About Bitcoin, Pyramids and Unicorns
I have talked about why BTC is not a Ponzi extensively in private chats and some charts comment-section in the past (which for the live of me, i can no longer find?).
The subject keeps coming up so here it is for future references.
A Ponzi/Pyramid scheme pays older/initial "investors" with money from newer "investors" - at some time one runs out of "greater fools" and the scheme collapses, leaving the last at a loss.
Person A promises something to a few people. Person B, C, D, E, F, G. H and I.
"I got this great thing .. you give me 50$ and I 'guarantee' you'll get 75$ back .. tell your friends too .. you'll see"
They go along and sure enough the money comes in.
Person A takes the money from D, E and F (total of 150$) and gives 75$ of those to B as promised, he also collects 150$ from G, H and I and in turn pays C the 75$.
The remaining 150$ ... ;)
More people hear about this. The greater fools .. keep finding them idiots to fuel the scheme. There are many variations on the scheme, DYOR.
Now, the difference here with Bitcoin, Crypto and (most) markets is, they do NOT function like this .. AT ALL.
One does NOT need fresh fuel over and over again, one simply recycles the old fuel.
(hands of that keyboard .. keep reading first)
Let's, again, oversimplify this:
JimBo paints a limited amount of (20) paintings on small pieces of paper/cloth that represent some value, because they're so unique, nobody can replicate them.
Trader-A , let's call him Aron, starts with 10$.
Aron buys 10 masterpieces from JimBo for 1$ each.
JimBo is thinking "if Aron just bought for 1$ .. maybe I can sell them for 2$ too ?".
So he does just that and Trader-B (Buffalo-Bill, who also started with 10$) is now the happy owner of a stack of 5 crispy-fresh 2$ paintings.
(JimBo is now the proud owner of (10x1$)10$+(5x2$)10$=20$ but lost 10+5=15 of his precious paintings, the average value of one painting now represents 20$ / 15paintings = 1.33$ (or 1$ = 0.75painting). So his theoretical total worth (all assets combined) is his 20$ plus a theoretical 3.75 for the reaming 5 paintings.
Aron and Buffalo-Bill are unaware of JimBo's valuation.
Aron takes note of Buffalo-Bill paying more for the paintings and starts bragging that he payed LESS for them. Someone else hears this .. let's call her Trader-C or Cicciolina.
.. here comes what all trading boils down to, sentiment/psychology, how you are looking at the valuation of an asset, are you looking at it positively (Bullish) or negatively (Bearish)?
The way you look at it influences your decisions. The equilibrium between sentiments at large, effects the market as a whole
Cicciolina thinking:
Buffalo-Bill asks for more than the initial 2$:"Would you buy this ? I would buy this, I would buy this so hard"
and
"why should I pay 2$ or more when Aron got it cheaper ?"
will buy 5 pieces from Aron for the price of 1.5$ each (Aron wanted to make money on them but it was still cheaper than Buffalo-Bill), totaling 7.5$.
Aron made theoretical profit on half of his initial stack and thereby lowering the cost of his remaining stack, he now has 5 paintings and 7.5$, if he can get 2.5$ for the remaining 5 paintings (0.5$ per painting, less then JimBo got for them), he breaks-even. Aron is content for now.
Buffalo-Bill bought for 2$, happy and "confident" it will go higher, making money in the longer-term because of "the past" showing prices can and will go up.. ALWAYS .. SCIENTIFIC FACT .. MATHEMATICAL FACT EVEN.
Time passes and Cicciolina is starting to develop doubts about her deal. She is always so impulsive .. did she make a mistake ?
She asks Aron and Buffalo-Bill if they want to buy some of hers for more or at least 1.5$ ..which they decline .. they are "good".
Cicciolina is getting really nervous and keeps nagging about price until Aron agrees to buy 2-paintings off of her for 1.25$. Cicciolina now lost 0.5$ on 2 of her 5 paintings while Aron now owns 7 paintings and 5$. Cicciolina will now need a total of 5$ (1.666.. $ per painting) to break even.
JimBo aware of what is going on with his paintings is not amused and pulls some strings (there always is the possibility of manipulation) .. he tells his neighbor, who works for the phone-company and is a trader in his spare time, Dillon Doe (he wants to remain anonymous .. yes .. the brother of John Doe) to cut some phone lines in order for the others to no longer talk to each other.
Meanwhile Dillon Doe is cutting up one of JimBo's paintings (he got it for his birthday). He now puts up a sell order for 1$.
Cicciolina sees 1$ and JUMPS right on it .. YESSS .. but .. wait .. what's this ? The trading-chart they've all looked at all this time now shows a huge greenDil..eh..candle .. going straight for 1000$.
"How could this be?" Cicciolina thinks, "I only paid 1$ ... oh crap .. I .. bought .. 0.001 part of a painting ?".
