“Deflationary” Token Burns DON’T make their price rise. Stop being played.
LUNA, CAKE, SOL, MATIC, and so many more “deflationary” tokens make people think their prices can only ever rise. Here’s why that’s wrong.
If you’re into Crypto, it’s more than likely you’ve heard the term “Deflationary cryptocurrencies”. This means that the actual token you can purchase, is not only of a limited supply, but also a shrinking one.
Because most people understand basic economic rules, they read about these projects and think: “Wow! With the amount of tokens being burned that’s going to elevate price so much in the long run!”
When you have the same demand, but the supply shrinks, then that should mean that prices increase, right? That’s theoretically what should happen, yes, but only in an economic market.
You see, most people don’t know the differences between a Financial Market and an Economic Market. For those of you who have read my previous article “Everything you Know About Market Behaviour is Wrong” https://wire.insiderfinance.io/everything-you-know-about-market-behavior-is-wrong-heres-how-you-ve-been-played-9c849389f2f3
I won’t go so much into detail here like I did there, so if you haven’t read it, I strongly recommend you check it out.
Disclaimer: I discuss topics like these on my Twitter all the time, you’re more than welcome to follow me there as well: @yrodos
Economic Markets
In Economic Markets, the prices of products are subject to a constant tug of war between sellers & buyers. Let’s say you go to a bakery to buy bread, you go with the intention to eat that bread. If the bread is too expensive in that bakery, you don’t buy it.
Price matters.
The baker’s desire is to sell you bread as expensive as possible, but your desire is to buy that bread as cheap as possible. These two counteract each other, achieving balance. This manifests itself on the price of goods, which are pretty much stable aside from inflation.
Financial Markets
In Financial Markets, however, the price of products are subject to constant inflation and deflation. Let’s say again you go to the bakery to buy bread, but this time you go with the intention to resell that bread for a profit. You don’t necessarily care if the bread is too expensive or not, it’s an investment that will return a yield. In fact, if the price has been rising for a while, you’re excited that the trend will continue and you’ll get to resell the bread much more expensive.
Price doesn’t matter.
The bakers desire is to sell you bread as expensive as possible, and your desire is to resell it even higher. These two do NOT counteract each other, and what you get are unstable prices, which tend to bubble and burst over and over again, depending on masses’ individual appreciations of the future value the bread will have.
Inflation & Deflation in Financial Markets is Inevitable
No matter what you try to do, whether you try to encourage demand by increasing utility of a token, whether you shrink supply by burning huge amounts of it, it is inevitable for speculative prices not to enter periods of deflation and crash.
The big problem with this is that big highly liquid tradeable assets like stocks or even indexes can survive this sort of crashes no problem. A lot of people will lose money, yeah, but most of the time it eventually retraces the fall.
This is not what happens in new and small projects like cryptos, where the excitement and rising prices make developers motivated to continue on with projects, yet when the bubble inevitably bursts, developers tend to give up on the project and move forward with something else, not knowing that if they had simply waited, another bull market could always be around the corner.
This is why most crypto projects will dissappear, but those who stay in the roughest bear market likely rebound.
Prices have a life of their own
Since most people seem to think about price movements in terms of economic laws of supply & demand instead of financial principles of irrationality, they don’t understand what I mean when I tell them prices actually have a life of their own.
They aren’t influenced by external causes, such as news, “shocks”, war, or even including: Shifts in supply like the burn of a token.
You literally could not predict the price of oil if I went to the future and told you the exact amout of reserves left on Earth.
This is because price moves actually precede shifts in supply and demand. Yes, supply and demand are the consequence and not cause of price moves, not the other way around.
You first get a move in prices, and then people start reacting to it accordingly. If the price rises, people buy in greed, augmenting demand and shrinking the supply available. If the price falls, people sell in panic, decreasing demand and increasing the supply available.
You do realize that this is exactly the opposite of what people should be doing if financial markets were anything like economic markets? As the prices rise, less people should want to buy, not more. As prices fall, more people should want to buy, not less. Yet this is not what we see in financial markets.
That’s because what drives the price in financial markets is basically just the demand. Which comes and goes irrationaly in waves of fear and greed, euphoria and panic. If scarcity had anything to do with it, the US dollar wouldn’t be worth what it is, and each NFT would be worth trillions of dollars.
If you want to further your understanding of irrationality in financial markets, I encourage you to read my other article: “Markets aren’t Random” https://wire.insiderfinance.io/markets-arent-random-the-elliott-wave-principle-explained-like-never-before-fe524ecf2592
That’s all, if you enjoyed it, consider leaving a follow!
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