How do the majority believe the market (the price setting mechanism) works?
This general belief of how markets work is not only applicable to the Bitcoin market, but all markets, the majority of people believe that that price is set by a large number of market participants whos choices on a daily basis creates the price. In this world, with so many informed participants, price should reflect underlying fundamentals, i.e, good news for Bitcoin, like increasing adoption rate should push prices higher, and vice versa for bad news. Can we see that kind of correlation? No. In reality, over the last year the adoption rate has increased as the price has fallen 73 percent from the top. In other words the belief of how the price is created does not fit the data (what actually happens).
And yes, I know that the believers make up explainations (as all believers do when their beliefs gets challanged) on why ‘the market’ (a large number of market participants who creates the price) creates these illogical price movements. I don’t ignore them, I just don’t think they explain what happens.
What could explain the price movements?
Can we build a new better theory of how this market works? Yes. Using logic and real data to construct a new theory will be much more productive for investors who want to buy and sell Bitcoins at any time. A theory is only a theory, I don’t believe in it, but if it helps in explaining price movements better than any other theory I will use it, especially if it is logical. Of course, although the price movements may seem illogical from a smaller perspective, the movements are logical from a larger perspective that takes all factors into consideration. The structure of the Bitcoin market is key here and the factor that so many exclude when trying to analyse and explain price movements. Including this factor will make illogical movements seem logical.
If the pricing mechanism is distorted in some way, price will not be reliable for making investment decisions, i.e rising price do not have to reflect underlying value. How can this market get distorted? Well, let’s say for example that some market paraticipants have unlimited amounts of cash, who can create money out of nothing, those could do whatever they want to the price to the upside and thereby distort the market. If these participants also see Bitcoin as a threat to their business (the banks and those who own them) they may have an incentive to distort it and destroy the natural priceing mechanism, the one that the believers think exist today.
Do you see the logic in this? The most powerful institutions in the world, the money creating banks who owns the worlds settlement systems, who stand to lose most is Bitcoin grows want’s to halt it’s growth. This is potentially by far the most powerful and important player in the Bitcoin market today, they have unlimited firepower and an incentive to destroy this market. Of course, I can’t prove they are in the market, but if they are, they can paint the chart and after the last few years gains in price we can assume they own a lot of Bitcoin and therefore also can control the price in some way to the downside.
Why is this important?
If true, this changes almost everything. Price will not over long time reflect underlying value and can’t be a reliable source for making investment decisions. Instead, a falling price may be created to scare investors into selling when they in reality should buy based on fundamentals, and vice versa when price is rising. Since the adoption rate continues to grow, and supposedly will continue to do so, investors should always buy Bitcoins when the price drops thereby doing exactly the oposite of what those who potentially control the price wants you to do. This is how you will make money and get a good price for you Bitcoins that is more in line with fundamentals.