12 Jun The Purpose Of The Market
Let’s start with an example.
As you can see from this Google Trends screenshot, the topics related to bitcoin were not so popular until the 7th of December 2017.
The next peak of popularity was recorded on the 22nd of December.
What did media write about bitcoin on the 7th of December?
- SaxoBank predicts that bitcoin to peak at 60,000$ in 2018
- MoneyMorning: Ronnie Moas Hikes 2018 Bitcoin Forecast to $28,000
- Coinbase on Twitter: «We are currently experiencing record high traffic»
- WSJ: Bitcoin’s Wildest Rise Yet: 40% in 40 Hours
«I would say without question we will see Bitcoin above 20k before the end of the year. Momentum is growing daily and as momentum grows sellers have less reason to sell» — Latium CEO and co-founder David Johnson.
«As more people use Bitcoin, this rising demand will fuel higher prices» — Pawel Kuskowski, CEO & co-founder of Coinfirm.
The informational background engaged the public to buy BTC. The public has comparatively little idea of Bitcoin’s real value but they got all they needed to decide to buy coins:
- The ultra-fast growth of price on big volume. That activity attracts average human buyers;
- Positive expert’s forecasts;
- Buying signals on technical indicators.
TV and newspapers talked about the fantastic rise of Bitcoin so everyone could hear. Bitcoin shined as bright as a new heaven.
Let’s observe those events on the BTCUSD daily chart.
Actually, we can observe the extreme wide trading ranges after the 7th of December. It was several days of the broad and ultra-volatile market.
What did that great volatility represent?
The frenzied rush of people that got the emotional desire to own some coins before the price reached $20,000 or $30,000 or… whatever. People feared missing out on the great opportunity for fast enrichment.
«The price advances on high volume. That is because everybody buys. I should buy too» — typical reasoning of public trader.
What happened next?
After several days of extremely wide trading ranges, the price continued to grow, but on lowering volume. Then Bitcoin started to decline on expanding volume until the 22nd of December. That day marked another record on Google Trends. But the sentiments on media resources were just the opposite. It seemed that everybody turned negative.
- Bloomberg: Novogratz Halts Hedge Fund, Says Bitcoin May Drop to $8,000
- CNBC: Bitcoin buyer beware: The crypto carnage could continue, says a real currency strategist
- CNN: Bitcoin lost a third of its value in 24 hours
- FXStreet: Bitcoin price prediction: BTC on the way down, targeting $9900
The 22nd of December was judgment day for those harebrained investors who bought Bitcoin 2 weeks before.
Well… What is this all about?
Why were people engaged to buy Bitcoin just before the crypto market (‘suddenly’) crashed?
It seems like a big fraud. Well, this is just business.
The main purpose of the market is to make fools of as many men as possible. Bernard Baruch
The stock market is never obvious. It is designed to fool most of the people, most of the time. Jesse Livermore.
Proceeding from this quote as the starting point, we can divide the market players into two groups:
- Fools (public, crowd, herd, retail traders).
- Those who make fools (operators, professionals, smart money…)
Trading like any other business has the nature of competition. The big fish eat the little ones.
Big traders could not operate successfully without the public. For example, if there were only two big professionals in the market and no public, these two could make profits by dealing with each other. It would be difficult for one to deceive their opponent. But when the public enters the market, the biggest money game becomes easier for professional operators.
That is why you can easily find a lot of broker’s advertisements with attractive messages.
Trading is easy, even baby can make tons of money – the screenshot from ad of Etrade broker