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So disclaimer from the start, I will likely offend some people with this post. When it comes to investing, I come from the academic side of the street. That is to say, from the ivory tower theory side, and not the nitty-gritty gets your hand's dirty buying and selling side. I fully accept many will sluff of what I am about to say, and that is fine.
So clearly, technical analysts are already into crypto, and I know there is no hope to ever block them from applying their craft to crypto assets. But I can try, right...?
So I think most people have an idea of what a technical analyst is. Essentially someone who uses past trends to try and predict future trends. According to Investopedia, ``A technical analyst, also known as a chartist or market technician, is a securities researcher or trader who analyzes investments based on past market prices and technical indicators.'' I guess most see something like the image in this post — a chart with some weird lines and arrows on it.
So what does this have to do with random walks? Well, first, what is a random walk? Technically it is any process that can't be predicted. The name comes from a famous analogy of a random walk to a drunk person walking. You don't know which direction they will stumble.
The title alludes to the famous book A Random Walk Down Wall Street by Burton Malkiel. The book centers its investment advice around a theory known as the efficient market hypothesis. At a technical level, the hypothesis suggests the market can't be predicted. Or that the market is a random walk. Any stock is impossible to predict. So you are probably seeing where I am going, technical analysis is complete garbage.
So, I know many readings are going to say, wait. I listened to a technical analyst and they were right. Well, as the old saying goes even a broken clock is right twice a day. Just think, if a technical analyst gives advice to a hundred people and it is a coin toss if a stock goes up or down, well they will convince 50% of the people they are correct. It really comes down to the sell job, to convincing everyone there is something real behind the analysis.
Ok, so there is evidence there is nothing to it, and some evidence there is something to it. I don't want to solve the debate right here. What I would actually like to do is impart some intuition why the efficient market theory might be correct, or at least might be more correct than you think.
All technical analysis assumes there are some physical laws that stocks have to obey, right? I mean it is all about how if a stock price moves this way in the past, it is likely to follow a certain path in the future. The simplest way to dispel it is to understand what is truly behind the stock price. It is not a physical object, like a star shooting through space. Sure, things like that have paths, they have to obey physics. Stock prices are determined by what is between people's ears. It is determined by humans. There is no fundamental law as to why something like that would obey any path. The simple idea is, if there really is something too technical analysis, then everyone would do it. If everyone did it, they would buy the stock going up, then it would already have gone up. Then it couldn't have followed the exact path the analyst said it would follow. By the very nature of predicting a path, you change the path.
If technical analysis really was accurate, it couldn't possibly be accurate because the very nature of its accuracy guarantees it won't be. Any accuracy it could have proves it isn't that accurate. Or, I guess no one out there really wants to make money? Could that be true?
So crypto is new and exciting, yet it will have the same ghosts of past markets trying to find a new home. I would prefer a little more skepticism from the outset. If you are trading in crypto look for assets with fundamental value. Something where you really believe in the technology or the protocol behind it. That is why I got into crypto. It was a belief in the underlying technology. Not the underlying path put forth by a technical analyst. A path that has nothing to do with the future, if it did, well it wouldn't be the future.
