It’s the year 2011.
The word ‘Bitcoin’ was used by Hackers and Tech enthusiasts who argued over if they should order Pepperoni or Mushroom Pizza with this newly minted, magic internet money.
No one knew where it came from, no one knew where it would go. But for that point in time, this mystical internet money served two purposes. Pay for Pizza or Pay for Dope.
Fast Forward to 2018.
Cryptocurrency has a global market cap of $800 billion.
Let’s read that again. Eight. Hundred. Fricking. Billion.
Bitcoin spawned a whole new industry forcing the world’s leaders and financial markets to sit back, take note, and devise their own strategies on how to enter this alluring, multi-billion dollar market.
There are a multitude of coins and start-ups with their own tokens, backed by solid teams and technologies that aim to change the world bit by bit, block by block.
There’s also crypto-exchanges, where you can trade BTC for other currencies and make use of the price swings and market sentiments to make cold hard cash.
However, any one who has spent an hour tracking crypto prices is bound to notice price swings that certainly render the market to look intimidating and scary.
Such swings never occur in the traditional markets. 10% swings in the asset, commodity, and equity markets are rare, blue moon occurrences. The traders usually pop the most expensive champagnes on such rare days.
But a 10% change is considered cute in crypto.
Crypto traders are used to looking at 50% changes in a day, and consider it as a perfectly normal behavior of the market.
To an average person, this is very volatile and hence most people stay away from cryptocurrencies, thinking of the absolute worse to happen and not touching with a 10 foot pole an asset that swings so wildly.
But such swings also ring the ears of people (like me) who smell opportunity. These swings and gambles took me from $1000 to $29000 within the span of a few months.
Traders and risk takers smell opportunity. And most importantly, they smell money.
Generally speaking, people are skeptical of anything they aren’t familiar with, or hasn’t proven itself. It’s the small bunch of people that believe in it that help evolve the world. After all, an artist is nothing without a keen audience.
Every coin has two sides to it, and so do Virtual coins, effectively dividing the market sentiment into either highly optimistic, or highly pessimistic.
Optimism because people usually prefer to talk highly of things they are invested in, just like the popular saying “Put Your Money Where Your Mouth Is“, which is perfect for the early adopters of Bitcoin.
Pessimistic because Crypto is very volatile and is a Ponzi scheme where no one will benefit. Haha. While I agree it is highly volatile, the market shows zero signs of being a Ponzi Scheme. There are some rotten apples in this basket thou, as coins like Bitconnect are proven ponzi schemes, but these few elements are needles in the giant trans-formative haystack that is the Crypto Market.
Before we get guns blaring out and walking away from a huge opportunity, let’s take into consideration an important point —
Anything that trades in a free market without regulations will be highly volatile.
To put things into retrospect, take a look at the unregulated Gold market when it launched way back in 1969.
The red outlined box plots change in percentage of Gold prices, when the market was still unregulated and in that sense, “free”. Compare this to the right side of the chart, and Bitcoin displays a similarly trajectory, only magnified in nature.
To single out one factor that causes such volatility is difficult, as the market is a product of nearly infinite number of factors that can cause prices to move significantly in one direction or another. This can include such things as economic data, geopolitical events and market sentiment, among a myriad of other factors.
But, it is clear that such volatility is not indicative of anything negative.
Every strong market goes through significant volatility in it’s earliest stages.
Gold, stocks, energy. Everything.
Bitcoin has the potential to match the volatility of major fiat currencies
Bitcoin did not do too bad last year compared to fiat currencies. In average, daily returns were positive, volatility was still the highest, but an almost 8% drop in GBP value does not seem a lot better than the 15% drop of BTC.
Table: Currency versus USD statistics for 2017
Bitcoin volatility is also driven in large part by varying perceptions of the intrinsic value of the cryptocurrency as a store of value and method of value transfer.
A store of value is the function by which an asset can be useful in the future with some predictability, it can also be saved and exchanged for some good or service in the future.
A method of value transfer is any object or concept used to transmit property in the form of assets from one party to another.
Bitcoin’s volatility at the present makes it a somewhat unclear store of value, but it promises nearly friction-less value transfer. Since these two drivers of the current spot price of Bitcoin vary against the dollar and other fiat currencies, we see that Bitcoin’s value can swing based on news events much as we observe with fiat currencies.
There is a constant in each of these situations. In any market move, whether up or down, there is a significant difference between supply and demand.
Simply put, “supply” is the total number of coins in the market, that people want to sell and “demand” is the coins that people wish to buy. When there is a difference between these two groups, the prices in the market move.
The greater the disparity between demand and supply, the more significant the move will be.
A fisherman named Chao catches a rare, yellow-fin trout, and announces in the town market about this delicacy. Immediately, the town’s 5 star hotels, Michelin restaurants, and wannabe celebs start bidding at higher prices for this particular trout, and at the end of it, it sells for 77% more than a regular trout.
