My Theory On Bubbles and Crypto Currencies using a standard lab filter funnel.
Imagine we have a glass filter funnel. (Other materials are permitted)
Buyers or early adopters start filling the funnel from the bottom up, with a tight and restricted range to trade and the very limited volume in the neck, they quickly fill the whole volume of the neck in the funnel.
Now we enter the V of the funnel, V for ‘Volume’ and now volume starts to increase at an increasing rate as the slope of the funnel side rises. Trading range is also increasing in direct proportion to the diameter increase of the funnel body as it fills with orders.
We now see big swings. The people in the neck don’t care, they are few and very happy having got in early. They have nothing to lose and can’t really influence price, even if they all sell at once. Price is well above the neck anyway.
As we rise up the sides of the funnel volume increases until we hit the top and overflow. Price might hold, but those at the top have more to lose and the chance of a sudden fall increases because of the volume of holders with more to lose and fewer buyers waiting to fill the void. The higher we rise up the funnel body, the greater the volatility and the trading range.
The bubble is now ready to pop!
As traders we need to estimate where our instrument is in its own funnel.
What worries me most about Crypto currencies, is the lack of sellers.
It is a well know fact that most traders like to buy. However, this is a learned behaviour that is acquired through environment. It’s an ego thing too! I get that with investments. I own my own house for that reason. The population is increasing and life expectancy is also. As for land, they stopped making that too! : So in general property and land will rise in value with population increase.
I think what worries me most about crypto currencies is the fact that they are at heart, investments in technology. I understand science. I understand Moores Law. This worries me too. I see crypto currency as another technological product and as such, they are subject to rapid change that is delivered as chip speed reaches the current maximum.
I think this is one of the reasons we see the proliferation of crypto now. I see this increasing in the next couple of years. There will be winners, but as always those winners will be strong enough to buy in to those ahead of them in the race!