Reflexivity is feedback between what people expect from a market and what their decisions actually change. A rising price followed by more buying is not enough to establish it. We need to show how actions changed the conditions and how those changes influenced subsequent decisions. For Bitcoin readers, companies buying BTC and trading with borrowed money offer useful ways to explore the relationship.
Imagine investors becoming more confident in a company. They are willing to buy its newly issued shares at a higher price, giving it money to acquire more assets. The improved position then attracts further interest. An initial expectation has helped change the company itself, and the change feeds back into expectations. That return path is what we need to identify. In his 2012 speech, George Soros emphasizes that participants both observe and change situations. This does not make every expression of confidence a mistake or every rising market a bubble. [1]
We will use a simplified example of our own: expectations → share price → terms for issuing new shares → assets actually acquired per share → new expectations. Issuing shares means selling newly created ownership interests in the company. Raising and spending the money takes time; the steps have conditions and delays. The loop may also break, for instance if nobody buys the new shares. This example is not empirical evidence about a particular company. It shows what we would need to verify to distinguish a working mechanism from an appealing story about a rising price. [2]
Our model company holds 100 BTC and has 100 shares outstanding: 100/100 = 1 BTC per share. When an investor buys an existing share from another investor, the seller receives the money, not the company. A secondary-market trade, meaning a trade in shares already issued, may lift the quoted price without changing the company's bitcoin holdings or share count. Its market value can therefore rise without money reaching its bank account. Turning that higher price into further BTC purchases requires a separate step: actually issuing shares and using the proceeds. [3]
Both versions of our example start with 100 BTC and 100 shares. One BTC costs 100000 USD, or US dollars. Selling 10 additional shares at 150000 USD each lets the company buy 15 BTC. It then holds 115 BTC with 110 shares: 115/110 is about 1.04545 BTC per share. If it instead sells each new share for 80000 USD, the same number of new shares funds only 8 BTC. The ratio becomes 108/110, about 0.98182 BTC per share. The growing share count matters alongside total BTC. This gross ratio ignores debt and costs and gives shareholders no right to withdraw company bitcoin. An increase guarantees neither a share-price return nor another issue at the same price. [3]
During a decline, a similar interaction can operate through leverage: investing with borrowed money. Our own model has assets worth 100 USD, debt of 80 USD and equity of 20 USD, the difference between assets and debt. Here we measure leverage as assets divided by equity: 100/20 = 5. If asset value falls to 90 USD while debt stays unchanged, equity falls to 10 USD and leverage rises: 90/10 = 9. If the investor must restore a limit of 5 by selling assets and repaying debt without further price changes, the required sale is 40 USD. Assets are then 50 USD, debt 40 USD and equity 10 USD. If similar sales push market prices lower, they can trigger further forced selling. Loan terms and the market’s ability to absorb sales matter; this does not automatically happen to every holder. [4]
Soros distinguishes amplifying feedback from dampening feedback. Positive feedback amplifies a change; negative feedback reduces it. These words do not say whether investors make money. A selling spiral that deepens a decline is therefore not negative feedback merely because investors lose. In our company example, a possible brake is that additional shares reduce investors' willingness to pay far above the value of the assets attributable to each share. That extra price, or premium, shrinks, slowing further issuance-funded purchases. This is a possible sequence, not a guarantee of equilibrium. Several influences may operate together, and some proposed loops never begin. [2]
Putting a share-price chart beside a chart of BTC holdings is not enough. Announcing a share issue does not mean the company has received the money. For a US-listed company, filings can be found in SEC EDGAR, the public database of the US securities regulator. Our checking method compares the announcement and completion dates, proceeds after costs, completed asset purchases and changes in shares outstanding. We also look for other explanations, such as a BTC-price change affecting several measures together. Decide in advance what outcome would challenge the proposed loop, and include periods when it failed. Co-movement alone does not establish two-way causation. [5]
Finally, return to the practical ability to pay. Our model company has 2 million USD in cash and must soon repay principal of 10 million USD: the amount it originally borrowed. Without another source, it is short of 8 million USD. A plan to raise this through a share issue is not cash already received; changes in the share price or investor demand may prevent the issue. Keep BTC price, the share-price premium, repayment dates and actual access to funding separate. Reflexivity helps explain how they can influence each other. It does not by itself give a market reversal date, a safe level of borrowing or an answer to whether the next obligation can be paid. [6]
For the clearest picture, read this entry together with Leverage, mNAV, Accretive acquisition, Cash flow.