Market Volatility and Chomskyan Economics
Writing helps me form an opinion on what I read. The plan is to end research sprints with thoughtful questions since I don't find clear answers anyway. Today's 599 words written in 3 hours.
Whale activity is a simple signal for crypto volatility. Whales are just individuals or institutions who hold large amounts of a certain cryptocurrency and trigger outsized waves on the market. Here’s a simple heuristic:
When whales sell unreal levels of coins at a high price: supply shifts to the right—> prices decrease—> market arrives at a sell wall where the whales have reached a desirable lower price in order to begin accumulating more coins
When whales buy unreal levels of coins at a high price: supply curve shifts to the left—> prices are artificially inflated—> bidders are forced to raise their prices—> smaller retail investors get FOMO from the large amounts of capital deployed
Below is a simple graph of the first “sell wall” scenario where the supply curve shifts to the right as a result of whales selling. Note that both circumstances require a shift (coin’s quantity supplied is impacted by a factor other than price) in the supply curve (influenced by the sellers’ productive capacity instead of changes in consumer preferences).
In January 2022, Bitcoin lost 20% of its value, Ethereum 30%, and Binance 25%— the 3 biggest circulating cryptocurrencies by market cap.
Market cap is just a more complete way to measure a cryptocurrency’s value since it indicates growth potential based on what investors are willing to pay. It’s calculated by multiplying the price of a stock by its total number of outstanding shares.
Crypto crashes happen because of investors using too much debt to finance future purchases, illiquid markets that lack buyers after a large sellout, declines in network hash rates after harsh regulations in mining, security breaches causing fear, investor sentiment changing due to Twitter influencers, and rising inflation which leads to an increase in interest rates and a lower appetite for risk.
The biggest defining characteristic here is that the value of most cryptocurrencies is driven purely by investor sentiment, unlike stocks that are supported by underlying assets. This means that with the market crash ahead, more people will begin to take their money out of crypto investments leaving most assets extremely undervalued. The big question to ask here is whether this is the time to dump money into crypto since prices can rise extremely fast in an eventual bullish market, or avoid the opportunity altogether in fears of a 2018 type winter. Seemingly, the safest bet is to hedge potential losses by investing in Bitcoin over alts.
This brings into question the future value of cryptocurrencies beyond just profit from speculative markets. There seems to be an endless struggle between what free market participants and state actors are selecting as currency. Chomsky’s take is that one of the biggest myths of libertarianism is that free markets don’t really reflect what most people want. The market should be treated as a tool for democratic decision-making instead of a holy institution. Here’s a concrete example: when you take the Moderna billionaires or someone like Bill Gates, their wealth is accrued from decades of research in the public sector like universities (funded by a regressive taxation system), while none of the returns from their businesses are returned to the people.
The tldr; on that tangent is that even though there’s more institutional investment being poured into cryptocurrency and web3’s veneer of decentralization touts democratized financial access, I’m not convinced cryptocurrency will replace fiat because money isn’t necessarily wealth. Money is an agreement about stable value that facilitates the movement of wealth. Since Bitcoin’s supply isn’t elastic, its price most definitely will be— you can’t have both price stability and supply when it comes to currency.