The cryptocurrency market is renowned for its extreme volatility. Sudden price surges often attract waves of investors, only for subsequent crashes to cause significant losses. How should we view such fluctuations? Should we go with the flow, or adopt a rational analytical approach? This article explores the issue from the perspectives of probability theory, cryptocurrency cycles, and the influence of human psychology on investment behavior.

Cryptocurrencies are far more volatile than traditional assets. According to 2022 statistics, Bitcoin (BTC) had an average daily volatility of 4.56%, compared to just 1.13% for the S&P 500 index. This extreme volatility means price movements often exhibit randomness, making short-term predictions nearly impossible.

Case Study: Bitcoin’s Rapid Correction in 2021
In 2021, Bitcoin dropped from its April peak of $64,000 to $28,000 by late June. Some investors believed that after consecutive declines, a rebound was "inevitable," leading them to increase their positions. However, the price did not rebound as expected, instead consolidating at lower levels for nearly three months.

Probability Analysis:
These investors fell into the "gambler’s fallacy"—the mistaken belief that short-term trends will "correct" previous movements. They overlooked the fact that short-term cryptocurrency price changes are independent and largely random events.

Frequent traders often underperform the overall market. Research shows that more than 80% of active cryptocurrency traders incur losses over a year.

Reasons:

• Trading costs: Fees and slippage gradually erode profits.

• Misjudging randomness: Frequent adjustments to strategies based on perceived patterns often lead to "buying high and selling low."

Case Study: FTX User Behavior Analysis
In 2022, FTX trading data revealed that over 80% of short-term traders had less than a 20% probability of achieving profits within a 30-day period. The majority of profits were concentrated among a small group of professional traders.

Summary:
Probability theory shows that cryptocurrency price fluctuations are highly random in the short term. Most who attempt to profit from short-term predictions fail. Instead of adopting a speculative mindset, it’s better to participate in the market through more stable strategies.

Bitcoin’s halving mechanism (a reduction in block rewards every four years) is a key driver of cryptocurrency market cycles. This supply-reducing design often causes Bitcoin’s price to experience significant increases within 1-2 years after each halving.

Case Studies: Bitcoin Cycles

• 2012 Halving: Bitcoin rose from $12 to $1,100 in 2013, then fell back to $200.

• 2016 Halving: The price climbed from $400 to $19,800 by the end of 2017, then dropped to $3,000 in 2018.

• 2020 Halving: From $8,800 during the halving to $64,000 in 2021, followed by a decline to $28,000.

Each bullish cycle exhibits clear "bubble effects." For instance, during the 2021 bull market, a surge of retail investors entered the market, driving prices excessively high. On-chain data shows that in 2021, over 60% of Bitcoin holding addresses belonged to new users, many of whom were the first to panic sell during the subsequent downturn.

Bear markets are a common phase in cryptocurrency cycles. From early 2018 to late 2019, Bitcoin prices remained largely subdued. However, this period was also a golden opportunity for long-term investors. Data shows that those who accumulated Bitcoin during 2018-2019 achieved an average tenfold return during the 2021 bull market.

Summary:
The cryptocurrency market exhibits clear cyclical patterns. Understanding and respecting these cycles is key to investment success. Blindly chasing rallies or panic selling often leads to missed opportunities.

Greed and fear often drive dramatic price swings in the cryptocurrency market:

• Greed: When prices rise, investors become overly optimistic and ignore risks.

• Fear: During downturns, investors panic and sell at lows.

Case Study: LUNA Crash in 2022
LUNA reached an all-time high of $119 in April 2022. However, following the collapse of the UST algorithmic stablecoin in May, LUNA’s price plummeted to near zero. Some investors went all-in at the peak out of greed, while others doubled down after a 50% drop, only to face catastrophic losses.

• Loss Aversion: The pain of losing money often outweighs the joy of gains. This causes investors to double down on losing positions, accelerating their losses.

• Herd Mentality: Many follow market trends without considering fundamentals. For example, during the 2021 bull market, investors bought Dogecoin (DOGE) and other assets with little intrinsic value, solely due to rapid price increases.

• Set a Clear Investment Plan: Define entry and exit conditions to avoid emotional decision-making.

• Adopt a Long-Term Perspective: Treat cryptocurrencies as long-term assets rather than quick-profit tools.

• Learn and Reflect: Continuously improve your understanding of market cycles and human biases to reduce emotional trading.

Before investing in cryptocurrencies, accept their high volatility and be mentally prepared for potential losses.

Practical Tip: Only invest money you can afford to lose, ensuring it doesn’t affect your daily life.

Spread investments across different assets to reduce the impact of any single asset’s decline on your portfolio.

The cyclical nature of cryptocurrencies means patience is essential for long-term returns. Avoid frequent trading and wait for the market to return to rationality.

In the face of cryptocurrency fluctuations, we should adopt a rational, cautious, and learning-oriented approach. By understanding short-term randomness through probability theory, identifying opportunities within cycles, and reflecting on our psychological tendencies, we can stand resilient in this enticing yet risky market.

Rational investing is far more valuable than chasing overnight riches.