1/ What causes asset prices to move? For someone to buy, there must be a seller and vice versa. It only takes one single buyer of $1 worth of an asset to potentially drive the drive up infinitely...the price will rise until some new marginal seller is enticed to sell.
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2/ In most traditional assets, there's some conception of "fair value." Buyers and sellers often disagree on fair value, that's what causes most trading. But, there's usually general agreement on fair value within a broad range.
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3/ So as the price rises, people are enticed to sell, and fewer people are interested in buying. Cryptocurrency is different for a few reasons.
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4/ Why is crypto different? A. Value is reflexive. A higher price actually makes the asset more valuable because it is then more liquid and better able to serve as a store of value or monetary transmission tool.
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5/ B. There is no calculable fundamental value for the store of value crypto assets. Rather, the network value reflects demand for judgement resistance. The price has no connection to the "service" of judgement resistance.
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6/ C. And lastly, network effects in what may be a "winner take all" use case increase the odds of an appreciating cryptocurrency winning the competition, so investors become more confident in their investment as price rises.
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7/ This might make it seem like a rallying cryptocurrency will rally forever. Of course that's not necessarily true. A reversal can be caused by an exogenous shock (regulation, software bugs, hacks, etc).
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8/ But no exogenous shock is necessary. When an asset rallies for a while, speculators jump on board, often with margin and leverage. Then a slight decline can trigger a wave of these speculators to sell, causing a major correction that resets the market psychology.
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Clear, lucid thinking, as usual. Thanks for sharing.
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Replying to @mistermircea
That's high praise coming from you! I'm a big fan of your storms.
0 replies 0 retweets 8 likesThanks. Twitter will use this to make your timeline better. UndoUndo
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