Finance

Poor investment like watching classic thriller

Published

1 year ago

July 23, 2023

Investors can get swept away by the fear or euphoria of the recent past, and it often costs them financially.

Recency bias is the tendency to put too much emphasis on recent events, such as a stock-market rout, the meteoric rise of bitcoin or a meme stock such as GameStop, for example.

Investor choices are guided by these short-term events, which may be counter to their best interests, as is often the case when selling stocks in a panic.

Recency bias is akin to a common yet illogical human impulse, such as watching Steven Spielberg’s classic summer blockbuster “Jaws,” a 1975 thriller about a Great White shark whose diet revolves more around humans than marine life, and then being afraid of the water.

“Would you want to go for a long ocean swim after watching ‘Jaws’? Probably not, even though the actual risk of being attacked by a shark is infinitesimally small,” wrote Omar Aguilar, CEO and chief investment officer at Schwab Asset Management.

Fans celebrate the June 14, 2005, release of the “Jaws” 30th Anniversary Edition DVD from Universal Studios Home Entertainment.

Christopher Polk | Filmmagic | Getty Images

Recency bias is normal, but can be costly

Here’s a recent real-world illustration.

The financial services sector was among the top performers of the S&P 500 Index in 2019, when it yielded a 32% annual return. Investors who chased that performance and subsequently bought a bunch of financial services stocks “may have been disappointed” when the sector’s returns fell 2% in 2020, a year when the S&P 500 had a positive 18% return, Aguilar said.

Among other examples posed by financial experts: tilting a portfolio more heavily toward U.S. stocks after a string of underwhelming performance in international stocks, and overreliance on a mutual fund’s recent performance history to guide a buying decision.

People need to understand that recency bias is normal, and it’s hard-wired.

Charlie Fitzgerald III

FOUNDING MEMBER OF MOISAND FITZGERALD TAMAYO

“Short-term market moves caused by recency bias can sap long-term results, making it more difficult for clients to reach their financial goals,” Aguilar said.

The concept generally boils down to fear of loss or a “fear of missing out” — or FOMO — based on market behavior, said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner.

Acting on that impulse is akin to timing the investment markets, which is never a good idea. It often leads to buying high and selling low, he said.

“People need to understand that recency bias is normal, and it’s hard-wired,” said Fitzgerald, a principal and founding member of Moisand Fitzgerald Tamayo. “It’s a survival instinct.”

The psychology behind the retail trading frenzy fueling GameStop, Robinhood

It’s like a bee sting, he said.

“If I get stung by a bee once or twice, I’m not going to go there again,” Fitzgerald said. “The recent experience can override all logic.”

Investors are most vulnerable to recency bias, he said, when on the precipice of a major life change such as retirement, when market gyrations may seem especially scary.

How to assemble a well-diversified portfolio

Long-term investors with a well-diversified portfolio can feel confident about riding out a storm instead of panic selling, however.

Such a portfolio generally has broad exposure to the equity markets, via large-, mid- and small-cap stocks, as well as foreign stocks and maybe real estate, Fitzgerald said. It also holds short- and intermediate-term bonds, and maybe a sliver of cash, he added.

Investors can get this broad market exposure by buying various low-cost index mutual funds or exchange-traded funds that track these segments. Or, investors can buy an all-in-one fund, such as a target-date fund or balanced fund.

One’s asset allocation — the share of stock and bond holdings — is generally guided by principles such as investment horizon, tolerance for risk and ability to take risk, Fitzgerald said. For example, a young investor with three decades to retirement would likely hold at least 80% to 90% in stocks.

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Crypto

Bitcoin’s Recovery – the Downturn Is Over

Published

5 months ago

July 16, 2024

The market is currently in a news-driven environment where the prices of cryptocurrencies have been determined by news agenda rather than fundamentals.

Bitfinex analysts have warned crypto investors to be cautious as bitcoin’s (BTC) recovery over the weekend is not a sign that its correction is over; the asset could witness more bloodshed in the near term.

