This post was most recently updated on May 21st, 2020

The worse things seem in a market the bigger are opportunities to profit is the philosophy for contrarian investing.

“The time to buy is when there’s blood in the streets.”

The saying is credited to Baron Rothschild a British aristocrat from the famous bankers family. Who better than Rothschilds can give investment advice! They made a fortune buying in the panic after the Waterloo battle against Napoleon. Some believe that the original saying is:

“Buy when there’s blood in the streets, even if the blood is your own.”

When you make an investment decision that everybody agrees with you it is probably a bad one as Warren Buffet says:

“You pay a very high price in the stock market for a cheery consensus.”

Whether you are investing in financial markets or investing in goods you need like buying a new laptop, for example, it is important to find the best time to invest.

Going Against the Crowd Takes Guts

The contrarian philosophy implies to go against the crowd. When everybody is excited that the price will go up is probably because everybody is fully invested in and there is no more buying power. This is usually when the market peaks. And the opposite happens in the downfall when the price has a sharp decline which seems irrational but nobody has the guts to buy it is probably the best time to buy because sellers already sold up and the price can not go anywhere except to the upside.

Derivatives Effects in the Markets

However, in today’s markets with derivative trading platforms thinks are not that simple when these derivative markets that can issue paper assets without limit. This is what happened to scarce assets like gold and even to bitcoin when CME and CBOE launched in December 2017. What happened after is that price corrected by %85.

Now we have Bakkt that is not clear is their futures are really settled in bitcoin since there is no proof that somebody can withdraw bitcoins from their trading platform as pointed by this research.

On the other side, the real bitcoin trading volume on spot exchanges is small compared to the futures volume.

In other words, retail users are left at the mercy of the big players that shake markets in the booth sides resulting in a wealth transfer from the poor to the rich.

Bitcoin Market Psychology

While going against the crowd may bring big profits successful traders and investors do that after research to be sure that the crowd is wrong. Speaking about bitcoin most part of the crypto community is bullish in the long term, but since there is no new money entering the space the price will no go up easily, this is why the wall street guys came to pump and dump the price with their derivative tools.

Bitcoin price is clearly manipulated heavily. It makes no sense that suddenly the market psychology reversed at $3.000 with people buying up to $14,000 and then the same people are selling the whole way down. It is clearly big players in cooperation with exchanges making money on the small investor expense.

However, fundamentals are strong in the long term, add to that the huge potential of growth because a small percentage of the world population is invested in bitcoin.

Today the Fear & Greed index today shows 17%, one of the lowest levels in the last 12 months. The lowest point was the last year on 14 December when the index was showing 10%. At the time of writing bitcoin price is hovering around $6,770 according to CoinMarketCap.

Conclusion

When an asset takes a nonsense appreciation or depreciation it is a time to counter invest.