If you’re just starting out in your journey, trying to answer ‘what is this Bitcoin thing’, then this one’s for you.
Reflexivity in your muscles is like when you accidentally touch something hot — your muscles contract super fast to pull your hand away, keeping you from getting burnt, without you even thinking about it. I once stopped a kid from crossing the road and being run over – my muscles knew what to do when I wasn’t even aware of it.
In the world of investing, George Soros made word ‘reflexivity’ pretty famous. In my studies I remember being told markets are about ‘price discovery’, and reaching ‘equilibrium’. George, on the other hand, captured the idea that markets are also about how people think and feel. He used this theory on reflexivity famously betting against the British pound in 1992 (known as Black Wednesday), where he saw that the market’s perception of the pound’s value wasn’t aligned with fundamentals, which led to a self-fulfilling prophecy when the pound was devalued.
It’s not common to find ‘reflexive’ bets in markets, but we may have one with Bitcoin.
A closer look at reflexivity:
  • Feedback Loop: There’s an invisible pendulum that swings between what people think and what the market actually does. 
    • Perception: What people believe, can actually push prices up or down. This is why passive investing works – we all believe the entire market’s going to rise, so we invest in the entire market.
    • Reality: The belief of the masses, gives birth to a market reality, but it often leads to chaos, or sharp ‘corrections‘.
  • Self-Reinforcing Cycles: Output becomes input, the head eats the tail, the end is just before the beginning….
    • Boom: When prices increase, FOMO solicits maximum engagement from all market participants.
    • Bust: But when prices drop a little, people get nervous, and the cycle enters the next phase.

“The higher Bitcoin’s price goes, the less risky it is…’ Anthony Pompliano

Bitcoin is a ‘reflexive’ asset because it’s value, is influenced by a feedback loop where increasing prices attract more buyers due to the belief in its future value, which in turn can drive prices higher, independent of the fundamentals.

Bitcoin started from $0, but at the time of writing, it’s around 6 figures USD. The more valuable this asset becomes (currently equivalent to the 9th largest publicly traded company), the more likely it won’t go to $0 – in other words, the higher the price, the safer it is. This can be further backed up by the Lindy effect, where the longer the technology exists, the longer it persists.

Bitcoin isn’t like traditional investments, and technically, it’s not an investment at all. It’s a savings technology in the form of digital scarcity.

As it’s success [partially] comes from new participants joining in, it can be likened to a pyramid or Ponzi scheme yes, however, by definition that’s not technically possible. There’s no ‘mastermind’ calling the shots from behind a green curtain. Central banking on the other hand…

Tactical Investing: If you get how reflexivity works, you might start to notice:
    • Fads, that become trends, that convert to new realities the numbers never saw coming. 
    • If you’re early (if you’re the right personality type?!) you do well, but it’s risky if you’re the type normally late to the party. Spotting reflexive opportunities, and acting upon them correctly, are two different skill sets.

Policy Changes = Wildcard: Decisions by governments or central banks can mess with what everyone thinks, making market outcomes trickier to predict.
  • Earlier this year, for example, I was surprised to see the SEC (Securities and Exchange Commission) approving a spot Bitcoin ETF (Bitcoin that you can buy within traditional investment products and platforms)
  • Recently, US president elect Donald Trump and his pro crypto stance, led to a significant rise in interest in this space. Even more recently, rumors of countries starting Bitcoin reserves (other than the US) are starting to pick up.
  • Clearly, central banks around the world did not see Bitcoin coming, and their attempts to follow suit in the form of CBDC’s, make or may not be successful.
Reflexivity, adds a layer of complexity to mix. The value of Bitcoin becomes more apparent as time progresses (digital currency, digital gold, digital trust…), but over time also, perceptions and beliefs with change, as will attempts to interfere with it.
Often your mental muscles react to protect you from danger without conscious thought. There’s an intellectual muscle that protects us all from being scammed or conned into something stupid – this is a very important defense mechanism, that can occasionally protect you from good things, too. As you go through the process of learning about Bitcoin, you will want to own some of it. The reflexivity applies to Bitcoin at this point – remember that many people have gone before you (which is why price is rising), and there are many more behind you.
So – is it early days with you and Bitcoin? If so, or if you haven’t jumped on board yet, start with studying why this is special out of all the other cryptocurrencies. Once you get that part figured out, take this free online course I built for you in partnership with Easy Crypto. Learn about the benefits of setting up your own digital wallet, and dollar cost averaging into Bitcoin until it’s equal to about 1-3% of your own portfolio. Take the course to learn more and for advice around estate planning in this area, reach out for a free 15-min phone call.