JimBo now all of the sudden is worth 20$ + 4 paintings (he gave one to Dillon Doe remember?) for a total of 4020$ .. where did that 4000$ come from ? did JimBo steal it from someone ? Did someone just lose 4000$ ?
Aron and Buffalo-Bill also seemed to have 'gained' money out of nothing.
^^^ this is essentially Market-Cap .. so you see .. it's an absolutely irrelevant metric, since the cap does NOT mean that amount of money really exchanged hands, not every painting was bought/sold for that price and/or at the same time. So, YES BTC could go to 10 million $ and have a market-cap higher than all the money in the world.
Aron, Buffalo-Bill and Cicciolina now cut off from knowing each others reason, unknown to them if others are joining their trades, will have to rely solely on their charts. Trying to "predict" price, trying to find patterns, trying to use their guts, trying to throw dice or only trade on Mondays (see one of my related Ideas "How-to-create-a-Strategy-and-make-it-profitable").
Maybe they'll start groups where they discuss all of their gathered knowledge, 'coercing' each other into trades they otherwise wouldn't take "He said it would go up?!"
Simply put: 3 or 4 people can be enough to drive price in every direction indefinitely. It is not needed to get "fresh money", "new blood" or "greater fools" in. Not quite how a Ponzi works now is it?
Practically there always will be fresh money in of course, old Traders die or quit, youngsters pick up the trade (pun intended), derivatives of the paintings, futures on the paintings, merchandise with the paintings on them .. you name it.
Yet that is still irrelevant.
The reason why this can continue for quite a while (how long is Gold being traded by now ..) is the difference in mentality and knowledge of traders.
Look at Cicciolina for example, she is impulsive (but has a good paying job making movies), she don't mind losing some money .. she "will win BIG some day".
Aron on the other hand is extremely patient, taking some of Cicciolina's money once in a while, while watching her movies.
They will keep doing their trades, wining some, losing some.
And Buffalo-Bill ? Who knows.
This is of course ridiculously oversimplified and does not work in the real world.
The real world is more cunning, it clouds our minds with fairy tales, make-believe, hope, fear, scarcity and inflation (one asset gains while the other loses and vice versa).
Trading is distribution of wealth.
Even if you have extended knowledge about markets/trading and are master of your emotions. You will let go of money or asset once in a while. Be it purposely (cutting losses, see my other Related Idea: "Letting go of Losers") or by mistake, that money will make someone else's day, getting them hooked on this addiction called "Trading".
The subject keeps coming up so here it is for future references.
A Ponzi/Pyramid scheme pays older/initial "investors" with money from newer "investors" - at some time one runs out of "greater fools" and the scheme collapses, leaving the last at a loss.
Person A promises something to a few people. Person B, C, D, E, F, G. H and I.
"I got this great thing .. you give me 50$ and I 'guarantee' you'll get 75$ back .. tell your friends too .. you'll see"
They go along and sure enough the money comes in.
Person A takes the money from D, E and F (total of 150$) and gives 75$ of those to B as promised, he also collects 150$ from G, H and I and in turn pays C the 75$.
The remaining 150$ ... ;)
More people hear about this. The greater fools .. keep finding them idiots to fuel the scheme. There are many variations on the scheme, DYOR.
Now, the difference here with Bitcoin, Crypto and (most) markets is, they do NOT function like this .. AT ALL.
One does NOT need fresh fuel over and over again, one simply recycles the old fuel.
(hands of that keyboard .. keep reading first)
Let's, again, oversimplify this:
JimBo paints a limited amount of (20) paintings on small pieces of paper/cloth that represent some value, because they're so unique, nobody can replicate them.
Trader-A , let's call him Aron, starts with 10$.
Aron buys 10 masterpieces from JimBo for 1$ each.
JimBo is thinking "if Aron just bought for 1$ .. maybe I can sell them for 2$ too ?".
So he does just that and Trader-B (Buffalo-Bill, who also started with 10$) is now the happy owner of a stack of 5 crispy-fresh 2$ paintings.
(JimBo is now the proud owner of (10x1$)10$+(5x2$)10$=20$ but lost 10+5=15 of his precious paintings, the average value of one painting now represents 20$ / 15paintings = 1.33$ (or 1$ = 0.75painting). So his theoretical total worth (all assets combined) is his 20$ plus a theoretical 3.75 for the reaming 5 paintings.
Aron and Buffalo-Bill are unaware of JimBo's valuation.
Aron takes note of Buffalo-Bill paying more for the paintings and starts bragging that he payed LESS for them. Someone else hears this .. let's call her Trader-C or Cicciolina.
.. here comes what all trading boils down to, sentiment/psychology, how you are looking at the valuation of an asset, are you looking at it positively (Bullish) or negatively (Bearish)?
