The reality of Crypto Investments – The cryptocurrency market seems to be growing in popularity every day and you might be searching for the best crypto investments in 2022. However, the actual reality isn’t the one you are looking for. The recent crash of cryptocurrencies including bitcoin is continuing.
The current price of bitcoin has plunged to USD 18,993, witnessing one-third depreciation while the price hiked up to USD 65,000 last November 2021. You might have seen statistical data and reports on this one-year-wide 75% major crash which wiped about USD 200 Billion from the global crypto market.
Have you ever thought about where this USD 200 Billion gone? Did some entity got benefitted from this wipe-out? Did someone get the “lost” billions in their accounts? or, Did it just disappear from the market just like how it happened when “Thanos” snapped? Here is an overview to give you understanding on the reality.
THE REALITY OF Crypto Investments
Let’s say, you bought a share of Apple Inc. at USD 140. Later when the share price decreased to USD 100 you sold it to avoid more loss in future. Now you have lost your USD 40. Where do you think you lost USD 40 go? Did your stock broker or the next person who buys the stock get that 40? No, It doesn’t.
Also read – The Kanban of an Investor – Plan To Be Rich
Let’s take another example, You were planning to buy a stock of Alphabet Inc. at USD 2200, and before you decide to buy it, the stock falls to USD 2000. Looking at the sudden drop in the price, You quickly bought the share at USD 2000. You can think that you saved that USD 200, but you didn’t earn USD 200 profit either. It has to move up higher in order to generate profits.
If you sell a stock for a loss, the next person who buys the stock at that lower price doesn’t benefit from your loss. He must hold the stock until it rises to make a profit. The companies that issued these stocks also didn’t benefit from the loss you have made. So where did the money go?
According to Marvel Cinematic Universe when Thanos snapped, half of the world population just vanished into thin air. Where did they go? They were wiped out and disappeared from the face of the Earth. Just like that, the money lost in the market actually disappears irrespective of crypto markets or share markets.
Implicit value and Explicit value
There are two terms that you need to consider while trying to understand this phenomenon. The Implicit and Explicit Value of an asset. The implicit value of an asset changes with the people’s perception of a stock/asset. For example, when TATA Motors announced and introduced its EV lineup, which outperformed the expectation of its consumers, will improve the implicit value of the stock over that of Mahindra or Maruti, or its competitors. It is just a pure and basic concept of demand and supply of assets.
When this faith or emotion undergoes a change, it will reflect in the implicit value and the stock price follows a similar trend. This is literally true in the case of crypto.
The value of crypto is determined by the people’s perception of its underlying technology and market sentiments. The best example of the decade is the DOGE coin. Its value increased when Elon Musk, CEO of Tesla and SpaceX tweeted about it on Twitter.
The Explicit value of an asset depends on the actual value of the company according to its accounting value in its books, also known as Book Value or Intrinsic Value. Book value or Explicit value of a company or an entity can be defined as the difference between its assets and liabilities.
Also read – Inflation – Is it Good or Bad?
To make it further clear, consider this real scenario, the total number of shares of TATA Motors is 332 Crore shares. If the value of TATA Motors shares drops by INR 1, it would be equivalent to losing more than INR 332 Crores in its implicit value. Still, the company has many assets and the change didn’t take place in its explicit value. When the stock/crypto price plunges it indicates that the demand for that particular stock has decreased among the investors at least for some time.
The Reality in Cryptoverse
The harsh reality of the crypto world is that there is no explicit value for a cryptocurrency moreover if you check the book value of bitcoin is Zero. Its value is due to the hope in the disruptive underlying technology.
Based on this speculation the value of the cryptocurrency changes. To the principles of supply and demand, when there is a high demand which outnumbers the number of newly mined bitcoins, this pushes the market price for bitcoin. Since there is only a limited supply of Bitcoin (21 million coins produced by the year 2140, 19 million coins are currently circulating till now) value of bitcoin is interlinked to the total quantity.
If everyone finds bitcoin to be a rare collectible and starts buying it will raise the market price. If many people holding a huge quantity of bitcoin sell their coins, then the markets will be flooded with bitcoins, and the supply of the coin increases, which in turn reduces the value. Just like now, huge amounts (in billions) will be simply wiped out. This applies to all traded assets and collectibles.
The tailpiece; As per triple-a, India has the highest number of crypto holders at 100 million. The United States has the most Bitcoin trading volume on exchanges followed by Russia, Nigeria, the EU, and China. Most bitcoins are owned by Satoshi Nakamoto, the anonymous creator of bitcoin (above one million holdings in a single account).
Since the intrinsic value of crypto is zero, what if the entire crypto market (USD 1 trillion) is wiped out? Will the world slumps into a Financial Recession? Let us hope that time will prove everything!!
What are your comments on Crypto Investments. Let us know in the comments below. Check out other articles from various domains – click here.
