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Crypto Currencies and Market Corrections

A big driver behind the different crypto currencies and their fluctuating prices is the concept of market corrections. We are still trying to lock down on what a Bitcoin (and other types of coins are included) should be worth in different fiat currencies. The reason for this is that it is still a fairly new concept and therefore it is up to the market to decide its value. If you happen to play online role playing games, you have probably already seen this happen, although you may not have understood what it is. Basically an items is released and someone offers to sell theirs. If they are selling it too cheap others will sell higher. If they are selling it for too much, others will sell lower. As time goes on, the price starts to stabilize because people lock down on a smaller and smaller variance each time. With Bitcoins and other cryptos, it really works the same way, although on a much bigger scale. Rather than dealing with gold you can farm in a game, we are dealing with fiat. Along with this, instead of being based on one country or other block of area, we are dealing with the entire world. For example, Australians may believe that Bitcoins have more value than Americans. As such, they will pay more than we are asking and boost the price up. The opposite could also happen, as we are seeing with the China situation (when China jumped on board the prices shot up; as soon as their government stepped in, the prices tanked). While this was a pretty disheartening event, it is nothing out of the norm; in fact, we will undoubtedly see it happen more times in the near or long term future.

Market Corrections Are Not Always Static

A huge misconception of the market corrections is that they stick and are static. For example, once a Bitcoin hits their value, say $1500, they would always be worth that. This is not true, much like it is not true with the USD or other fiat. While a dollar is always a dollar, what that dollar can buy is always varying by small degrees. Eggs could be $1 a dozen now and $1.20 next week and then back to $0.90. This is really the equivalent to the way Bitcoin reacts to the dollar; how many dollars the Bitcoin can purchase is varying.

Now, while this is true, we can expect the variances to be small. Much smaller than now, for sure. We would not see jumps of 50% in a day, a week or even a month or year except for in extreme cases (which we would probably not see). Instead, it would be like the rate of inflation here in the US: a couple of percent a year on average, with some being slightly more and some being slightly less. This gives the benefit of being able to prepare for the future, although not 100% accurately. Then again, we can not accurately guess what the dollar is going to be worth, either, until the change actually occurs.

Over time, inflation will hit the dollar. In Bitcoin terms, this would be deflation; being that there are more dollars produced each year and there are no new Bitcoins and never will be (past the 21 million mark). So whereas we will pay attention to the inflation rate with our cash, with Bitcoins and similar crypto currencies we will be following the deflation rate; you need to realize the difference, as these are two very different (and opposite) things.

Cryptos Are Babies

At this point in time, all crypto currencies are still in their infant stages. We could argue that Bitcoin and a few others are multiple years old, but they are still new to the public. It would be a lot like comparing the age of the US to the age of the world; we are just a tiny blip on that marker. In the same sense, Bitcoin is, in relation to fiat, a brand new baby that still has to find its place. We can see this pretty easily by how many people still have no idea what Bitcoin is, what it means or how it works. People hear about it in the news all of the time and come asking basic questions. If this is not a sign of a new creation, I do not know what is. And yet even though it is new, it is thriving.

The path for the growth of Bitcoin and other crypto currencies is wide open. They can go in any direction: up, down, expansion, etc. They could end up disappearing in a day or a year or they could continue for thousands of years. If someone were able to compare where crypto currencies stand a thousand years from now (or even maybe a hundred), I am sure that it would be vastly different than it is now, in ways that we can not even begin to imagine. It is things like this that make Bitcoin so awe inspiring, yet scary. While those of us who are involved are considered as “early adopters” (and when it really comes down to it, even if you join right this minute you will still be one), we are also huge risk takers. If you mine a Bitcoin and it is worth $500 right now and you choose to hold it, you are risking $500. Excluding the fact that the Bitcoin cost electricity to mine, you could have sold it and chose not to. Therefore it is just like you took out $500 and then put it back in to the system again. So we can better be described as early adopting risk takers.

Expansion of Value

This sort of goes in line with the fact that the coins are in their infant state right now. The value that each coin has is based on the total amount of money put in to the system divided by the total number of coins. If there are 100 coins and $100, each coin is worth $1. Why is this important to take in to consideration? As more people join the economy of cryptos, they bring more money in with them. Each person adds to the pool of available funds, which increases the total amount of money there is to divide the number of coins by. This, in turn, boosts the value of the coins.

To break this down in to another example from recently, we go back to China. As soon as they started picking up on Bitcoin, its prices shot up. This was because they brought a lot more money to the table and tossed it in to the pool, effectively increasing the prices of all the coins. On the other hand, when the government stepped in and made some rules against Bitcoin, they pulled their money out of the pool. This meant there was less money to divide by all of the coins, effectively lowering the prices again. So this recent boost in value and then drop was because more money came in to the Bitcoin economy and then left it again.

How Long Will True Market Corrections Take?

This is something you can guess at, but nobody knows. In online games the market can correct after a matter of weeks. In the real world, when dealing with actual cash, this can be very different. We could end up in the correction phase for the next few years or longer. There is really only one thing that is certain during this time: the prices can drop or raise to and from any amount at any point, without warning, at absolutely any second. Anyone can go from broke to a millionaire or from a millionaire to broke within seconds. Because of this, we consider Bitcoin as being a very high risk investment. Theoretically it would continue to go up in value over time, but there is no guarantee that this is going to happen. Look at how many people in China lost money due to the government's regulation that made exchanging it for fiat there illegal for banks. Some of them took the ride up, and all of a sudden crashed to the ground because of something they had no control over and no warning of. Not only were they affected, but the rest of the world that was involved with Bitcoin was also affected.

Looking to the Future

All we can do right now is base our decisions on how we feel about everything. Since there is no telling what is going to happen, when it is going to happen and how it is going to happen, we can not make many informed decisions. Unlike a company where we can see the latest news and events as to what they are planning to do (for example, dealing with stocks), we are stuck hoping for the best with a world wide audience taking part. What happens in one part of the world can make or break Bitcoin for the rest of us, causing another boost or drop at any point. And this is part of what makes Bitcoin such an awesome thing; nothing else is affected in the same way it is, and nothing else brings us the same opportunities and risks that it does. It is new, exciting and fun to play along with the market and see where we end up!

The good part about this being worldwide is that we are consistently getting more and more new people on board. As this continues to happen, we are expanding and it makes it much harder for smaller groups to make a large impact on the system as a whole. As long as we continue with this trend, we are going to be moving closer and closer to some more stable values, more security when it comes to holding, and less chance that something will happen to destroy it altogether. While some like to argue that Bitcoin has already gotten to the point where there is no going back, and that it is already too big to fail, this is not necessarily true. We can think that, and we can hope it, but in all actuality we just do not know.

Conclusion

Market corrections are a normal part of any currency, whether they are in real life or within games (Bitcoin can be considered as a type of game currency). While people like to argue that we have been experiencing this, I think we still have a ways to go before we really hit the correcting stage. Bitcoin and its other related crypto currencies are becoming more and more wide spread daily, with new adopters in both the individual and merchant levels. Each of these additional people bring about new challenges and benefits to the coins, and help expand their reach.

Sadly, this turns in to a catch-22, though, in that a lot of people do not want to get involved when it is so volatile and yet even if it stabilized, when more people join in it would just become volatile again anyways. It has led to a situation that is going to be tough for us to get out of, but at some point hopefully we can lock down a smaller variance in price and keep it there. Whether this is high or low really does not matter (although we could argue that the higher it is, the more profit we have made off of our current coins); something has to happen or we are going to continue this limbo.

Markets | Finance


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