The Greatness and fall of Bitcoin: Cryptocurrencies, Speculation, Psychology

The Greatness and fall of Bitcoin: Cryptocurrencies, Speculation, Psychology

I think it would not be an exaggeration to say that the world, unfortunately, besides love, is ruled by greed and fear. Many decisions that radically influenced the fate of the world were made under the pressure of greed or fear. But we will not get into political matters now, but talk about stock investment and speculation, and how greed and fear determine the pricing processes.

In general, historically, the exchange was an attempt to find market pricing for goods expanding the limits of the local market. How the local market works – let’s simplify it to a meat row. There are 10 butchers, each hovering mountains of freshly chopped meat. Each has its own price tag. But, nevertheless, if the market is common, “popular”, in the general case the price for the meat of the same type will be the same or differ insignificantly. The bottom line is that explicit, visible competition gives rise to direct adherence to the laws of supply and demand – the average market price is defined as the top of the normal distribution of prices within the current supply and demand. If a butcher significantly raises the price without having any additional advantages – convenient packaging, fresher meat, especially the quality of the meat cut, he will face an outflow of customers. A possible situation with dumping is a decrease in prices, as a rule, it is decided on the market – the stocks of such a butcher’s meat are quickly sold out and he goes to lunch, ceasing to influence pricing, or competitors reduce the price. There is, of course, a non-market method, after which the butcher walks with a black eye, but we will not consider it.

The more we take the market by size, the more difficult such direct price regulation is, and the price at different ends of the market can deviate greatly (other factors come into play, such as proximity to entry or aggressive advertising). In addition, the live market is not able to effectively average prices over a long period – hence the rise in prices for vegetables in winter, and a significant drop in prices for them in summer. In addition to the obvious difficulties for buyers, this also creates difficulties for sellers – the inability to predict the sale of the crop, which entails large price fluctuations between seasons and years.

  • The emergence of an exchange with such instruments as futures gave rise to the opportunity to reduce the volatility of prices of real goods, and, at some point, became a significant regulating factor in pricing.
  • What happened then – from the moment the exchange began to manage commodity and non-commodity values ​​(such as company shares) and players who were looking for a use for their capital flocked there, pricing began to experience a certain pressure. The pressure is associated with greed and fear.

What is meant? In general, many exchange positions have a “market” price that significantly differs from a “fair” one. the market price reflects the EXPECTATIONS of the players. The players believe that the grain harvest will be good, or that iPhone sales will grow – grain quotes are falling, Apple quotes are growing. Expectations are limited to greed or fear. The more players are SCARY are, the more they are inclined to fold positions (no matter whether they are long or short), and enter them only for a short time. The more greedy the players are, the more they tend to gain positions or hold them, despite even losses.

So, greed and fear. Greed and fear determine the shape of the price curve – if greed is great and prevails in the market – the price curve is sharp, impulsive (no matter in which direction), if fear prevails – the price curve is more jittery. You will say that there is some inconsistency, it would seem that if fear prevails, then we should observe just a sharp drop in positions and a rapid fall. Everything is so, but we must take into account that the modern exchange allows both long (long, buy) positions and short (short, sale of the occupied).

Accordingly, the largest drops and rises occur at the moment of the greatest greed of the players, when they, observing a completely directed movement for themselves, nevertheless, out of greed, take a position with the formulations – “well, the price cannot be lower” or “well, this is the price limit, much more” When fear prevails in the market, the quickly started movement gets bogged down due to lack of fuel, because sellers, including those who go short, are also afraid and quickly liquidate their positions after each sharp movement, thereby generating a reverse impulse.

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