There is a very interesting mystery that has been going on for years. This is known as the quality paradox or water-diamond paradox. Many economists and philosophers have tried to figure it out without much success. The basic idea behind this is the contradiction that water is essential for survival but its price in the market is much lower than the price of diamonds. We all know that diamonds don’t have much practical use in our daily lives, especially compared to water.

The concept of utility is central to this conflict. As we mentioned, water is very important to all of us and its utility value is incredibly high. On the other hand, diamonds are an expensive luxury item with limited practical use, resulting in their very low utility value. At the same time, when we compare the price of both in the market (not everywhere in the world, but overall), the price of a diamond is many times higher than a water one. It raises the question of what are the most important factors that determine market value and influence it. Is utility the key factor behind market value or is there something else?

In the world of cryptocurrencies, a very similar discussion has been going on for a long time — perhaps since the birth of this new type of market. Most investors believe that crypto value should be and has a lot to do with utility. However, as we have already seen from the water-diamond paradox, perhaps this is not always valid.

One reason for this may be that prices depend not only on utility but also on other factors such as supply and demand, for example, which can affect price action regardless of utility. Another important factor that can affect the price of cryptocurrencies can be the cost of minting. Whatever the utility is it can affect the market price. If a coin costs more to produce, its value may also be higher – even though its utility is very limited. Similarly, the reverse is also true. If the value of the token is low, the price may be low — even if there’s a lot of use behind it.

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Another explanation for the discrepancy between utility and price may be the concept of network effects. In the case of cryptos, the value of a coin is often tied to the size and strength of its network. This means that the more people use a particular currency, the more valuable it becomes, even if it only has one utility – as a store of value. This is because a larger network brings more liquidity to the currency.

But the opposite is also true. If a cryptocurrency does not have many users or is not widely adopted, its utility value may be high, but the price may be low. This is because the currency has fewer uses and is less liquid. Note that if we return to the paradox, we find that it does not always have the same effect on prices. We know many more people use water on a daily basis than use diamonds, but water is still the cheapest option.

Additionally, a major factor that can affect the price of a cryptocurrency is speculation. Cryptocurrencies are often viewed and advertised as speculative investments. A lot of people are buying them in the hope that their prices will increase over time. Such speculation can increase the value of a currency, even if its utility value is low. This is because investors are willing to pay more for an asset if they believe its price will be higher in the future.

If you want to practice this, you can try using these guidelines:

  • Analyze historical price trends and correlations to find out if assumptions have affected prices.
  • Look at indicators showing supply and demand, such as trading volume and market depth, to see their impact on price.
  • Study network growth for signs of active user base, adoption rates, and network impact on up-and-coming protocols.
  • Keep track of specific news, events and industry developments that have impacted prices.
  • Check out the community platforms and search for factors that have significantly affected the price
  • Be aware of the costs that come from mining or token minting to understand their impact on price.
  • Research its impact on utilities and asset prices.

In conclusion, the water-diamond paradox highlights the complexity of market value and how it is determined by various factors. Although utility may be an important component of market value, it is not the only one and may not have the most significant impact on value.

The same can be said in the world of cryptocurrency. Utility can be a serious factor in determining the value of a coin. However, other factors such as production costs, supply and demand, network effects and speculation may play an even more important role. By taking these factors into consideration, we can better understand how market prices are determined, so we can make better-informed decisions when we analyze crypto-investment opportunities.

Bogomil Stoev is the CMO of Seasonal Token — the ERC20 token system designed to make cyclical trading profitable.

This article was published by Cointelegraph Innovation Circle, a vetted group of senior executives and experts in the blockchain technology industry who are building the future through the power of connection, collaboration and thought leadership. The views expressed do not necessarily reflect those of Cointelegraph.

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