Jam wrote:I don't understand how currencies are subject to volatile trading. If you sell a stock you are removing your money from the company. If you sell dogecoin you are giving your money to someone else in exchange for something. A currency isn't a corporation. I don't understand.
Think about currency trading as trading in anything else. The price of a currency derives from the current demand and supply of said currency. The value of assets and other currencies is usually denoted in dollars, because it is simply the main reference point.
As Dolan said, owning a company share entitles you to a
share of the company profits, paid out in the form of dividends. Hence, common share valuation theories say that the expected future stream of profits divided by the number of shares is a fair stock price. However, that is just a theory and now people come into play. The
actual stock price is not determined by some theory, but just by the subjective expectations of millions of individuals. These individuals trade stocks with each other and everyone has his/her own model on how stock prices are formed. The stock price now reflects the aggregate tendency towards bullish or bearish expectations for the corresponding company. Do people on average believe, on whatever basis, that the company is currently over- or undervalued? In the very short run, we can also observe a lot of volatility. This is partially driven by the former and further by the reduced number of available shares for trading, since many shareholders are not active at the markets daily.
The same applies to crypto currencies, just that you are not entitled to shares of a company. The valuation of a currency still depends on the relation between demand and supply. Taking the dollar as an example, the demand for a currency can be driven by products that you can only buy using that currency, e.g. oil. There is a lot of demand for dollar simply because the entire world pays oil in dollars and has to buy these dollars first. Another example are general trade relations. If Germany exports a lot of stuff to non-EU countries, these countries have to pay with Euros, thereby increasing demand and price of the currency. The same is true for crypto currencies, which makes it important when Tesla allows its cars to be bought with bitcoin, since it increases demand for the currency. Cryptos, however, are very volatile compared to other currencies, because their price does not so much depend on market activities such as buying oil or cars but on peoples' expectations that they will be used for such actiivities in the future. Many people just asssume that crypto currencies will be a big thing in the future and the earlier you acquire them, the better is the price that you have to pay for them. Others have no idea how all this works, just see an asset that keeps increasing value and jump on the bandwagon.
Whatever is written above: this is no financial advice.
Beati pauperes spiritu.
