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Apply Behavioral Science If You Want to Invest in Cardano

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Long an intriguing alternative cryptocurrency, Cardano (CCC:ADA-USD) claims to be a proof-of-stake network “first to be founded on peer-reviewed research and developed through evidence-based methods.” One of the benefits for ADA-USD, then, is that its mining process is pound-for-pound more efficient than what you might find in proof-of-work protocols.

A concept coin for Cardano (ADA).
A concept coin for Cardano (ADA).

Source: Shutterstock

My suspicion, though, is that few people are buying Cardano for its environmental impact or lack thereof.

Instead, at a time when so many popular altcoins are trading for double-digit prices or greater, Cardano’s combination of fundamental value — that is, the underlying blockchain’s ability to foster multiple decentralized applications — and single-digit prices attracted a new generation of speculators.

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True, many if not most analysts dismiss such trades as flavors of the week. Certainly, ADA-USD has shown significant movements to the upside and down. However, what makes Cardano special is that it has been able to sustain the enthusiasm.

Recently, Bloomberg ran a report declaring that Cardano’s ADA token (technically, Coinmarketcap.com lists it as a coin) is the world’s third-largest cryptocurrency at time of publication. For clarity’s sake, as I’m writing this, Binance Coin (CCC:BNB-USD) pipped it for the third slot.

Still, it’s a tight race. Binance Coin has a market capitalization of $70.7 billion, whereas Cardano has a valuation of nearly $68 billion. One modest move and Bloomberg can be proven right yet again. It now begs the question: should investors consider adding ADA-USD to their portfolio?

To me, it’s a relative inquiry. If you’re asking me whether Cardano is a solid investment in light of truly speculative cryptos — of which there are thousands — than ADA makes sense. Again, the proof-of-stake protocol is intriguing because a) other blockchain projects are making the transition and b) Cardano already started off with the protocol.

The Behavioral Difference for Cardano

But what if this is your first rodeo with cryptocurrencies? Would ADA be a worthwhile wager or should you stick with established digital investments like Bitcoin (CCC:BTC-USD)?

To better answer this question, it’s important to appreciate the behavioral differences between Cardano and a benchmark investment you’ll find in the stock market. Interestingly, investors can extract meaningful insights when comparing week-over-week changes (from September 2017 onward) in price relative to volume for ADA versus the popular exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

Principally for Cardano, when volume levels increase on a weekly basis, this trend usually corresponds to higher changes in price. Conversely, when volume declines, the price also tends to decline. In my opinion, this dynamic is characteristic of a classic growth play. When the crowd is moving, the price is likewise robust. When the folks are panicking out, the price suffers for it.

You might think that’s an obvious statement that corresponds with any other investment but that’s actually not the case. For the SPY ETF, higher changes in volume barely correlate with higher price changes (52% bullish sessions over 48% bearish sessions). On the other end, lower changes in volume correlate with higher price changes (73% bullish sessions over 27% bearish).

Behavioral trading comparison between Cardano and SPY ETF
Behavioral trading comparison between Cardano and SPY ETF


Click to Enlarge

Source: Chart by Josh Enomoto

From my interpretation, the SPY ETF behaviorally aligns with a value play. During periods when market activity is at a relative lull, SPY investors tend to accumulate. That makes sense as this fund is tied to the benchmark S&P 500 index, a trustworthy benchmark. In other words, you can buy the SPY’s dips with confidence.

But that’s not necessarily the case with Cardano. When people panic out of their ADA holdings, the situation can get very ugly, very quickly.

Know Your Market

While I’m hesitant on providing buy/sell ideas for volatile assets like cryptocurrencies, what I can tell you is what advertising experts say to their clients all the time: know your audience. If you don’t know who you’re targeting, you’re going to end up frustratingly wasting a ton of time and money.

It’s the same principle with Cardano or any of the other cryptos. Specifically for ADA, you must appreciate that historically, this is a sentiment-of-the-time driven trade. While proponents love talking about buying the dips, the data shows that there’s not a whole lot of dip-buyers for ADA.

Instead, when it dips, they slip — as in they slip their way out of there and onto something else. Knowing this can at least help you focus your trading tactics and strategies.

On the date of publication, Josh Enomoto held a LONG position in ADA and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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