass the entire capital market. In this chapter, we will provide an example of how "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 since the H1N1 flu in 2009, ten years later. The capital markets were completely unable to price this news, as the world had changed too much in the past decade. The destructive power of this pandemic on the human body, its economic toll, and the potential death toll were unimaginable in the early stages, because the virus was man-made and uncontrollable, making it difficult to predict. The results projected by several models were terrifyingly outrageous. If anyone remembers the beginning of 2020, it truly felt like a bioweapon crisis.

For the capital markets, firstly, this is bad news, it should drop. Secondly, we don't know how to price this news, meaning 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 take it.

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

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

Let me give everyone a tangible example, one of the hottest trades from 2024 to 2025, 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 obvious driving factors, the pricing logic at this time is actually based on the previous high, and everyone will feel that it has reached the historical high, oh, maybe I should sell or wait a bit. However, once the price breaks through 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 means there must be a rigorous formula or something similar. As long as you can find a convincing reason for yourself, then we are still within a pricing range. But with gold, it has entered a no-pricing zone, and this moment is when it rises the fastest and the most.

The current situation of Bitcoin is very similar. We spent a long time around the historical high of 70,000 in 2024, and after breaking through, it shot straight to 100,000, because 100,000 is a psychological price point for normal humans, and this number looks good. However, after Bitcoin officially breaks through 100,000, how should we price it? Right now, it can't be found. Various imaginative theories seem to make sense.

• Historical factions believe the peak of this cycle is at 120,000.
• The pricing school links Bitcoin to 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 purists might think the peak is at 1 million.
• The narrative genre believes that Bitcoin is the anchor of the future US dollar, with no upper limit.

Anyway, no matter how you say it, it all makes sense. Everyone just pick a flavor you like. I just want to say that if there is something that everyone doesn't know how to price, it often has huge upside and downside potential.

3. Despair Reversal: "Cold Snap" in Capital Markets

There is a saying that goes, "Buy when no one cares, sell when the crowd is buzzing." This phrase effectively illustrates the counterintuitive nature of capital markets, where big opportunities often arise in overlooked niches, while popular opportunities that everyone loves tend to be limited.

Especially those moments that turn around in despair can yield significant returns. Let me give you two examples directly. The first is the 1998 World Cup final. Are readers feeling confused about what Dave is saying? First, I have to explain the definition of virtual economy, which includes not only the financial and real estate industries we are familiar with, but also sports economy, gambling, and collectibles. Therefore, sports are essentially very similar to 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 by a large margin against France. At that time, Brazil had a super luxurious lineup, with players like Ronaldo, Carlos, and Taffarel ensuring that there were no weaknesses in any position of the team. At the same time, the team's star player Ronaldo was the best performer in that year's World Cup, with four goals and three assists. Moreover, Brazil has never lost once they reach the World Cup finals in history.

The consequence of this popularity is that everyone placed massive bets on Brazil winning. It was rumored that the odds reached one to six at the time, and this match alone took away 25 billion USD in the Asian betting market, meaning a considerable number of retail investors were betting against the sportsbooks. At the same time, every time the French team scored a goal, the sportsbooks would continue to open live betting, meaning they would increase the odds that Brazil wouldn't score at all, with global betting funds following the sportsbooks' live betting. 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 condition 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. Everyone also came out and made a series of clarifications. However, this betting incident remains a classic to this day, and people can still see the 1998 segment in a series of movies about gambling gods and heroes.

So they say to bet against football, and the villa is by the sea. Brothers, don't be fooled by the capital's schemes.

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

The cryptocurrency "Erbing" 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 succinctly reveals the secret of sudden surges and declines.

4. Buy expectations, sell reality

This is what we often refer to as the realization of expectations. Good news turning into bad news and bad news turning into good news. If one cannot grasp this counterintuitive aspect of the capital market, they may often feel confused by some phenomena related to price information linkage, such as why a good piece of news occurs but the stock price still falls. The reason actually lies in the quantized transition 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. So when expectations become reality, when something attractive turns into something unattractive, we need to interpret the news in reverse.

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

A classic example would be the approval of the Bitcoin ETF on January 10, 2024. At that time, I was interning in Shanghai and actually set an alarm for 3:00 AM to check the news. In the anticipation phase from the end of 2023 to the beginning of 2024, the price of Bitcoin rose from around $30,000 to about $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 often refer to as the realization of expectations. Positive news turning into negative news and negative news turning into positive news. If one cannot understand this counterintuitive aspect of the capital market, they may often feel confused by some phenomena related to price information linkage, such as why a good piece of news occurs but the stock price still falls? The reasoning is actually hidden in the quantum shift from expectation to reality. Expectations are the most alluring things; if I could leave only one word for the secondary market, I would choose 'expectation.' Reality is not alluring; reality is often very stark. Therefore, when expectations turn into reality, when something alluring becomes something unappealing, we need to interpret the news in reverse.

Some classic examples include upgrades of public blockchains. When the news of a public blockchain upgrade is announced, people tend to have expectations for the performance of the upgraded blockchain, which can drive up the price of the associated tokens. However, when the public blockchain officially completes the upgrade and the high-speed, efficient features we anticipated are finally realized, the price of the tokens actually drops.

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

Interested friends can search for themselves why the price of Bitcoin actually fell after the ETF was approved. Everyone has done a detailed attribution analysis of this event, and it has been explained very well. However, if we look at it purely from intuition, we cannot understand it. Before the ETF was approved, there was no inflow of off-exchange funds; only after the ETF was approved could off-exchange funds flow in. Why was the price rising when there was no inflow of funds, and why did the price start to fall after the inflow began? Expectations, still expectations.

Make a brief summary: if the news is unexpected, it can be interpreted logically. For example, if the Federal Reserve suddenly announces a rate cut, which is unexpected, the market will rise. If the news is expected, it should be interpreted in the opposite way. For example, when the gold ETF (GLD) was launched in 2004, the price of gold also experienced a short-term correction after its launch, because the market had already digested the positive news in advance.

Conclusion:

The entire series of secondary revelations revolves around rigorous reasoning and logic, but this article changes the usual writing style and discusses the irrationality in the market with everyone. 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 into a significant uncertainty: the Russia-Ukraine war, the 20th National Congress of the Communist Party of China and its pandemic policies, the ongoing fires of war in the Middle East, and Trump's return to the White House. These trends have injected considerable and uncomfortable turbulence into the macroeconomy.

Irrational markets are not actually a new concept. As early as in Soros's book "The Alchemy of Finance," the idea of market reflexivity was proposed, which challenges the rational market hypothesis that has existed 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 foundations since the third industrial revolution that have transformed the consumption perspective of the new generation are three different factors that interact with each other, and their triple resonance amplifies the influence of emotions infinitely, causing the market to deviate significantly from rational valuation.

The subtle changes in asset trading development models actually reflect the structural changes of market participants. Looking back at the entire history of the financial market, it seems that we have transitioned from classical investors with an artistic aura, graduated from the Philosophy Department of Cambridge University, to modern investors with a technical aura, graduated from MIT's Statistics Department, 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, Emperor Qin Shi Huang discovering the elixir of immortality, or Bai Suzhen meeting Xu Xian. It is about the path to enlightenment amidst dangers, where one can die by evening after gaining insight in the morning. This article aims to use superficial words to unveil a small part of this vast topic.