Bitcoin
Out of context: Reply #1020
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- monNom0
@yuekit
As prices start to rise, fewer people are willing to sell. If they sold, they would miss out on future gains. At the same time, those rising prices attract outside interest and outside money starts trying to buy in to the rising asset. This bids up the price of the few available coins that holders are willing to sell, which in turn leads to rising prices. Go back to step 1. Rising prices become a self-fulfilling prophecy
Now, as those prices are rising faster and faster, fewer and fewer people are willing to sell, and fewer people can afford to buy at the prevailing price, so the market becomes more thinly traded (Less buyers).
At some point, an external shock, or a change in sentiment encourages some owners to sell. If they dump a large position, they can saturate all the current buyers at a given price, and if they want to continue selling, those sellers will need to lower their price until they find additional buyers at the new price-level.
If other buyers start to see that the price is going down, they may be reluctant to buy in for fear of losing their money, which reduces buyers further, and so the price tends to fall further. Other's see the lower price and start to sell to lock in their gains, but as there are few buyers, and a lot of coins now hitting the market, the price starts falling faster to find the point where someone is willing to buy at again. Falling prices become a self-fulfilling prophesy.
That's basically how you end up with a bubble, and how a bubble pops. It has nothing to do with the quality of the underlying technology/asset, it's all about momentum, greed and fear.
Any asset that can double in a week can get cut in half in an hour.
- Imagine a world where dollars ceased to exists. There are many other currencies that have logic built in. They have ability to expire, ...zaq
- ..., ability to be spent on food or on clothing. or perhaps you can pay only rent with them. You can transform your own energy into coins or use green energyzaq
- to generate coins.zaq
- Thanks monNom...I guess the question is at what point does it actually reach saturation.yuekit
- Also when you say fewer people can afford to buy, would this be true with cryptocurrency? Given that it's infinitely divisible unlike say real estate.yuekit
- that's the thing, it's unknowable, and not at all rational. You can't predict the future. Maybe never? Maybe right now?monNom
- But it's good to know that when prices start rising exponentially, this is what's happening, and it nearly always snaps back faster than it went up.monNom
- Correction: it's actually not infinite, but can be divided down to 8 decimal points. Which allows you to buy a tiny amount right now.yuekit
- As for the affordability thing, it may be more of a willingness/capabili... If you want it but can't afford it (you're tapped out).monNom
- vs you're unwilling to buy at the current price. At some point everyone is either tapped out or unwilling.monNom
- The divisibility doesn't matter. It's the change in price over time that you care about. 100 pennies is the same as 1 dollar. a doubling yeilds the same.monNom
- Yeah I was talking more about the ease of continuing to buy as the price goes up.yuekit
- With a real estate bubble, an increasing number of people would be unable to invest at all as the price skyrockets. With cryptocurrency, you are still able buyyuekit
- you just get a smaller fraction.yuekit
- For RE, you can form a corporation, sell shares that allow fractional ownership. For bitcoin, an ETF/Mutual fund can do the same. You can always divide things.monNom