If you're not familiar, the Wall Street cheat sheet explores the change in investor sentiment throughout a cycle. Euphoria is the "I am a genius! We're all going to be rich!" phase of the cycle.

Let's take a closer look.

To better understand Euphoria, it's helpful to look at market sentiment in general. Market sentiment is simply the collective attitude of market participants toward the market.

Market sentiment depends on the level of optimism or pessimism among participants. If most participants are optimistic, more people will buy, creating an upward trend.

On the other hand, if the collective attitude of most market participants is that prices will fall, assets depreciate, and people start selling to reduce losses.

According to the theory of "reflexivity," market sentiment is self-reinforcing. It suggests that a "feedback loop" exists in which the participants’ perception of the market affects the market’s direction which in turn alters participants’ perception. In this way, prices become more and more detached from reality. So, a rising market will attract buyers, leading to further price appreciation.

And, as part of the "herd behaviour" phenomenon, investors typically follow what they see other investors doing rather than relying on their own research.

The movement of a market is just as much a social phenomenon as it is a simple case of supply and demand.

If the price of Bitcoin jumps a significant amount in a short amount of time it is likely that the price will continue to increase for a period after the initial move. The same is true in the other direction.

As we mentioned above, the Wall Street cheat sheet explores the change in investor sentiment throughout a cycle. Euphoria is the "I am a genius! We're all going to be rich!" phase of the cycle.

In general, when the market starts going up, you see more and more people starting to get interested in that asset.

Why?

Simply because prices are going up and they see that other people have made money. Someone might be able to make money at the start. This is where you get more knowledgeable people coming in and doing their research.

However, toward the end of a cycle is when you start to see ‘euphoric’ sentiment. At this point, people's only thesis is that 'this asset has gone up, so it will continue to go up'. This is the weakest type of thesis.

At peaks and bottoms, we tend to reach a point where anyone who wanted to buy has already bought it. So you no longer have any new buyers and the demand is gone.

As there are no new buyers, there are many sellers, because, for someone to buy, someone else has to sell to them. When we run out of buyers, prices start falling.

The most recent buyers (whose only thesis was ‘this asset is going up and that's why I'm buying it now’), start to panic as soon as the price goes down by ~5-10%. Their weak thesis is being tested.

The price goes down and they sell, which causes the price to fall a little further. This, in turn, causes more people to sell right until the price reaches an attractive level for other investors that have been interested to get into the asset at X price. This is where we see the bounce.

Near the bottom, we reach a point where no one else is selling. Anyone who wanted to sell has already sold.

Click here to learn more about Reflexivity in the crypto market.

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