CryptoURANUS Economics: Bag Holder: Defined in CryptoCurrency

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Thursday, August 2, 2018

Bag Holder: Defined in CryptoCurrency

Bag Holder



What Is a Bag Holder?
A bag holder is an informal term used to describe an investor who holds a position in a security that decreases in value until it descends into worthlessness. In most cases, the bag holder stubbornly retains their holdings for an extended period, during which time, the value of the investment goes to zero.


Bag Holder Example(s):
A bag holder refers to an investor who symbolically holds a “bag of stock” that has become worthless over time. Suppose an investor purchases 100 shares of a newly public technology start-up. Although the share price preliminarily rises during the initial public offering (IPO), it quickly starts dropping, after analysts begin questioning the veracity of the business model. Subsequent poor earnings reports signal that the company is struggling, and the stock price consequently plummets further. An investor who holds onto the stock, despite this ominous sequence of events, is a bag holder.

Suppose an investor purchases 100 shares of a newly public technology start-up. Although the share price preliminarily rises during the initial public offering, it quickly starts dropping, after analysts begin questioning the veracity of the business model. Subsequent poor earnings reports signal that the company is struggling, and the stock price consequently plummets further. An investor who is determined to hang onto the stock, despite this tumultuous sequence of events, is a bag holder.


The History of Bag Holders:
According to the website Urban Dictionary, the term “bag holder” hails from the Great Depression, where people on soup lines held potato bags filled with their only possessions. But the term has since emerged as part of modern-day investment lexicon. A blogger who writes on the subject of penny stock investing once quipped about starting a support group called “Bag Holders Anonymous.”




Disposition Effect:
There are several reasons an investor might hold on to under-performing securities.

1.) neglecting one's portfolio, and only be unaware of a stock’s declining value, and an investor will hold onto his position, because selling it means acknowledging a poor investment decision in the first place.

2.) There is a phenomenon known as "the disposition effect", where investors tend to prematurely sell shares of a security whose price increases, while stubbornly retaining investments that drop in value.

This translates into an investors psychologically hate losing more than they enjoy winning, so they consequently cling to the hope that their losing positions will bounce back.

A phenomenon known as "the prospect theory", where individuals make decisions based on perceived gains, rather than perceived losses. This theory is by the example where investor receives $50, rather expected $100 and lost half the amount in negative returns.

Sunk Cost Fallacy:
The sunk cost fallacy is an where investor may become a bag holder.

Sunk costs are unrecoverable expenses that have already occurred.

Suppose an investor purchased 100 shares of stock at $10 per share, in a transaction valued at $1,000.

Now, If the stock falls to $3 per share, the market value of the holding is now just $300. Therefore the $700 loss is considered a sunk cost.

Investors may wait until the stock slingshots back up to $1,000, to recoup their investment, but the losses have already become a sunk cost and should be considered permanent.

In this think-tank perspective, any investors holding onto a stock long enough to drop in value is known-as an unrealized loss, which is not reflected in their actual accounting until the sale is complete; [the begining].

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