In the latest Bitfinex Alpha report, experts deemed the market’s reaction this week critical, especially as supply alleviated over the weekend could return when traditional markets open.

“No Man’s Land”

Since Saturday, bitcoin has risen almost 10% from $57,600 to $63,000, closing last week in the green. The asset has surged above the 125-day range low of $60,200, which it broke through earlier this month after news of the German government’s massive BTC selling hit the market.

Market sentiment began to improve after reports that wallets linked to the German government were almost empty. However, the positive sentiment may not be sustained for long as the BTC the German authorities moved to trading desks and exchanges are yet to be sold.

While the supply from Germany appears to have been factored into bitcoin’s market price, Bitfinex analysts believe the end of selling pressure depends on how the involved trading desks execute their trades in the coming days.

Although the shift in sentiment underscores the market’s capacity to integrate new information and adjust expectations quickly, analysts think the market’s reaction over the first two trading days of the week cannot be overlooked for two reasons.

First, the low support level in the $60,200 range has now become a potential resistance line. Second, trading patterns over the past three months suggest that weekends are usually favorable for markets, especially on Saturdays when supply pressure seems to subside.

“We are now in no man’s land until we get clear resolution above or below this level,” the analysts said.

A News-Driven Environment

Besides the potential resistance level and three-month weekend trading pattern, the market is currently in a news-driven environment, where the prices of cryptocurrencies have been determined by news agendas rather than fundamentals.

Since selling pressure concerns are not yet completely obsolete due to upcoming Mt Gox creditor distributions, Bitfinex analysts expect such headlines to continue to have some impact on price movements. As such, the analysts urged investors to exercise caution in their trading strategies.

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Crypto

Bitcoin ETFs Saw $300M in Daily Net Inflows

Published

5 months ago

July 16, 2024

BlackRock’s IBIT led with $117.25 million in inflows on July 15, also being the most traded Bitcoin ETF.

The US spot Bitcoin ETFs recorded a daily net inflow of $301 million on July 15th. This extended their winning streak to seven consecutive days amidst a broader market recovery.

None of the ETFs recorded outflows for the day.

Bitcoin ETFs Rake in $16.11B in Net Inflows Since Jan

According to the data compiled by SoSoValue, BlackRock’s IBIT, the top spot Bitcoin ETF by net asset value, recorded the largest net inflows of the day at $117.25 million. IBIT was also the most actively traded Bitcoin ETF on Monday, with a volume of $1.24 billion. Ark Invest and 21Shares’ ARKB came in close behind with net inflows of $117.19 million.

Fidelity’s FBTC experienced net inflows of $36.15 million on Monday, while Bitwise’s BITB saw $15.24 million in inflows. VanEck’s HODL, Invesco and Galaxy Digital’s BTCO, and Franklin Templeton’s EZBC funds also recorded net inflows. Meanwhile, Grayscale’s GBTC and other ETFs, such as Valkyrie’s BRRR, WisdomTree’s BTCW, and Hashdex’s DEFI, registered no flows for the day.

A total of $2.26 billion was traded on Monday. The trading volume for these ETFs was less than in March when it exceeded $8 billion on some days. Meanwhile, these funds have collectively attracted $16.11 billion in net inflow since their January launch.

What’s Next For Bitcoin?

Earlier this month, bitcoin’s price decline was mainly due to fears of massive selling pressure from Mt. Gox and the German government’s BTC sales.

But the assassination attempt on pro-crypto former US President and presumptive Republican candidate Donald Trump at Saturday’s rally seemed to spark a recovery in the world’s largest digital asset, and experts are bullish on the asset’s price trajectory going forward. Bitcoin surged more than 9% over the past week and was currently trading slightly below $64,000.

