Psychology and btc price \ stacker news ~bitcoin

Psychology and btc price www.whatbitcoindid.com/podcast/the-wall-street-bull-market

521 sats \ 11 comments \ @elvismercury 9 Mar bitcoin

A lot of people have been talking price lately, for obvious reasons. The conversations have spilled across a number of posts -- for instance, I link to two here, and there's additional conversation in the comments.

One aspect that I haven't seen discussed very much is the psychological part of it. It's trivial to talk about this in a fully abstract way, since trading and market action is based on psychology inasmuch as literally everything that involves thinking is based on psychology. But what are the principles of how that works?

This WBD podcast isn't exhaustive on that topic, but it's quite good, and specific, about how different elements play in to how the market feels to the people inside it. No bullshit, good and thoughtful discussion, highly recommended.

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1000 sats \ 3 replies \ @0xIlmari 11 Mar

I will add one, maybe interesting, maybe useless, tidbit.

We know that "price" is a compression of distributed information, but not everyone realizes how mind-bogglingly complex the input to the compression is.

Sure, you might say, "there's multiple exchanges", some might smugly say, "there are order books", meaning multiple actors bidding at different levels and amounts.

Fewer people still might be aware of futures, meaning people bidding on future prices of an asset, at different times (expiration dates) - each of those expirations having its own order books. This in itself is a fascinating view into the market's expectations of the future. This already needs some compression to represent and glean intelligence from.

And then you might've also learned about options which adds the dimension of "strike", meaning not only are actors bidding on future but are pricing individual price levels (and very differently so).

(More acurately, options markets express traders' expectations of future volatility through some extremely complicated, albeit interesting, math.)

I look at this table almost every day. It's incomprehensible if you've never seen an options matrix. Every row in that table has its own order book (two, in fact, for CALL and PUT) and that's just for one of many expiry dates.

So the derivatives market has all these dimensions:

expiration date
strike
CALL/PUT
order book

with only partially correllated expectations. And that's just one asset.

Participants in those markets more often than not need to offset their positions on the spot market to stay delta-neutral, so their expectations continuously influence that singular number we call "price".

100 sats \ 2 replies \ @elvismercury OP 11 Mar

Great context -- all of this is dark territory to me. This isn't exactly the same, but tell me if this is a sensible thing to say:

I've often thought that what these financial products do is to allow you to make utterances, of varying complexity, about the world. Natural language let's you say I saw a tree but also If settlers were to try to build in this area, there would almost certainly be a great uprising. Whole forests have been set afire. In just this way, these other financial products allow you to make statements of belief, expectation, and probability about reality, and to anchor those statements with value.

If that's right, then all this aggregated information -- the exchanges, the order books, the interactions market participants have with each other -- is, collectively, bringing reality into crisper focus. But you need to be able to say complex things to have a complex understanding.

500 sats \ 1 reply \ @0xIlmari 11 Mar

Your intuition is spot on.

But allow me to provide some contexts, should you find it useful.

The origin of futures is traditionally traced back to the Japanese rice exchange in XVII century and it's just a tool to solve a very important problem for producers: prices are cyclical and volatile, but they want to secure a predictable price for their produce. So they can sell contracts for delivering produce (that may not have even been sown yet) in the future (harvest), at a price determined now. (Of course, the buyer effectively takes over the cost of carry, plus risk of price change, which is why they charge a premium.)

The price of a future is a fairly straightforward thing - it all revolves around the premium over spot (sometimes under). And with the math tools at the time, you could even calculate things like an annual yield, therefore "inventing" a yield curve for futures.

Options are a seemingly simple evolution - you add an optionality to exercise the contract, so the buyer can back out of a deal that went poorly over time. Simple as it sounds, it immensely complicates the math behind pricing such an instrument.

So while options existed for some time earlier, they were not widely traded because noone knew how to price them accurately. It took a whole new heavyweight branch of mathematics to develop in the 20th century, culminating with work of Black, Scholes and Merton in the 70s, particularly the "dreaded formula", a nasty solution to a nasty stochastic partial differential equation. But that's okay, we had computers at that time, and the market exploded.

After this unnecessary exposition, back to your question.

Futures and options have now become the building blocks in the language of financial engineering which indeed allow you to make simple and complex utterances in the market, such as:

"I think the long end of the futures curve is going to flatten over time" => Sell a long-termed futures spread (a combo of two opposing futures with different expirations)
"I think the price will stay in a $60k-$90k channel over the next quarter. I want to be paid off if I'm right but want to limit my losses if I'm wrong." => Short an "iron condor" (a combo of 4 different options)
"I think the volatility will decrease over the next half-year but I want to stay neutral on price itself." => Short any option (but more commonly a straddle or strangle) while continuously trading the underlying to maintain a delta-neutral position

These utterances may be business-driven (you have a structure of future flows and liabilities that you want to balance with some objective in mind) or purely speculative. But everyone brings their own particular set of needs (long this, short that) to a single marketplace and a single number emerges.

