All products traded in the market have two types of demand - real and speculative. The first means that market participants desire products for specific purposes. The second means they desire them to hold and ultimately exchange them on the market. For example. A desire for wheat to make food or gold to make jewelry, electronics, ornaments, etc. is a real demand. If, on the other hand, wheat or gold is desired only to be held and later exchanged, that is speculative demand.
The same is true for financial products. They have both real and speculative demand. When shares are desired for receiving dividends, buybacks or funds from liquidated assets, that is real demand. With bonds, real demand is those who want to receive coupons or face value at maturity. Units of fiat currencies are created with loans from commercial banks and purchases of government bonds by central banks, so the real demand is debtors who need them to repay those loans and bonds. If, on the other hand, stocks, bonds and fiat currencies are desired to be held and ultimately exchanged on the market, that is speculative demand.
So, everything traded on the market has both real and speculative demand. However, in 2009, a precedent occurred. The so-called cryptocurrencies appeared. They are virtual coins that have only speculative demand. Whoever holds these coins, sooner or later has to exchange them on the market because there is no specific purpose they can use them for.
A situation where something is traded on the market but has no real demand has never been seen in human history. The only reason products are created and brought to the market is real demand that uses them for specific purposes. Speculative demand is only a byproduct of real demand. Speculators on the market make predictions about how valuable products are to real demand and then pay prices according to those predictions. For example. By wheat having a nutritional purpose, speculators approximately know how valuable it is to consumers and whether prices are cheap or expensive. Similarly, by fiat currencies having the purpose of paying debt to the banks and by debtors facing foreclosures in case of default, speculators know these currencies are worth to debtors somewhere in the range of pledged collaterals. Meaning, they will not trade houses for a specific number of currency units if they see that banks take cars as collateral when issuing that number of units.
As crypto virtual coins have no specific purpose and, therefore, no real demand, there is nothing to predict. There's no way to tell whether prices are cheap or expensive. In crypto, speculators pay prices solely in the hope that other speculators will pay them higher prices in the future. Essentially, they believe in the greater fool theory and have hopes of ever-rising speculative demand.
Throughout history, there used to be situations where large ratios of speculative and real demand were created. This caused market bubbles, the most famous of which is the tulip one. But never before has that ratio been infinite, with speculative demand above zero and real demand at zero.
All bubbles eventually but inevitably pop. Then, massive sell-offs cause prices to decline, often quite dramatically. The real demand is what stops prices from further decline. With crypto lacking such demand, there is nothing to stop the decline, and prices inevitably must fall to zero.
Submitted October 04, 2023 at 03:06AM by Eaxecx https://ift.tt/Gc9e2P1
