You might have heard some of these or similar claims about Bitcoin:
It can reclaim the money from the evil banks.
It can catapult the poor into sudden abundance.
It deals a new hand of cards.
It puts you back in power.
The same old lies.™
While none of them is strictly false I have a problem with these statements and the underlying message especially.
I don’t consider myself an investor and much less an expert on trading and market dynamics. And I don’t need to be one, because the underlying principles are extremely simple. For the point that I am making it is enough to understand that a crypto currency is a token, which can be owned and freely traded on the open market. Everyone is always free to place an offer or to accept a standing offer that fits their needs. So if you have $ and want bitcoin you either announce that you are willing to exchange a certain amount at a certain rate and wait for someone to agree on that, or you directly find and accept one of the existing offers to trade BTC for $. That is the basic mechanism that has been used to exchange all kinds of goods and services for thousands of years. So far pretty fair and equal, eh?
The catch is this:
The price of a trade item is never inherent to or derived from the item itself.
The price is created and derived from the market!
Our perception of monetary values is the natural balance that establishes itself because few people want so sell their goods for less then they can get and even fewer people want to pay more than they have to.
Now imagine you have a Billion $. Imagine bitcoin gets traded around 1000$. Now what could you do? You could offer to buy a bitcoin for 1050$. It is a good strategy if you need your coin quickly and don’t mind paying some extra, because for sure very soon someone will take this advantageous deal. So that’s how it will look like to others too. But what happens if you immediately add a second offer and a third, maybe even up the price to 1060$ this time? You see where this is going…
Go ahead and automate it. You could do this 1000 times for only little more than 1%1 of your capital. On any common trading platform all those transactions are visible to the public. But not the identities of the contractors, only the volume and the exchange price.
Who will still want to sell their bitcoin for 1000$ now? Other people will naturally start asking for higher price too. And they will easily find buyers because hey, didn’t the value just increase 6% in only a few hours?! All those deals and the rising price will generate even more interest in bitcoin so increased demand further increases the price. To add further momentum to the rolling ball you can now already start selling back some of the 1000 coins you bought, already at a profit and with those gains you can immediately buy back in, creating even more volume, more momentum, more hype.
In all that chaos it is only the trading platform who can easily figure out whether most of the initial trade volume is connected to a single or very few clients. But since the trading platform earns on a small fee that incurs on every single trade, their motivation to put a stop to this will be sort of limited.
But any manic craze can only fly so high. Once the illusion begins to crumble you sell off the majority of your coins, and you do it fast. Because once over the point of no return the free fall has started and it wont stop. Not until the price is so low that the first people will buy back in again at what a is very attractive price point, if you consider how valuable this figment can be when sold at the right time.
Obviously, the full story is much more complex. But that doesn’t invalidate these very fundamental dynamics. If you feel like this is your kind of game and are prepared for the possibility of losing every last bit of your investment – go ahead and join the ride.2 It can be speculated that we have not seen the last of those bubbles, because they are so insanely profitable. Just be warned that the big players will always be a few steps ahead.
The blockchain is revolutionary technology that is here to stay. But the crypto market in its current manifestation is not re-balancing the global wealth distribution – it is making things worse!
It is true that almost anyone could become a Millionaire within this system. But certainly not everyone. And that’s one more thing you can bet on: The ones who got lucky didn’t bite their shiny new million off some big tycoon shark’s bank account. They withdrew it from countless poor fucks that now lost everything on a dream that wasn’t theirs to catch.