The way you look at it influences your decisions. The equilibrium between sentiments at large, effects the market as a whole
Cicciolina thinking:
Buffalo-Bill asks for more than the initial 2$:"Would you buy this ? I would buy this, I would buy this so hard"
and
"why should I pay 2$ or more when Aron got it cheaper ?"
will buy 5 pieces from Aron for the price of 1.5$ each (Aron wanted to make money on them but it was still cheaper than Buffalo-Bill), totaling 7.5$.
Aron made theoretical profit on half of his initial stack and thereby lowering the cost of his remaining stack, he now has 5 paintings and 7.5$, if he can get 2.5$ for the remaining 5 paintings (0.5$ per painting, less then JimBo got for them), he breaks-even. Aron is content for now.
Buffalo-Bill bought for 2$, happy and "confident" it will go higher, making money in the longer-term because of "the past" showing prices can and will go up.. ALWAYS .. SCIENTIFIC FACT .. MATHEMATICAL FACT EVEN.
Time passes and Cicciolina is starting to develop doubts about her deal. She is always so impulsive .. did she make a mistake ?
She asks Aron and Buffalo-Bill if they want to buy some of hers for more or at least 1.5$ ..which they decline .. they are "good".
Cicciolina is getting really nervous and keeps nagging about price until Aron agrees to buy 2-paintings off of her for 1.25$. Cicciolina now lost 0.5$ on 2 of her 5 paintings while Aron now owns 7 paintings and 5$. Cicciolina will now need a total of 5$ (1.666.. $ per painting) to break even.
JimBo aware of what is going on with his paintings is not amused and pulls some strings (there always is the possibility of manipulation) .. he tells his neighbor, who works for the phone-company and is a trader in his spare time, Dillon Doe (he wants to remain anonymous .. yes .. the brother of John Doe) to cut some phone lines in order for the others to no longer talk to each other.
Meanwhile Dillon Doe is cutting up one of JimBo's paintings (he got it for his birthday). He now puts up a sell order for 1$.
Cicciolina sees 1$ and JUMPS right on it .. YESSS .. but .. wait .. what's this ? The trading-chart they've all looked at all this time now shows a huge green
"How could this be?" Cicciolina thinks, "I only paid 1$ ... oh crap .. I .. bought .. 0.001 part of a painting ?".
JimBo now all of the sudden is worth 20$ + 4 paintings (he gave one to Dillon Doe remember?) for a total of 4020$ .. where did that 4000$ come from ? did JimBo steal it from someone ? Did someone just lose 4000$ ?
Aron and Buffalo-Bill also seemed to have 'gained' money out of nothing.
^^^ this is essentially Market-Cap .. so you see .. it's an absolutely irrelevant metric, since the cap does NOT mean that amount of money really exchanged hands, not every painting was bought/sold for that price and/or at the same time. So, YES BTC could go to 10 million $ and have a market-cap higher than all the money in the world.
Aron, Buffalo-Bill and Cicciolina now cut off from knowing each others reason, unknown to them if others are joining their trades, will have to rely solely on their charts. Trying to "predict" price, trying to find patterns, trying to use their guts, trying to throw dice or only trade on Mondays (see one of my related Ideas "How-to-create-a-Strategy-and-make-it-profitable").
Maybe they'll start groups where they discuss all of their gathered knowledge, 'coercing' each other into trades they otherwise wouldn't take "He said it would go up?!"
Simply put: 3 or 4 people can be enough to drive price in every direction indefinitely. It is not needed to get "fresh money", "new blood" or "greater fools" in. Not quite how a Ponzi works now is it?
Practically there always will be fresh money in of course, old Traders die or quit, youngsters pick up the trade (pun intended), derivatives of the paintings, futures on the paintings, merchandise with the paintings on them .. you name it.
Yet that is still irrelevant.
The reason why this can continue for quite a while (how long is Gold being traded by now ..) is the difference in mentality and knowledge of traders.
Look at Cicciolina for example, she is impulsive (but has a good paying job making movies), she don't mind losing some money .. she "will win BIG some day".
Aron on the other hand is extremely patient, taking some of Cicciolina's money once in a while, while watching her movies.
They will keep doing their trades, wining some, losing some.
And Buffalo-Bill ? Who knows.
This is of course ridiculously oversimplified and does not work in the real world.
The real world is more cunning, it clouds our minds with fairy tales, make-believe, hope, fear, scarcity and inflation (one asset gains while the other loses and vice versa).
Trading is distribution of wealth.
Even if you have extended knowledge about markets/trading and are master of your emotions. You will let go of money or asset once in a while. Be it purposely (cutting losses, see my other Related Idea: "Letting go of Losers") or by mistake, that money will make someone else's day, getting them hooked on this addiction called "Trading".
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