The Herding Effect in Crypto-Markets
https://www.cnbc.com/2017/10/13/jamie-dimon-says-people-who-buy-bitcoin-are-stupid.html
Cryptocurrencies have dominated financial news headlines for the past 12 months, as Bitcoin, the giant of cryptos, has soared 1000% in the past year. Cryptocurrency markets are entirely speculative, a feature which tends to lure away conservative investors. These types of markets are susceptible to attacks from what we call the “herding” effect in networks. The article above is a news article about Jamie Dimon, the CEO of JP Morgan, calling Bitcoin “a fraud.” Soon after he made these remarks and they became viral, Bitcoin’s price tanked. Granted, it climbed to new highs shortly after, this example still illustrates the extent to which news stories are able to influence speculative markets.
Linking what have learned in class to this recent drop in Bitcoin, the marbles example comes to mind. In the marbles scenario given in class, students are told that a jar containing 3 marbles in it is either majority-blue or majority-red. There is a 50% chance of either. Each student then takes their turn in secret pulling a marble from the jar, looking at it, and declaring their prediction to the class. With this scenario, imagine the case where the first two students picked the 1 blue marble in the jar, leaving the two red ones behind and never seeing them (1/9 chance). They would then declare to the class their prediction of majority-blue. If the third person chose a red, they would be hedging what they chose with what the other two chose and would say majority-blue regardless. Every student afterwards would say majority blue until the chain is broken. This scenario relates perfectly to the recent dip in Bitcoin. After Mr. Dimon, a big name in the financial sphere, made this statement, initially, young bitcoin holders panicked and sold off some of their BTC. Once a herd of investors with low faith in the market make the decision to dump, BTC’s price drops. After the initial dropping, the truth and valitidy of Jamie Dimon’s statement becomes totally irrelevant, because investors will follow suit and continue to dump Bitocin, only because they assume that others perceived for this event to be bad news. Herding effects are a reality in all network, but especially in speculative ones like crypto-markets.