According a new study, the cryptocurrency market is contentious because it is largely influenced by belief heterogeneity. However, even if personal sentiments and discord are great influencers, they aren’t enough to keep the industry going indefinitely. This is according to a research conducted by a finance lecturer, Wang Chun Wei PhD in the University of Queensland. The research noted that using short-term positions is the easiest way to bet against cryptocurrency prices. For instances: a person can borrow an asset and sell it because he expects to buy it back at a lower price and make profits. If this continues to be the norm, many of these assets will fall to zero. The research stated:
“The price volatility of Bitcoin on a daily basis is about 4%. This level is too high so there is no way it can be based on sentiments or informational changes alone”.
Bitcoin (BTC) Price Today – BTC / USD
A while ago, Wei conducted a study on Tether and the possibility of propping up the price of BTC with Tether. He based his investigations on coins that would eventually be worth zeros. Those cryptocurrencies that people believe are scams or jokes. In his latest investigation into the value of cryptocurrencies, he confirmed a theory known as the resale option hypothesis which partially explains why cryptocurrencies are valued the way they are valued today.
The hypothesis was originally formulated by Wei Xiong and Jose Scheinkman, two Princeton researchers. They argue that assets are most likely to favor the market’s most optimistic participants. This constitutes of those with long and not short bets. They benefit most when there is disagreement in price and shorting. These two conditions are currently in the cryptocurrency market according to Wei.
“People hope they can sell their cryptocurrencies to others higher than what they paid for and this fact drives prices”.
The research was conducted on mainstream coins, outright jokes and alleged scams. He concluded that the fundamentals that move Bitcoin are mysterious. He said that differences of opinion within the industry is what explains why some joke coins aren’t as volatile as they should be. He said that even if these fraudulent coins hold on to their value while the market is suspicious, the truth eventually comes to light. The paper continued:
“As soon as it becomes clear that the coin has no fundamental value, people lose belief and the value for resale drops as well”.
Testing The Value Of A Coin
While you can observe the fundamental changes with coins with small market capitalization, it’s get a little tricky with lathe coins. The paper states that there isn’t a precise way to calculate resale option value for these coins. The paper tested the significance of the relationship between traded price, turnover and realized volatility. This hypothesis also applies to mainstream coins like Bitcoin.
According to Wei, shorting options will soon be available for every cryptocurrency in the market. Already, Dydx is already offering tokens for shorting. If the analysis is to be considered accurate, the pressure on tokens that have been able to maintain higher prices will increase. The paper concluded:
“Overall, there is enough empirical evidence to support the claims that crypto prices are strengthened by the hope of selling and making a profit. People buy cryptocurrencies because they believe they will be able to sell it at a higher price and make a profit”.