Veteran trader Peter Brandt discussed bitcoin’s price outlook, suggesting a potential major rally. He referred to a pattern he terms “Hump->Slump->Bump->Dump->Pump” and highlighted that the July 5 double top attempt was a bear trap, confirmed by the July 13 close. He sees a likely continued upward trend but warned that a close below $56,000 would negate this bullish view.

“Bitcoin $BTC could be unfolding its often-repeated Hump…Slump…Bump…Dump…Pump chart construction. Jul 5 attempt at the double top was a bear trap, confirmed by Jul 13 close. Most likely scenario now is that bears are trapped. Close below $56k negates this interpretation”

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Crypto

LI.FI DeFi Platform Exploited, Over $8M Lost

Published

5 months ago

July 16, 2024

PeckShield alert reveals LI.FI’s protocol vulnerability is similar to a March 2022 attack, with the same bug recurring.

The decentralized finance (DeFi) platform LI.FI protocol has suffered an exploit amounting to over $8 million.

Cyvers Alerts reported detecting suspicious transactions within the LI.FI cross-chain transaction aggregator.

LI.FI Issues Warning After $8 Million Exploit

LI.FI confirmed the breach in a statement on July 16 via X: “Please do not interact with any http://LI.FI powered applications for now! We’re investigating a potential exploit.” The team clarified that users who did not set infinite approval are not at risk, emphasizing that only those who manually set infinite approvals seem to be affected.

According to Cyvers Alerts, more than $8 million in user funds have been stolen, with the majority being stablecoins. According to on-chain data, the hacker’s wallet holds 1,715 Ether (ETH) valued at $5.8 million and USDC, USDT, and DAI stablecoins.

Cyvers Alerts advised users to revoke relevant authorizations immediately, noting that the attacker is actively converting USDC and USDT into ETH.

Crypto security firm Decurity provided insights into the exploit, stating that it involves the LI.FI bridge. “The root cause is a possibility of an arbitrary call with user-controlled data via depositToGasZipERC20() in GasZipFacet, which was deployed 5 days ago,” Decurity explained on X.

“In general, the risks behind routers, cross-chain swaps, etc. are about token approvals. Raw native assets like (unwrapped) ETH are safe from these kinds of hacks b/c they don’t have approvals as an option. Most users & wallets also no longer do “infinite approvals” which gives a smart contract total control on removing any amount of their tokens. It’s important to understand which tokens you’re approving to which contracts.

This dashboard looks for all transactions of a user that intersects Lifi. Not all of these transactions indicate risk- but you can see how, broadly, integrations & layers of tech (like how Metamask bridge uses Lifi on BSC) can complicate how users do or don’t put their assets at risk. Revoke Cash is the most well known approval manager app.

But it’s also good security practice to simply rotate your address. New addresses start with 0 approvals, so starting fresh by moving your tokens to a fresh address is another good security practice.” – commented Carlos Mercado, Data Scientist at Flipside Crypto.

Recent Exploit Mirrors March 2022 Attack

Further analysis by PeckShield alert revealed that the vulnerability is similar to a previous attack on LI.FI’s protocol that occurred on March 20, 2022. That incident saw a bad actor exploit LI.FI’s smart contract, specifically the swapping feature, before bridging.

The attacker manipulated the system to call token contracts directly within their contract’s context, making users who had given infinite approval vulnerable. This exploit resulted in the theft of approximately 205 ETH from 29 wallets, affecting tokens such as USDC, MATIC, RPL, GNO, USDT, MVI, AUDIO, AAVE, JRT, and DAI.

“The bug is basically the same. Are we learning anything from the past lesson(s)?” PeckShield Alert said in a July 16 X post.

Following the 2022 incident, LI.FI disabled all swap methods in its smart contract and worked on developing a fix to prevent future vulnerabilities. However, the recurrence of a similar exploit raises concerns about the platform’s security measures and whether adequate steps were taken to address the vulnerabilities identified in the previous breach.

LI.FI is a liquidity aggregation protocol that allows users to trade across various blockchains, venues, and bridges.

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