http://en.wikipedia.org/wiki/Systems_theoryhttp://en.wikipedia.org/wiki/HomeostasisWhen things start getting messy and emotions run high, I often find it's useful to remind myself of the basics. Accordingly, this is a post aimed at those who, over the past few weeks, have become increasingly emotional and panicky about BTC price.
What should you do? Should you sell? Should you buy? Should you HODL? Should you diversify? Ultimately, these are unknowns, and the more you focus on the unknown, the less you focus on what is knowable.
So, what is knowable? Systems Theory is an *extremely* broad, overarching theory of systems in general. Depending on what discipline Systems Theory is applied to, it will look slightly different and certain systemic aspects will be highlighted over others. But, the core ideas behind Systems Theory are applicable to virtually
everything. Absolutely everything and anything is a system -- I'm a system, you're a system, and this community is a system. Most relevant to this post is that the Bitcoin market is a small, economic system nested within much larger economic systems.
Why is this basic knowledge useful?
All systems have some basic properties that, at the very least, can help us to understand the context in which the Bitcoin market exists in relation to other economic markets.
Let's first address some characteristics of all systems:
1) Entropy -- All systems are prone to entropy or decay over time, and will continue to do so without outside influence.
2) Homeostasis -- Homeostasis is a state of balance within a system, and is often achieved when systemic input is delicately balanced by systemic output. A system in a state of total or near-total homeostasis can be described as stable. A system not in a state of homeostasis can be described as volatile.
3) Input -- energy flowing into a system from external systems.
4) Output -- energy flowing out of a system into other, external systems.
Example:
Imagine a human being. From the moment you are born, you are subject to entropy. You will decay and die without some additional source of energy in the form of received input from some external system (e.g. food, oxygen, etc). But, simply receiving this input will not guarantee your continued existence. This systemic input needs to be counterbalanced by systemic output (e.g. excretion, etc.). The absence of one or the other will lead to a quick death, and extreme imbalances between systemic input and output will cause systemic volatility that can threaten systemic collapse.
Applying Systems Theory to Bitcoin:
This post isn't intended to give you a formula for determining the cause of every tiny movement, but rather to provide some general considerations so that you can place the current state of Bitcoin in a more reasonable context. Accordingly, here are a few of those considerations, though this is by no means an exhaustive or even comprehensive list:
1) Bitcoin is still a tiny economic system nested among larger ones. This implies that smaller amounts of systemic input/output will have a larger impact on Bitcoin than they would on some larger economic system. This is obvious -- simply imagine how, for example, the influx of $1 billion in new money might affect the Bitcoin market vs. how it might affect Google stock.
2) Bitcoin has experienced several phases of enormous systemic input that was not counterbalanced by systemic output. The rise to the $32 in June 2011 was the first example, the rise to $266 was a second example, and the rise to >$1000 was the third. These are all examples of periods in which systemic input was grossly mismatched with systemic output. The inevitable result of these scenarios is systemic imbalance or a lack of homeostasis, thereby increasing the chances of systemic collapse.
3) Bitcoin is not self-correcting. It is inherently linked to external systems from and to which energy is transferred. This dependence upon other systems is specifically what removes any guarantee whatsoever of recovery.
For the dense, let me repeat and highlight that last sentence:
This dependence upon other systems is specifically what removes any guarantee whatsoever of recovery.4) Volatility doesn't care which direction you're moving or whether you're making or losing money, it is simply a reflection of instability within a system. Although I'm certainly generalizing a bit with this next example, it's equally 'bad' in terms of instability whether the price goes up $100 in a day or falls $100. Accordingly, you shouldn't be looking to your trading success or lack thereof as an indicator of market health.
Again, this list is extremely short and by no means comprehensive, but I thought I'd get the ball rolling with some general advice (Note: I am NOT a licensed professional). I like people, which means that I generally like all of you, and I don't enjoy reading stories of people making investment decisions that end up ruining their lives. So, here goes:
1) To HODLers, there is absolutely 0% guarantee of a price recovery, and it is absolutely possible for this system to die.
2) Systemic death can begin at any price. Volatility and a lack of homeostasis lead to systemic death, not a low price.
3) However, as Bitcoin grows, its resistance to systemic death increases. Furthermore, as systemic output grows to match systemic input, the chances of re-establishing a homeostatic state increase. Consequently, even this precipitous price drop from the ATH over the course of nearly a year is not conclusive evidence of a dying Bitcoin market, but possibly of one that is mending and healing itself. This is directed towards the doomsday prophets on this forum.
4) Avoid extreme positions. Don't commit yourself to sinking with the ship, but also don't pretend icebergs can't or don't exist.
**Note: For the record, I released the majority of my holdings between $600-$850 but still have some stake in this market.
