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This question really goes for any kind of "financial instrument" or whatever the generic term is, but I'm going to mention Bitcoin as an example.

I fundamentally don't understand why, once somebody has taken an offer for $X, somebody else makes a sell offer for $X minus whatever amount.

Why sell for less than what somebody else has already proven that they would pay for? Why allow the price to go down once somebody has bought at the (relatively) high price?

Is there some kind of benefit to selling lower than the "new high" price? There pretty much has to be some benefit, or else they wouldn't do it... But I don't get it.

Clearly, I don't understand economical systems. It seems impossible to me to predict how the prices will change, unless you have some very juicy secret information that only you in the entire world knows, and I don't understand why anyone selling Bitcoin (for example) would ever make an offer that's less than what's previously been paid.

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    You are assuming that price always inevitably goes up again. Be very, VERY cautious with that assumption, because it leads a lot of people to take on higher and higher prices for something that turns into a bubble. In particular, I still do not believe bitcoin has any inherent value, meaning it relies on ongoing market trust for its continued existence, and loss of faith in that value could pop the bubble (which has already happened many times). – Grade 'Eh' Bacon Nov 24 '20 at 13:51
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    Have you ever bought and sold a car? Did you sell it for more than you bought it for? Why not? Was it because you know old cars are usually less valuable than new cars? Is that why you didn't wait a few years for the car to "inevitably" increase in value back to the showroom price again? – Robert Longson Nov 24 '20 at 20:02
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    This is happening on the real estate market to some extent. Sellers who don't need cash immediately are very reluctant to sell with a loss, which makes prices more sticky – JonathanReez Nov 24 '20 at 21:57
  • Speaking form experience, there are some markets where undercutting the current market price, even by a small amount, has the distinct advantage that the sale happens much faster than trying to sell at or above the current market price. The trading systems and auction houses in most MMORPGs are very consistently like this, at least during peak hours. – Austin Hemmelgarn Nov 25 '20 at 2:37
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    Looking at this from the opposite direction: if a buyer knows that something could be bought for as low as $X, why would anyone agree to buy it at $X + 1? Ergo, the prices should remain constant forever. – IMil Nov 25 '20 at 4:52
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Because what if nobody wants to buy at that price any more?

When the buy price and the sale price meet, a transaction happens, and those prices are removed from the market. That means there's always a gap between the highest buy price and the lowest sell price. No more trading happens until someone decides to increase the buy price or decrease the sell price.

So, the direction of movement depends on whether the buyers or the sellers get more desperate to make a transaction happen.

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    For example, in Bitcoin: if people think Bitcoin is going to go up, they want to buy it now before it goes up, which makes it go up. But if people think Bitcoin is going to go down, they want to sell it now before it goes down, which makes it go down... – user253751 Nov 24 '20 at 17:41
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    you should edit that in, it's a great way to explain it. – Kat Nov 24 '20 at 21:50
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    @user253751 funny illustration of that principle – JonathanReez Nov 24 '20 at 21:59
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    I'm hoping that people understand what Speculative Bubble is and not jump onto bandwagons with their life savings. I actually DO know someone, personally, that has Bitcoins, but they got it when it was worthless, like $0.01 ea worthless. They didn't buy any, since that was pointless. They really liked the tech side of things and mined it. He now has no problems retiring well before the retirement age, but NONE of the decision to "get into bitcoin" was due to any financial incentive. It is pure luck. – Nelson Nov 25 '20 at 2:23
  • @Kat I didn't write that in the answer, because it's tangential to the actual point. – user253751 Nov 25 '20 at 16:00
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Just because one buyer was willing to pay $X doesn't necessarily mean other buyers will as well. Maybe that first buyer isn't interested in buying any more since he already has what he wants.

If you don't mind waiting, potentially quite a long time, then you can feel free to leave your selling price at $X, or even increase it. But if you need the product sold soon (for example, so you have the money to spend on your own expenses) or if it's a one-off sale and you just want the thing out of your house, then you might want to consider lowering the price to make it sell faster.

There's also the question of other sellers. Maybe you're sticking to your "poven" price of $X, but if someone else starts selling the same thing cheaper, buyers will most probably go to him instead of you. Again, it's a waiting game. If you're content to wait until all other sellers have run out of supply to sell, you can maybe still command your desired price. But if you can't wait that long, or if other sellers are not likely to run out of supply any time soon, you might want to consider lowering your price to compete.