What really happened here ? Was the meat better ? Did it swim to mars and come back ? Was it’s skin adorned with Diamond ?
I don’t know, and neither did the buyers. The only information was about how rare and huge that particular trout was, and the perceived value, the need drove positive sentiments for owning a piece of said fish.
The next day this little incident repeats itself, and the prices soar even higher to 103% compared to a regular trout. (I still can’t find the diamond.)
After a few days, other fishermen observe the value of this particular fish and the kind of profits it generates. They get together and decide to follow Chao’s boat the next day, in order to catch some of this profit churning fish themselves.
The next day, the fishermen slyly follow Chao to the point in the ocean when he catches his priced trout. To their surprise, he fishes until he catches a relatively large trout, and proceeds to paint the fins yellow….
Where were the diamonds after all ? In your head hehe.
The perceived value of Fish, or a coin, determines the market’s movement for that day. If buyers believe they hold a superior coin, they continue to hold until it reaches a higher price in the future. However, infinite factors could dictate a group of people to sell, which creates a ripple effect on that coin’s market, leading to excessive sellers and hence, a fall in price.
Similarly, the reason for any increase in coin price is that more people are looking to buy that particular coin than to sell it.
This difference, this volatility, between the supply and demand causes crypto price to rise and fall until an equilibrium is reached.
And since cryptocurrency exchanges deal on a global level, we are looking at changes in price every minute, every second, as the world’s investors and traders constantly yet indirectly decide market prices.
This exact scenario occurs when the overall market moves: there are more buyers/sellers of coins than sellers/buyers, sending the price of companies up/down along with the overall market.
After all, the market itself is just a collection of individual coins.
The Crypto market is a complex, interrelated system of large and small investors making uncoordinated decisions about a huge variety of investments. “The market,” so to speak, is not a living entity, rather, it is just a colloquial term for the collective values of individual coins, backed by solid technologies.
This begs a new question: What creates more buyers or more sellers?
Confidence in the stability of future investments plays a large role in whether markets go up or down. Investors are more likely to purchase the coins if they are convinced it would rise in the future and result in the ultimate goal of every armchair investor, “lambo”.
However, if there is reason to believe the coin will perform poorly, there are often more investors looking to sell than to buy.
Reasons include :
For example, the largest single-day decrease in the history of Bitcoin took place on Feb 7th, 2014. The market “lost” (traded down) 49% in value overnight.
What I am referring to is nothing other than MtGox’s fall. After serving the Bitcoin community for multiple years, acquiring trust and support from traders, the exchange started halting withdrawals. Shortly later, they released a statement that a large-scale hack had occurred. On the 7th of February, the exchange halted all withdrawals, revealing that the hackers had absconded with more than 850,000 Bitcoins. Whether or not the loss was a result of the hack or due to poor bookkeeping on the exchange’s behalf is a matter of open debate, but there’s no doubt that the event negatively impacted the price of Bitcoin for several years.
Like many unknown commodities, cryptocurrencies are subject to market risks and price volatility. This aspect is seen by some an a HUGE opportunity, while others want to keep as far as they can.
Thus, it is very essential to not throw around money based on what a YouTuber, Instragrammer, or pseudo- celebrity said. It is likely they have vested interests in those projects, which is why people have heard more about Tron or Bitconnect, instead of a Waltonchain or Loopring.
By understanding the market risks, and educating ourselves to make smart investment decisions, there is a chance to make money while the market is still at it’s nascent stages.
Crypto-assets, for the longest time to come, will always be an unknown commodity. They simply don’t have the technical indicators of the traditional stock market which are usually used to analyze an asset.
Most stocks or bonds can be analyzed based on some trait of the instrument. Stocks have P/E ratios and dividends, for example, while bonds have return percentages. Crypto-assets have no fundamentals that can be easily measured.
Investing in the right coins, the right underlying technologies, and the right team will go a long, long way in terms of future returns.
And just like the traditional markets, a few companies become worth Billions, a few become unicorns and fizzle out, while a few show great promise and meet with an end, or a corporate takeover a few years down the line.
Hence, like any stock, we can’t expect every coin to be a constant part of the portfolio permanently.
There’s some fish you hang as a trophy, some you put in your aquarium, and some you sear with olive oil in a pan.
For the ultimate resource on your first steps in to the crypto market, plus your first investments, and how to invest, and in WHAT to invest, check out my guide —
These exact steps took me from $1000 to $29000 in a few months.
The only way to make it big is by learning how to catch trout yourself. See you on the other side. Cheers !
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Articulating my thoughts from over the years and super stoked to write about Blockchain, trading, cryptocurrency and life.
I aim to bring Cryptocurrencies to the masses in a well refined, easy to understand manner. Being complicated helps none and neither does the biased media.
Yes, I think the system is a massive lie and it is about time to change that.