Crypto crash explainer: This is why you’re losing money
Why cryptocurrencies have crashed and what it means for their future
Crypto confidence
Howinvestorsrespond will be key to the future of cryptocurrencies. We have already seen panic and despair, with some comparing this crash to a traditional run on the banks. But withbank runs, customers tend to be worried that their bank will be unable to give them their money, rather than worrying that their money has become worthless.
A more accurate comparison is withstock market crasheswhere investors worry that the stocks and shares they hold may soon be worthless. And so far, reaction to this crypto crash suggests that a large section of crypto holders view their investments in a similar way.
Notwithstanding historical price volatility, there is a basic assumption often seen in investor behavior: that the asset price will increase, and will keep on doing so. In this scenario, the investor doesn’t want to miss out. They see the asset rising, consider it a “sure thing” and then invest.
Frequently buoyed by initial successes, the investor may then put in more. Combine this with social media and the fear of missing out on “inevitable” gains, and the investments continue.
Put simply, many will have invested in cryptocurrencies because they believed it would make them richer. This belief has no doubt been shaken.
But another motivation for investing in cryptocurrencies may be a belief in their transformational nature, the idea that cryptocurrencies will eventually replace traditional forms of financial exchange.
For these investors, any increase in the value of a cryptocurrency is a demonstration of the increasing power of cryptocurrency over traditional money. But likewise, a significant decline in the value of crypto is not simply a monetary loss – it is an ideological one.
At the same time though, this ideological stance creates an investor group far less likely to sell in the face of any sharp fall. And it is this group that may yet provide hope for the sector.
In established stock market crashes we talk of a return to “fundamental value”. The fundamental value of crypto is frequently assumed to be zero. However, perhaps there is at least some fundamental value that is based on belief. The size of the investor pool who own cryptocurrency because they believe in its long-term future, and the promise of a new money, may determine that fundamental value of crypto.
Indeed, if we consider cryptocurrency investors as different groups with different motivations, we can better understand the behaviors we are seeing. Investors can perhaps take solace that we may have seen the worst of this crash and that better times may be ahead. But as any financial adviser will tell you, in crypto as in any other market, nothing is guaranteed.
This article byGavin Brown, Associate Professor in Financial Technology,University of Liverpool;Richard Whittle, CAPE Policy Fellow,UCL, andStuart Mills, Fellow of Behavioural Science,London School of Economics and Political Scienceis republished fromThe Conversationunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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