Retail investors are not market noise—they are the market’s main theme.
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Retail investors are not market noise—they are the market’s main theme.
In markets where retail investors congregate, emotional deviations are predictable, offering opportunities for both bulls and bears.
Navigating Web3 tides with focused insightsBy Theclues
I. The Entrenched Cognitive Trap
For a long time, I held an ingrained mental hierarchy of market difficulty: Commodities > A-shares > U.S. equities > Crypto. This ranking appears logically rigorous:
- Commodities demand deep industry research, macroeconomic analysis, and geopolitical understanding.
- A-shares are rife with policy-driven博弈 and information asymmetry.
- U.S. equities represent a mature market where institutional pricing efficiency is high.
- Crypto is the youngest market—transparent in information and thus “simplest.”
Yet this logic harbors a fatal flaw: conflating market complexity with investment profitability. The result? Hesitation before “complex” markets and superficial engagement in “simple” ones.
II. Reflections at the End of 2025
The markets deemed “simplest” have delivered the highest returns, while those considered “most complex”—requiring deep research—have proven exceptionally difficult to navigate.
We used to ask: “How much domain expertise does this market require?”
Now we must ask: “What determines price in this market?”
III. Retail Investors Are Not Noise—They Are the Main Theme
The Misleading Narrative of Traditional Financial Education
From day one of learning about investing, we’ve been steeped in the “rational market” narrative:
- Prices reflect fundamentals.
- Markets ultimately correct mispricings.
- Retail investors are noise traders who will be disciplined by the market.
This narrative may hold in institution-dominated markets—but it completely breaks down in retail-dominant markets.
The true operating logic of retail markets: In crypto, meme coins, and A-share thematic stocks—where retail investors dominate—prices are not determined by fundamentals but by collective retail sentiment.
This is not a “flaw” of the market—it is its defining characteristic. When one million retail investors simultaneously believe a token will rise to $1, their buying activity itself pushes the price upward—and rising prices attract even more retail participants. This is George Soros’s concept of reflexivity.
Key cognitive shift:
- Before: Retail irrationality was an error to be corrected.
- Now: Collective retail behavior is the strongest driver of price.
In retail markets, sentiment isn’t noise interfering with price—it is the decisive variable determining price.
IV. Reflexivity: The Core Mechanism of Retail Markets
What is reflexivity? Simply put, Soros’s theory states: perception shapes reality, and reality in turn reinforces perception.
In retail markets, this feedback loop is amplified to the extreme: price rises → retail notices → FOMO drives new entries → price rises further → more FOMO → price accelerates upward.
This cycle does not halt simply because “valuations are excessive,” because retail markets lack stable valuation anchors.
Why is reflexivity weak in institutional markets?
In institution-dominated markets like U.S. equities:
- Valuation models constrain price (P/E, DCF, peer benchmarks).
- Quant strategies automatically arbitrage deviations (mispricing is instantly corrected).
- Fundamentals ultimately matter (a miss on earnings triggers sharp declines).
Reflexivity is suppressed by rational forces, limiting both upside and downside.
Why is reflexivity strong in retail markets?
In retail-dominated markets like crypto and meme coins:
- No consensus valuation framework exists (“What’s a meme coin worth?”—nobody knows.)
- No effective arbitrage mechanism exists (retail won’t sell just because “valuations are too high”).
- Sentiment can decouple from fundamentals for extended periods (until sentiment exhausts itself).
Reflexivity can persist to absurd extremes—producing astonishing volatility.
V. The Source of Predictability: Sentiment Is More Regular Than Fundamentals
The unpredictability of fundamentals: Researching commodities or U.S. equities requires forecasting:
- Macroeconomic trends (What will the Fed do?)
- Industry supply-demand shifts (When will demand for new energy explode?)
- Corporate performance (Will next quarter’s earnings beat expectations?)
These variables brim with uncertainty—even top-tier institutions frequently err.
The predictability of sentiment: In retail markets, you need only understand one thing—human nature. Retail sentiment follows highly predictable trajectories:
- Neglect Phase: A new phenomenon emerges—most people ignore it.
- Curiosity Phase: A few discuss it—price rises modestly.
- Trial Phase: Early adopters enter—price rises steadily.
- FOMO Phase: Social media floods with chatter—price surges.
- Mania Phase: Mass participation—“financial freedom” dominates feeds.
- Panic Phase: Price crashes—“I’ve been scammed!” echoes everywhere.
- Despair Phase: Silence reigns—rumors of zero value circulate.
This cycle repeats with every trend—the only differences are duration and magnitude. Sentiment evolution is far easier to track and forecast than fundamental change.
VI. Both Long and Short Offer Opportunity: Volatility Itself Is Value
Within traditional investment frameworks:
- Identify great companies → hold long-term → wait for value realization.
- Core strategy is “going long”; shorting is seen as speculative.
This works well in secular bull markets (e.g., U.S. equities), but represents massive opportunity cost in volatile retail markets.
Two-way opportunities in retail markets: In retail-dominated markets:
- Upside certainty: When sentiment turns positive, reflexivity drives price higher.
- Downside certainty: After sentiment peaks, collapse is inevitable.
Certainty is equally high in both directions.
Key insight: In retail markets, don’t fixate solely on “up”—instead, grasp the pendulum of sentiment: its full swing from one extreme to the other.
VII. Why Focus on Retail Markets?
The institutional-market dilemma: In institution-dominated markets (U.S. equities, commodities):
- Information barriers: Retail lacks access to deep industry intelligence and primary research data.
- Research depth: Institutions field professional teams—retail cannot compete.
- Pricing efficiency: Arbitrage quickly corrects mispricing—leaving little room for excess returns.
Here, retail faces absolute disadvantage. Equality in retail markets: In retail-dominated markets (crypto, meme coins):
- Transparency: On-chain data is public; social media sentiment is trackable.
- Sentiment-driven: No deep research required—understanding human nature suffices.
- Massive volatility: Reflexivity creates enormous long and short opportunities.
Retail and institutions start on equal footing—or even with retail holding greater agility.
The essential distinction:
- Institutional markets reward information advantage and research depth (I have no edge).
- Retail markets reward understanding of human nature (everyone has a chance).
VIII. A Fundamental Cognitive Leap
From “choosing markets” to “choosing participant groups”: Which markets’ prices are driven by sentiment? Where do retail investors dominate?
- Target “predictable” markets—shift focus from “analyzing assets” to “understanding sentiment.”
- Where in the sentiment cycle are retail investors now?
- How long can reflexivity persist?
From “seeking value” to “following certainty”:
- Identify inflection points in retail sentiment—and ride reflexivity.
- Grasp the market’s underlying operating rules.
IX. Conclusion: Redefining Investment Difficulty
Investment difficulty lies not in how complex a market is—but in whether its price drivers are predictable. In retail-dense markets, sentiment deviations are predictable—and both long and short positions offer opportunity.
This is neither “dimensional warfare” nor “harvesting韭菜”—it’s understanding how markets truly operate:
- In institutional markets, rationality dominates.
- In retail markets, sentiment dominates.
The essence of investing is not finding the “right” market—but identifying the “right” logic.
Once we let go of obsession with “professionalism” and “complexity,” and instead embrace “sentiment” and “reflexivity,” we recognize what true certainty means.
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