And then there are other market factors to consider, aside from basic availability of supply. Changes in public mindset can influence how much people are willing to pay for a given product. A product that's popular due to being a fad or having some association with a popular political mindset might be able to command high prices, but over time those interests may fade from the public opinion and the buyers of the product will correspondingly dry up.

Finally, there's the the question of perishable goods, or "newness" in the case of things like video games. This may not apply so well to Bitcoin, but some products are more valueable when they're new/fresh, and will natutally degrade in value over time. So you need to set your price accordingly, and you may need to lower it if it doesn't sell quickly enough, because it's simply less valueable after time has passed.

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Pricing is a complex art, and there are a lot of non-intuitive aspects to it. Here's a real-world example that might help (examples use normal products, but the concepts are generally the same for investments like bitcoin).

A certain PC video game retailed for around $50. This game was rather popular, sold well, and was one of the main moneymakers for the company that developed it. Around six months after its original release, the game was added to the digital distribution platform Steam where its initial sale price was in the $5-7 range. Within about a week, sales from the deeply-discounted digital version had brought in more overall profit than that game had earned from full-priced copies over the last six months.

Each copy sold had a significantly lower profit margin. However, the lower price resulted in higher demand and thus higher sales volume. Total profit = (profit margin per item) x (number of items sold). Reducing sale price lowers your margin per item, but that's not a bad thing if it increases the number of items sold by a greater magnitude.

Things are a little bit different in situations where your number of items sold is always 1 (e.g., an individual selling a house or a car). When a buyer sees equivalent items available from multiple sellers, they generally choose the cheaper option. Undercutting your competition (selling at below the current market price) drives demand to your item and allows it to sell faster. If selling your car for $500 under market price means you can sell it fast enough to avoid making next month's $650 car payment, then you've made $150 more overall than if you had waited to sell it at full price. Similarly, you can come out ahead by selling your bitcoin quickly at a 5% discount if if means you can pay that credit card bill on time and avoid a pile of late fees and interest.

When businesses take this to the extreme it's called a price war. Multiple businesses continually adjust their product's price downward in an effort to draw customers away from their competition or force weaker competitors to close.

Some items are already sold at a loss and the sale price doesn't matter much anyway. Products like inkjet printers or video game consoles can be loss leaders. The money lost by selling them is made up for over time by the sale of ink cartridges and games (respectively). In cases like that, reducing your price may not have much impact on your overall profitability. Mobile phone service providers advertise free high-end phones for customers that switch from other providers. They lose money by giving the phones away, but they make it up over the length of the service contract plus they poach customers from their competitors.

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  • Could you reference a specific game? – JonathanReez Nov 25 '20 at 1:01
  • @JonathanReez I was a bit vague in my example because I couldn't remember the specific game (it's been a couple of years). It was a big-budget AAA game from a major studio though, think something on par with an entry in the Bioshock or Fallout franchises. – bta Nov 25 '20 at 1:21
  • To sell a car securing a loan you have to pay off the loan (using the sale proceeds, since if you had other cash to hand you should already have paid off the loan). Only part (and a varying part) of your payment is interest, so waiting until next month to sell for $500 more may in fact be a better deal (sometimes). Interest (much less penalty) on your CC is different; that's all pure expense. – dave_thompson_085 Nov 25 '20 at 9:09
  • The question specifies that it's talking about financial instruments. – Acccumulation Nov 25 '20 at 17:37
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If a seller shouldn't offer to sell at a price lower than the highest price anyone has ever paid, doesn't it follow that a buyer shouldn't offer to buy at a price higher than the lowest price anyone has sold at? If everyone followed those rules, no sales will ever occur.

Suppose you're at an auction selling a baseball card. One person bids $100, then someone bids $101, then someone bids $102, etc. Eventually someone makes a bid that no one beats, say $120. Since no one beat the bid, we can conclude that no one is willing to pay $121 for it. So if you have another one of the cards, and you want to sell it, what will you be able to get for? You definitely won't get $121. On the other hand, just before the $120 bid, there was a $119 bid, so you probably will be able to sell it to whoever made that bid. It's possible that the person who was willing to buy one for $120 is willing to buy a second one for $120, and it's possible that someone else was willing to buy it for $120 but the auction goes to whoever puts their bid in first, but that's not certain. So if you want to sell the card, you may have to offer to sell it for $119. You can either offer it for $119 and very likely have it sell, or offer it for $120 and possibly have it sit on the market and not move.

From an information theoretic point of view, once you enter the market wanting to sell, you are adding the information that you think that the current price is at least as high as its value. It's rational for the market to adjust downward on receiving this information.

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