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Max pain theory was talked about a lot in previous cycles when Bitcoin volatility was more exaggerated than it is today. The idea comes from options trading where at expiry the price will gravitate towards the level where market makers can extract the maximum value from traders.
This was often seen in liquidation cascades and wicks to take out stop losses and grab liquidity where available. Market makers could push prices to extremes for short periods (often seconds) and recoup their positions using the hard stops and limits from the perps on centralized exchanges. Today the market has matured but we are seeing the first really significant pullback in Bitcoin price action for some time. The market dropped just over 30% from the highs in January, led partly by tradfi markets and Trump’s trade wars. Altcoins have suffered far worse with ETH down 50% and some memecoins down 95%+ since Murad’s supercycle thesis. For most market participants it will be the biggest losses they’ve ever encountered. Portfolios reach new highs during bull markets and when the market corrects, the losses are greater than ever encountered.
This type of pain can be difficult to deal with, when seeing a big number as the dollar amount lost in a day, week or month. The only way it has been possible to lose money with Bitcoin in the long term is to buy high and sell low. If you had a plan before this period of pain, stick with it. Trading to escape an emotional reaction is always sub-optimal. The importance of zooming out and maintaining perspective cannot be overstated. Historically, every significant Bitcoin correction has eventually led to new all time highs. While past performance does not guarantee future results, it is a reminder that volatility is an inherent part of the market cycle. if you are going to hold crypto, expect periods of max pain At times like these it’s clear how hard it is to “be greedy when others are fearful and fearful when others are greedy”. Executing a contrarian strategy is challenging on many levels and hitting the buy button during a period of fear goes against our natural instincts for risk aversion. The current downturn will shake out weak hands and overleveraged players, paving the way for a healthier market structure. Historically, corrections have served to reset sentiment, consolidate price action, and build a stronger base for the next move higher. If it’s over for another four years then so be it but I believe the technology for decentralized finance and web3 will become fundamentally important to society and valued eventually by Wall Street. Having a good understanding of the tech and potential of an investment can definitely help with conviction during difficult periods. Stay safe, keep building, don’t get hacked and embrace the pain of being a crypto hodler, it wont always be like this ♥️
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