Common misconception about economics of "major holders"

[intrigid]

I was reading a lengthy topic earlier regarding "major holders" or "early adopters" of BTC and how they have "too much control" of the market.

I'm by no means an expert on economics, but I know how to play scenarios out in my head. And I do know that the following scenario is commonly misunderstood.

The premise goes like this: "It's bad to allow anyone to hold too many bitcoins. This would allow them to sell off their holdings when the price is high, crash the market, and buy back at a low price, sending the market back up. Then they can repeat this until they hold ALL bitcoins and ALL money associated with selling them, and Bitcoin itself is completely destroyed."

Anyone with a shred of common sense should have alarm bells going off in their head, telling them that something is wrong with this hypothesis.

These people seem to be assuming that ANY holder of bitcoins can sell ANY amount of their bitcoins at any time for the current going price. I can only imagine that the closest these people have ever come to trading any floating-price asset is bidding for used DVDs on eBay.

Price charts do NOT tell you what you can buy or sell your holdings for. They tell you what OTHER people have ALREADY traded their holdings for. If you're a small holder, you can sell your entire holdings likely without influencing the price much. But you may have to settle for slightly less than the going price.

Let's suppose that a major holder has 25% of all BTC in existence. He might only be able to sell the first 1% of his holdings for market price, then the next 1% for 1/2 market price, then the next 1% for 1/4 market price, etc. This is how a major holder "crashes" the market through selling. However, this demonstrates exactly why a major holder has no incentive to sell his holding: After selling just a few percent of his holdings, the market may crash to 2% of its prior value, thereby rendering the remianing 95% of his portfolio worthless!

It also works the same in the opposite direction. Even though the current market cap of bitcoins is in the hundreds of millions of dollars, it's not possible for a billionaire to buy up all bitcoins. He might only be able to buy up a $million or so before sending the price skyrocketing by 100 times.

Ironically, this is why "major holders" actually have far less control over markets than the math would suggest at first glance. This is true in any market.

[molecular]

I think the idea is that our "seller" only gets the selling started and after he has pushed the price down sufficiantly there would be a selling panic, long squeezes, etc. He wouldn't sell any more at this point himself, wait for the price to find a bottom, then re-buy (and hope price would rebound).

Now I'm not sure this currently still works (look at the dumps during the rally starting january: they did not induce any panic selling), but I think there has been a time when this was profitable.

EDIT: In addition I think it would currently (in this rising market) be extremely stupid for a big holder to sell more than what he needs to be able to live next decade or so of his life in relative comfort and safety, which might not be much percentage-wise for the really big fish if they're prudent. The upside potential is just too huge... they could be Rockefellers and Rothshilds... why risk that?

[intrigid]

I think the idea is that our "seller" only gets the selling started and after he has pushed the price down sufficiantly there would be a selling panic, long squeezes, etc. He wouldn't sell any more at this point himself, wait for the price to find a bottom, then re-buy (and hope price would rebound).

Again, I think that even this hypothesis is based on a fundamental misunderstanding of the markets.

[molecular]

I think the idea is that our "seller" only gets the selling started and after he has pushed the price down sufficiantly there would be a selling panic, long squeezes, etc. He wouldn't sell any more at this point himself, wait for the price to find a bottom, then re-buy (and hope price would rebound).

Again, I think that even this hypothesis is based on a fundamental misunderstanding of the markets.

It's possible and I don't understand enough about markets to shed enough light.

However I think the story you told initially is easier to dismiss than my modification, no?

EDIT: my "story" is not based on the misconception that one could sell any amount at "last price", btw.

[intrigid]

However I think the story you told initially is easier to dismiss than my modification, no?

Yes it is.

And I'm not even saying that your scenario is impossible. Just that if the major holder tried what you suggested, he'd be more likely to come out a loser than a winner IMO. There is equilibrium in all things, and a free lunch does not exist.

[molecular]

However I think the story you told initially is easier to dismiss than my modification, no?

Yes it is.

And I'm not even saying that your scenario is impossible. Just that if the major holder tried what you suggested, he'd be more likely to come out a loser than a winner IMO. There is equilibrium in all things, and a free lunch does not exist.

totally agree.