Humanity has known trade since the dawn of history, and when people learned trade, they learned its sole law.. the law that determines the price of something is the law of supply and demand.
Why did the price of Bitcoin rise from mere cents to tens of thousands of dollars? - A question you must ask yourself before entering the world of crypto. The answer lies, as we mentioned earlier, in the simplest and strongest economic law: supply and demand.
On a cold night in 2010, Laszlo Hanyecz bought two pizzas for 10,000 Bitcoins. The value of these Bitcoins today exceeds one billion dollars! What changed the value of Bitcoin so dramatically? Simply: a huge increase in demand against limited and decreasing supply.
Supply and demand in the crypto market operate on the same principles as any other market, but with some unique characteristics:
*Limited supply: Unlike traditional currencies that can be printed without limits, most cryptocurrencies have a predetermined limited supply. Bitcoin, for example, is limited to only 21 million units, of which more than 19 million have already been mined. This programmed scarcity is similar to gold in its limitation.
*Continuous decrease: With the loss of private keys and the burning of coins, the actual supply is continuously decreasing. It is estimated that about 4 million Bitcoins have been lost forever!
*Volatile demand: Where demand is affected by multiple factors: news, institutional adoption, government regulations, speculation, and psychological factors such as fear and greed.
Robert Kiyosaki says: "The rich buy assets, and the poor buy liabilities." In the crypto world, understanding supply and demand dynamics helps you determine when to buy assets and when to sell them.
The expert in technical analysis Walid Rafat explains: "When I see a large inflow of cryptocurrencies to trading platforms, I know that selling pressure may increase. And when I see a large withdrawal of currencies from the platforms to private wallets, I expect a decrease in supply and a potential rise in price."
The halving event in Bitcoin - when the mining reward is cut in half approximately every four years - illustrates the effect of reduced supply. Historically, each halving event has led to a new upward cycle afterwards.
But beware of the "false supply and demand law" created by market manipulators. In crypto markets, especially small ones, "whales" (large investors) can create artificial demand to drive up prices, then sell at high prices to eager investors.
Karim, a professional trader, says: "I remember a small coin that rose 300% in one day due to a rumor about a big partnership. People bought like crazy, then we discovered that the rumor was false. It was a harsh lesson in how to manipulate demand."
As Warren Buffett says: "Be greedy when others are fearful, and fearful when others are greedy." In the crypto market, this means buying when demand drops due to general fear, and selling when demand rises due to greed and frenzy.
In the next post, we will discuss common mistakes that beginners make in the world of crypto. Are you ready to avoid the traps that await new investors?