It’s frustrating seeing your account value massively up one week, only to see it take a massive decline the following week.
Why is this so prevalent in the crypto space?
Well, the best way to break this down is through old-fashioned supply and demand. However, an easier example would be to understand penny stocks.
Yes, penny stocks! Penny stocks are notorious for seeing massive spikes in value and then crashing back down. The reason for these particular spikes is due to imbalances in supply and demand. A large investor can single-handedly move the market drastically with a large purchase, only to not have enough true buyers to support or sustain price.
Imagine buying $1 million worth of an asset, yet only $50,000 worth of volume is actually flowing through the asset. In that moment, you will have an imbalance of demand. The buying pressure will be artificial due to not having enough buyers in the market.
This is how smart investors avoid pump and dump schemes in the market (read more on those here). If price drastically rises but volume does not support it, that signals that a large player has artificially pumped the market with a few large orders. This can lure novice investors into the market through greed. However, when those investors arrive, they are buying a fraction of the orders and price drops because not enough true volume has entered the market.
So how does this relate to crypto? Crypto is still considered a young emerging market. High price valuations are difficult to sustain due to not having proper supply and demand ratios.
Imagine everyone who thinks they will become a millionaire holding SHIB. In order to make that a reality, most people don't factor in the amount of people that would have to buy a million dollars' worth at a higher price.
Look at this math:
Let’s say 10,000 people have $1 million worth of SHIB.
That means if all 10,000 people wanted to sell, they’ll need at least $10 billion worth of buying pressure in that moment. However, let’s say there are 100,000 people in line ahead of those 10,000 sellers in the order books. Those 100,000 orders will get filled before those of the new 10,000 sellers. If that occurs, the 10,000 sellers may not have enough buyers for their SHIB.
This is why DOGE coin couldn’t sustain at 73 cents valuation. At the time of this writing, DOGE is at 15 cents, which is still not bad considering that many invested in DOGE when there were 5 zeros after the decimal.
To sum it up, crypto prices drop drastically due to not having enough buyers to enter the market at certain price levels.
Crypto is a young market and we will soon see stabilization as new institutions and regulations enter the space. Once this occurs, we will see healthier market moves.
Written by Eric White