If there wasn’t any money printing, wouldn’t there be as many losses to valuation to certain stocks/coins to compensate? I just don’t really grasp why certain stocks going up ends up pulling up other stocks of similar nature usually.
In: 2
It’s important to understand that financial markets (stock, bond, derivatives and now crypto) are largely closed systems and don’t generate new wealth on their own. **Trading a financial asset doesn’t cause any money to go to the original creators and enter the wider economy.** There is not actual money going into the company you are “investing” in unless you actually buy the stock from them. Many of these assets have what I am going to refer to as retention value, a value you can earn by owning the asset. Common examples of retention value are the dividends payed by companies to their shareholders, or the payoff from a bond. Notably, crypto-coins and NFTs don’t have any retention value, and the only to make money from them is by reselling them. This brings us to the second major point: **The selling price of a financial asset is dependent of the purchaser’s perception of it’s value**, a combination of it’s retention value and it’s resell value. If you can convince people that an asset is either going to produce a lot of value just by owning it (the company is going to do well so they are going to large dividends or everyone pays their mortgages so this bond will be safe and earn you a lot of money), or that the demand for an asset is going to increase so they can resell it at a high profit, you can sell it for a high profit. **The people who got in early get to resell their assets to the people who got in late for large profits.** Since the value of the markets are based of the volume of the assets in them and the last selling price of those assets, **markets grow in value when people put more money into it.**
This leads to a problem in the underlying incentives of the markets, which show up two easily observable ways: fraud and bubbles. Fraud is when a person deliberately causes an asset to be overvalued in other to sell something effectively worthless for a high value. A common way this is done is using “pump and dump” schemes, which run rampant throughout the crypto-space. This points to the underlying problem: **increasing the value of a market increases the perception of value of the assets in that market, regardless of the underlying reality.** This is why there hasn’t been a systematic effort to attack fraud in the crypto-space: the fraud increases the perception of value in the market, which lets everyone sell their assets at a higher value, even if they are toxic. And I’m not just picking on crypto. Even in the other financial markets where fraud is better controlled, you get bubbles. A bubble occurs when a kind of asset is systematical over-valued, driving up the value in the market until everyone realized that they are toxic and tries to sell them all at once. All the wealth that was used to buy those assets on the market is transferred to the people who were able to get out early before the bubble burst. This over-inflation in value is always expressed in the perceived resell value, which is result at people being bad at predicting what things will be worth in the future. This is actually a hard problem, but a common (and often wrong) expectation is that similar assets will rise and fall together. If one company does something innovative and massive increases in value, other companies in the same sector will have their stocks purchased as well, increasing their value, as people assume that they will be able to do something innovative as well and the purchases want to get in early before the stock bubbles.
Latest Answers