(Drivebycuriosity) - Bitcoin gets a lot of attention these day. After an explosive rally which catapulted bitcoin from 30 Cents (2011) to almost $20,000 its price suddenly crashed and bitcoin dropped almost 50% by last Wednesday. But at the end of the week bitcoin rallied again and gained about 11% ( worldcoinindex).
I think the bitcoin turbulence is another proof for the madness of the crowds. Yes, I don`t believe in the popular term "wisdom of the crowd". I rather agree with the Scottish journalist Charles Mackay who published already in 1841 his book "Extraordinary Popular Delusions and the Madness of Crowds" - an early study of crowd psychology (wikipedia). Mackay named phenomena like the Dutch tulip mania, alchemy, crusades, duels, economic bubbles, fortune-telling & haunted houses. Makay noticed that crowds behave unpredictable, irrational and often dangerous. Sometimes they panic and cause a deadly stampede. Modern times examples include the stock market crash in 1987 (minus 22% overnight), tripling oil prices 2007/08 & the stock market meltdown 2008/09.
Bitcoins got fast popular because they are scarce. According to Wikipedia new bitcoins are created at an ever-decreasing rate (wikipedia). The total number of bitcoins is capped at 21 million by its creators. And its anonymity can be used for illegal transactions and money laundering. The bitcoin price started to rise because speculators made bets on rising prices which worked as a self-fulfilling prophecy. Other responded and jumped onto the bandwagon guided by the hope on further price gains, the so-called momentum players, which created a snowball effect. Recently bitcoin holders got irritated by reports on possible government crackdowns and regulation (reuters). Some sold, causing a correction, which induced also some momentum players to take profits. Falling prices induced more sales because many bitcoin holders feared more losses.
The bitcoin yo-yo is driven by herding behavior. People often behave like herds, they are following others, depending their decisions on the behavior of the group. Often they move in the same direction which can intensify into a panic. On financial markets occur sometimes buying panics - when a large crowd believes to miss easy gains - and selling panics, when the crowd wants to get out. These phenomena are called stampedes. They are known from cattle which sometimes panic all together and trample everything down which is in their way. Unfortunately, humans behave sometimes in the same way. On December 31, 2014, a deadly stampede occurred in Shanghai, where around 300,000 people had gathered for the new year celebration (wikipedia). In July 2010 at least 18 people died at the Love Parade music festival in Germany when they were crushed inside a tunnel during a stampede caused by panic (theguardian).
"We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first" wrote Charles Mackay.
As I said, crowds behave unpredictable and so will the price of bitcoin.
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