10 sats \ 0 replies \ @elvismercury OP 11 Mar

This is awesome -- looking forward to poking at some of these things. Thanks for taking the time to elaborate.

218 sats \ 6 replies \ @k00b 9 Mar

It makes me wonder what's unique about prices:

we track them to an insane degree - unlike anything else
they're out of our control
there's a direct benefit in predicting prices well and direct loss in predicting prices poorly
because we track them so, our benefits and losses are certain

Could there be other things that make prices so psychologically interesting? Could we enhance priceless things with price-like qualities to create more price-like psychological effects? I'd guess that's what we're getting at with all the bio-tracking.

1186 sats \ 2 replies \ @elvismercury OP 9 Mar

Could we enhance priceless things with price-like qualities to create more price-like psychological effects?

I think this is an important question. Doomberg recently mocked the shit out of efforts to price aspects of nature in an article about natural asset companies. From what I read of the article, it sounds like NACs are unworkable and perhaps ill-motivated, but it's also true that one of the biggest dangers -- perhaps the single biggest one -- of the modern world is that people think that things that don't have prices also have no value. Or they don't really think this, but the machinery of capitalism compels the most powerful entities in the world to act accordingly. Any effort to solve that problem should be taken seriously.

But wrt what makes prices special: imo, it's that they roll up such gigantic and diffuse kinds of value and instantiate that massive vector into a single number that people can think with. Which means that everything pertaining to price carries that complex bouquet with it -- it's inherently compelling, the perfect psychological racoon trap.

218 sats \ 1 reply \ @k00b 10 Mar

it's that they roll up such gigantic and diffuse kinds of value and instantiate that massive vector into a single number that people can think with

Aha! We do love treating a vector like a scalar. Lex interviewed Meta's head of AI who made a related point arguing LLMs will not produce AGI because language is a lossy compressed thought and experience. Whether a scalar or language, compression allows information to travel far and wide.

I've been thinking about the tendency to vector collapse in founder friends; "successful founders do x, so I'm doing x" or "it's really all about y, so I'm doing y." They compress to coordinate with their future self. (Really founders need an element in their vector for nearly every role that a mature organization has. You can probably get away with compressing the vector to 2 or 3 dimensions, but hardly ever just 1 afaict.)

Which means that everything pertaining to price carries that complex bouquet with it -- it's inherently compelling, the perfect psychological racoon trap

This clicks. Prices are like the outline of something seen through a sheer curtain and we are all some sort of peeping tom.

0 sats \ 0 replies \ @elvismercury OP 10 Mar

Please turn this into its own post!

216 sats \ 2 replies \ @ek 10 Mar

I think with "direct benefit" you basically mean tangible and non-abstract consequences. If you can predict prices well, it's pretty clear that you can be rich af and what being rich af means is also pretty tangible for most people since they suffer from not being rich af everyday.

I guess that's why most people don't do bio-tracking: Not living a healthier life has long-term consequences which are abstract and non-tangible until you suffer from them. Bio-tracking makes at least the short-term of living healthier more tangible by comparing numbers. But long-term is still not tangible and abstract.

I am kind of using abstract as the contrary of tangible but I think there is a difference, lol.

100 sats \ 0 replies \ @elvismercury OP 10 Mar

I guess that's why most people don't do bio-tracking: Not living a healthier life has long-term consequences which are abstract and non-tangible until you suffer from them.

It's even more stark than that: in most ways that matter, your brain considers future-you to essentially be an entirely separate person. Which is also philosophically interesting, bc now your own success, based on how 'nice' you are to future you, looks dependent on how thoughtful you generally are to other people.

Hmmm.

Bio-tracking makes at least the short-term of living healthier more tangible by comparing numbers. But long-term is still not tangible and abstract.

Another great aspect of where psychology comes into play -- a number moving, and the rate of its movement, has hedonic implications, even when the number itself is meaningless to you.

100 sats \ 0 replies \ @k00b 10 Mar

I think you're right that health is less tangible/direct than wealth in that health is more like an annuity than a cash prize. They are both fairly abstract as I see them, but I'd rather order take out than mince words.

I think health tracking done right can make you feel the benefit of positive changes.