Most likely it happened to you that you don’t know where the last dollars you swore were in your wallet. Given this situation, it would seem that the money has literally vanished.
It is an inexplicable mystery that may never have an answer; that in this case you probably don’t remember what was spent.
But this feeling of “fading money” is felt by many people when they suddenly discover that the stock market has plummeted affecting the balance of their investment portfolio.
It is then, when you ask yourself, where does all that money go?
The simple answer is that money doesn’t go anywhere when the market falls, mainly because it was never there!
And to try to explain it clearly; We must keep in mind that money is not real, it is only an idea, a concept or a notion.
And my comment does not go from an antimaterialist perspective; I mean that money is a purely theoretical concept.
If we investigate, we will realize that the current money in wallets and bank accounts; It is actually a very small part of our economy.
The vast majority consists of share value and property valuations, etc. All that value, on which companies, jobs and lives are based, only exists literally in our minds.
Trust, faith and expectation is everything
It is our confidence, which allows us to give a price to things. The moment we lose confidence in that, everything collapses. Money only has as much value as we give it.
In essence, what happens is that investors, analysts and market professionals show their expectations. When they declare that their projections for said market have been reduced; Market faith falls and with them prices.
Therefore, investors are not willing to pay as much for the shares as before. Thus; Faith and expectations can translate into cash.
If the money does not exist; How do you earn and lose capital in the markets?
No one wins or loses, until they sell their position. Profits and losses are not temporary; they are states and they arrive the moment you change your position.
In this way, many take real gains in a favorable trend. Others decide to wait longer and end up selling when the market goes against them.
Markets move by the forces of supply and demand. If the offer is very large and unbalances the balance, we will have a price drop. If demand is high, prices will increase.
But supply and demand do not take part on all the existing actions of a particular market.
The volume of the shares that enter the trade, are only a fraction of the total of the same. Since not all shareholders sell at the same time.
Let’s put the Bitcoin capital market in context, at the time of writing it is “valued” at $ 155 billion. With a supply total of more than 18 million Bitcoins at about $ 8,600, each unit.
That “estimated value” of the Bitcoin capital market is an extrapolated value that is determined simply by multiplying the Bitcoin market price by its total supply.
However, the key to understanding it is that to reach that market value of $ 155 billion, you do not need to sell all existing bitcoins.
That is, that would be the theoric value of the capital market, if all Bitcoins were commercialized at that precise moment. Thing that doesn’t happen.
We know that this is not the case; since bitcoins that are immersed in commerce are only a fraction of the total supply.
Many have no intention of putting them up for sale; as they happen with the actions of the markets.
An example to clarify ideas
We will set the case for tangible things. Suppose we have a bakery and we have prepared 10 cakes to start at a price of $ 20 each.
In this way, if we manage to sell all the cakes in a single day our potential profit will be $ 200 (capital market).
The first day we managed to sell 2 cakes (volume traded) and we get a total profit of $ 40 (traded value).
On the second day, the 2 cakes are replenished and we have 10 cakes again at the start of the day. And so every day. After a few weeks; We see that every day 8 cakes are sold very well and someone commented that they are very tasty and their price is very low.
For this reason, we have market confidence and have decided to double production and raise the price to $ 30 each cake.
In this way, we now have a supply of 20 cakes at $ 30 each; which gives us an expected potential profit of $ 600 (capital market).
However, one day for some strange reason, people have decided not to buy cake and on that bad day only 1 was sold, resulting in a traded value of $ 30.
Unfortunately for business, this is repeated several days.
And in this situation you decide that now you will lower your prices again to $ 20 and produce 20 cakes, which will result in an expected profit of $ 400.
With this, in stock terms, $ 200 of your business has vanished, which can no longer arrive because now the market already pays less for your cakes. That money never really came in, but in theory it had the potential to do so when they were worth $ 30.
Thus, we can say that the stock market refers to a “potential money” that could enter the market; but that is actually in expectation and is determined only by a small fraction that moves the price of the shares according to supply and demand.
The real money that intervenes in the markets, acts as a fractional reserve; and serves as market liquidity. Therefore, the rest of the money that never reaches the market; It is the one that in “theory” could come.
Likewise, when a market loses investor confidence; that fraction that represents the real liquidity; It usually moves to other markets and that is when we say that wealth is transferred from one sector to another.