Imagine you and I are neighbors.
We live in two identical houses, which we each paid $100K for.
And then, we get some good news.
It seems like Jay-Z and Beyonce might be moving in down the street.
Suddenly a lot of people want to move in right where we live.
You sell your house for a cool million dollars.
A net profit of $900K.
A 900% return on your original investment.
I hold on because I figure if Jay-Z and Beyonce are moving in, Kanye West will move in too before long, and this will shoot up prices even more.
Only there’s a crash.
And Jay-Z and Beyonce decide to move somewhere else entirely.
Suddenly, my house is back to being worth just $100K.
And I’ve seemingly lost the $900K in assets I had only yesterday.
Except in reality, I’m right back to where I was before the whole Jay-Z and Beyonce bubble happened.
I might feel bad about my loss, but looked at in another way, I haven’t really lost anything.
This is just the nature of value.
It’s a fickle thing, and it depends on agreement and human emotions more than the “real” value of the underlying assets.
It’s something we see very well in the crypto world.
Many cryptos have billion dollar market caps.
That doesn’t mean they are actually worth anything like that.
Just like with the real estate example, it’s about expectations and valuation.
And if you managed to sell your Bitcoin for $20,000, it doesn’t mean that the millions of other Bitcoin in circulation are actually worth that much.
Maybe they will be worth more in the future, if more people want to get in, like when people wanted to live next to Jay-Z and Beyonce.
But if that doesn’t happen, the value might go down as well.
And in that case, your cryptos might not be worth very much at all.
P.S. There’s a lot of confusion about what cryptocurrencies actually are and how they operate, especially for mainstream investors who are newer to this market.
That’s why explaining things using analogies like the real estate example above can be useful to get new, non-crypto investors comfortable with what cryptos are all about. i
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