There are prices of things and then there are values of things. While value is a perception of the investors, price is the metric which is observed – Price is more tangible and has its impact on determining the sentiments of market participants more reactively than value does. Therefore, it is price, which motivates immediate action and value motivates a calibrated approach to action.
Market cognition is an individualistic phenomenon while taking the value approach, but is largely induced cognitive activity when the price approach overwhelms. Afterall, we are social animals – and standing out seems to be both risky and foolish – ain’t it? So, we give up our value cognitions and participate with the mob – either participating in the Panic or the FOMO. This is what exactly the market actions in the Crypto markets highlight.
Bitcoin prices went down south, so did Ethereum and other major Cryptocurrencies. Stablecoin TerraUSD lost the peg and exposed the de-stability in the concept of stablecoins. Hard times are the times to test the true characters and also the convictions of the market participants.
These things had been put to test adequately and will continue doing so – and through this painful process the industry will mature, learning from the mistakes made today and avoiding them in the future and evolving with better and more sound solutions to the problems in the process – thereby regaining market confidence and expanding further. This cycle has been true to any financial market, and will also remain true to the Cryptocurrency markets undoubtedly.
Let us take a few basic learnings from this experience – firstly, prices – prices are a function of relative valuation of two different assets – one is let’s say the value of Bitcoin and the other being the value of USD – these two together make the price of BTC in USD terms – a metric which has broken some “key support levels''.
It is the right time to ask the question – if the purchasing power of USD goes up, irrespective of the fact that the value of Bitcoin does not change, will you need a lesser amount of USD to acquire the same value of BTC? YES! And so, from the price perspective – the metric “price” for BTC/USD will go down.
There are two perspectives to this – some will view it as an opportunity and some will react to this as if this is an unfortunate loss. The viewpoint will determine the action of the market participant.
Secondly, when things are “normal” we fail to witness the weaknesses we introduce to the system in order to achieve the goals quickly. During such times of stress, we get exposed by these weaknesses we introduced to the system making it difficult to repair.
The concept of cryptocurrencies is a decentralised participation – So, if you allow your supplies to be concentrated with a “Whale” and if that market participant determines to change the team sensing an opportunity in the strengthening of the USD, thereby liquidating $285 million of your UST stablecoin, you will have a problem maintaining the peg for a small period of time. Which is exactly what happened with UST when it crashed to $0.67 momentarily causing another set of reactionary action from participants.
This does emphasise on us the importance of assessing the “tokenomics” of any Cryptocurrency along with its whitepaper and governance protocols meticulously before partaking in the same.
Ajoy Pathak is a Blockchain Evangelist with CryptoWire, a first port of call for entry into blockchain and cryptocurrencies. CryptoWire seeks to empower participants of the crypto universe with its super app and its research, training and information platforms like Crypto University, CryptoTV and CryptoWire.