Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
If you feel like youâve had your financial torso bit in half by the negative spikes of Bitcoin prices over the past couple weeks, it may be easy to convince you that the market is a T-Rex. Right now, everything hurts. Your portfolio is mangled. Body parts are missing.
As I type this, the dollar-price of Bitcoin is down about 40% over the past ten days.
At first glance, this sounds apocalyptic. Depending on when you closed your eyes and stopped looking, something like $45 billion of market cap has been wiped off the books in the blink of an eye.
For those of us who own Bitcoin and havenât panic-sold yet, this is a gut-check. Is now the time to bail before things get even worse?
Or is this a blood-in-the-streets moment the investment-savvy people are talking about when they say âbuy when there is blood in the streetsâ?
Or is now the time to sit tight and do absolutely nothingâââlike a deer in the headlightsâââand not make financial decisions while under the influence of unpredictable emotion?
Feeling myself pin-balling between all three of these positions, I figured it was a good time to try to figure out what this price-dump actually means. As in:
Where, exactly, did that $45 billion dollars of value go?
The answer, of course, is that itâs all T-Rex chow. But thatâs actually not as bad as it may sound.
Bitcoin and Eminem: âI am whatever you say IÂ am.â
The first thing to come to terms with is that Bitcoin is totally useless except for its being an unforgeable digital asset. There is nothing to maintain its price other than the subjective opinion held by everybody else.
Bitcoin canât be repurposed, sold for scrap, recycled, or used as a paperweight.
Its only value, ever, is what you can exchange it for to someone else. That could be another currency, or a Lamborghini, or a used couch.
So when the value of BTC on the major cryptocurrency exchanges drops by 40% in less than two weeks, what exactly has happened?
Nothing more (but nothing less) than this:
People who were looking to sell Bitcoin could find no one willing to buy it from them for more thanâŠ(checks current price)âŠ$3,949.
In other words:
- Itâs not that $45 billion dollars worth of something got destroyed (e.g. one billion apple-carts holding $45 of apples each were overturned).
- Itâs also not that $45 billion is now in some different personâs pocket.
Itâs just that the people who want to buy right now can find sellers willing to sell at around $4,000 per bitcoin. Previously these sellers werenât willing to sellâââor if they were, they demanded a higher price. For the past 4â5 months, that price had been hovering around $6,500.
Sellers being more eager than buyers drives the âmarket priceâ down. (And vice-versa.)
This is Economics 101, but itâs easy to forget how this theory derives from real-world practice.
And this relates toâââand, in fact, drivesâââBitcoinâs famous price volatility, both on the upside and the downside.
Nobody asked your opinion.
Letâs say youâre the proud owner of one bright, shiny bitcoin. Two weeks ago, it was âworthâ $6,500. Today, $4,000.
Take note that at no point during that timespan did anyone ask you what you though the price should be.
For the sake of argument, letâs say that you got your bitcoin on a lark years ago, and youâve always thought it was overvalued. You think itâs worth, at most, $1,000. But youâve been busy with other stuff, and never got around to unloading it. (After all, whatâs the hurry, since thereâs seemingly other suckers out there willing to overpay whenever youâre ready?)
The fact that you were busy with other stuffââânot transacting or letting anyone else know your subjective selling-price for Bitcoinâââhas made your longstanding opinion totally invisible to the market.
Youâre probably not like this, though.
You hodl your bitcoin because you thinkâââeventuallyâââthe price will go to the moon. But consider:
The die-hard hodlerâs opinion of Bitcoinâs price is totally ignored by the market.
This is worth re-reading a couple times, because itâs not intuitive.
The hodl-or-die crowd, Bitcoinâs most fanatically loyal enthusiasts (and, one can assume, a disproportionate share of its owners) are neither selling nor spending their bitcoin. Thus, they areâââby definitionâââtotally invisible to the exchanges that define Bitcoinâs market price.
Hereâs where we get to the T-Rex. Remember Jurassic Park, where the T-Rex could only see movement? If you could just hold (hodl) still, you were invisible?
The market is that T-Rex. It can only âseeâ financial activity.
What this means is: a small sliver of the overall group of people who own Bitcoin are the only ones determining/asserting/revealing its market price.
