How does a market ‘crash’?
In: Economics
A market crashes when human emotion gets out of control when trading goods. Everything we trade between each other has extrinsic value, or worth based on how much other people want it (demand) and how hard it is to obtain (supply). (Dirt is cheap because there’s lots of it and not many people want it, but land is expensive because there’s only so much of it on earth and too many humans want it) Now this value changes all the time, and that’s fine, but if the value, for say, bitcoin, drop too fast, all the people watching will panic because they assume that all of the Bitcoins they have could soon be worthless, so what do they do? Sell the Bitcoins while they’re still kinda valuable. But uh oh, now there’s more supply and less demand for Bitcoins, that makes them cheaper, making more people sell, making it cheaper, making more people sell, etc, creating a feedback loop where the Bitcoin becomes completely useless as a commodity. Basically people’s reluctance to buy is linked to people’s desire to sell, this pushes the value down exponentially. That’s a market crash.
Now, what would.cause that initial big blip that triggers the crash? There’s lots of reasons but one big one is when people get hyped up and buy into it, causing an artificial rise that’s not linked to supply and demand. This rise “fad” is called a bubble, and bubbles pop.
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