A small tail can wag a 100-billion-dollar dog and whipsaw its valuation while almost no actual value changes hands.
Say it again, with potatoes.
Imagine a community of ten people, where the local currency is PotatoCoin. Each PotatoCoin has been worth 100 potatoes for as long as anyone can remember.
Eight of the ten people go on vacation, leaving Alice and Bob behind. Alice needs some cash for a purchase, but luckily sheâs got some potatoes. So she goes down to the market with 100 potatoes to get a PotatoCoin.
Everyone is out of town except Bob, and Bob is sick of potatoes. (Bob is also kind of a dick.) Heâs only willing to give her 0.1 PotatoCoin for her 100Â spuds.
Alice protestsâââthis is a rip-off and both of them know itâââbut she needs the cash and no one else is in the market.
Grumbling, she sells Bob 10 potatoes for 0.01 PotatoCoin. (Sheâs unwilling to sell all 100 potatoes at this price, so she makes the minimum sale for the short-term cash she needs.)
With this transactionâââsince there no other PotatoCoin sellers presentâââthe âmarket priceâ of PotatoCoin has fallen by 90%.
When the other eight PotatoCoin holders get back from vacation, theyâll be shocked to find their financial âsavingsâ in ruins. Their PotatoCoin accountsâââwhich held millions of potatoes-worth of funds previouslyâââsuddenly equate to mere hundreds of thousands of potatoes.
All of this based on a 10-potato transaction.
We can imagine the PotatoCoin market cap quickly recovering when the returning vacationers begin transacting again, assuming that other people like potatoes more than Bob, and as much as they always have in the past.
But this silly example underscores a point thatâs easy to miss when you see âbillions of dollars of Bitcoin wiped out in two-week slideâ: the actual value of the transactions responsible for this change is nowhere close to the change in perceived valuation.
All we know for sure is that there has been a short-term asymmetry between would-be buyer and would-be sellers.
Hodling in plain sight (?)
There may be millions of hodlers out there who believe that in the future, their bitcoins will be worth hundreds of thousands of dollars each. These people, if they stick to their guns, will have no interest in selling at $4,000, or $6,500, or $20,000.
The only things we can infer about this group of hodlers is that, currently, they have decided:
- their Bitcoin exposure is already high enough, or
- they think Bitcoin will stay cheap long enough that thereâs no hurry to buy more right now, or
- theyâre broke.
Now that we recognize why hodlers are invisible, we can better come to grips with the reasons behind Bitcoinâs legendary volatility:
- Ownership is clustered in a comparatively small demographic of techies, currency speculators, and Millennials.
- The most enthusiastic subset of this group refuses to spend or sellâââso the market only knows their opinion of Bitcoinâs price when they are ready, able and willing to buy.
- Very few people use Bitcoin for day-to-day transactions (e.g. groceries), which would reveal their beliefs as to Bitcoinâs value. What the market sees is the extremely short-term beliefs of speculators who, for the most part, are buying/selling based on their beliefs about the beliefs of other speculators.
If this sounds like a snake-eating-its-own-tail, youâre not wrong.
I know that none of this will make you feel any better if your portfolio just got crushed, you need to buy potatoes, and your only liquid cash is Bitcoin.
But if youâre stocked-up on potatoes (or youâve got another currency handy), the good news is this: thereâs every reason to suspect that a large number of your fellow hodlers think todayâs Bitcoin price is wildly low, and they still wonât be selling even if the price doubles, or 10xâs, or whatever.
As long as these currently-invisible people remain unwilling to move, the Market T-Rex canât see them, it wonât sniff out their price-opinions, and a small handful of willing sellers can aggressively boost the perceived market price when buyers come a-knockinâ.
In a market like Bitcoinâs, the serrated teeth of volatile prices can definitely cut both ways.
Fun Fact: Even on the most transaction-heavy day of the recent price routâââNovember 19thâââthe total volume of BTC trading across all major exchanges was under $2 billion. The âgreat, silent majorityâ has remained on the sidelines, hodling. (h/t to: bitcoinity.org, Taylor Pearson)
The Bitcoin Market is a T-Rex was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.