How to view the token fluctuation in the secondary market

“Price fluctuates around value.” This is a wonderful exposition of the relationship between price and value by Marx in “Das Kapital”. As a measure of the relationship between value and price, this principle is widely applicable to various financial products, financial derivatives and tokens.

Today, let’s focus on the secondary market volatility of tokens.

Price Equilibrium and Value Return

Whether it is stocks, futures, bonds, financial derivatives, or tokens, there is a common phenomenon that prices are always in a state of dynamic equilibrium.

What is dynamic balance? If $10 is a common price on the secondary market for a product, $5 and $15 are also two common prices. Well, these three prices are often referred to as homeostasis prices. The process of moving from one price to another is called dynamic imbalance. The regression process is called dynamic regression.

The other is the return of value relative to the dynamic equilibrium price. For example, if the intrinsic value of a financial product is $100, and the market price is a series of values, the lowest digit is $50. Well, when the market price rises from $50 to $100, we call it a return of value.

However, an interesting phenomenon is that both price equilibrium and value return will only be maintained in a short-term state, that is, an instantaneous state. That is, when the price equilibrium is reached or the value returns, its duration is very short. Most of the time, prices move above or below the equilibrium price or actual value. If it is above, we call it overvalued; if the movement is below, we call it undervalued.

Our statistics show that any product, if viewed from a long-term perspective, is in a trend state for about 30% of the time, and in a shock state for 70%. In other words, the trend of the secondary market of products is in a volatile trend most of the time. Let us explain what is called trend and shock.

In technical analysis, trend analysis is a well-known genre. According to the trend classification, the trend is divided into three types: uptrend, downtrend, and sideways trend. Among them, the sideways trend is what we usually call the shock trend.

From the trend point of view, when the price of a product in the secondary market starts to fluctuate from one equilibrium price to another equilibrium price, a trending market will occur. When the trend completely reaches the equilibrium price, the rising or falling trend ends, and the market enters a sideways trend, that is, a shock trend. At this point, the price fluctuates in a narrow or wide range around the equilibrium price. After a period of time, a price range will appear, which we call the price range band. The price will always move within this band until the price moves away from the equilibrium price.

The above is the secret of product price fluctuations.

How to view the token

As the value embodiment of the blockchain project, the secondary market trend of the token also has the same characteristics. Here, we focus on analyzing how to view the relationship between the price of tokens and blockchain projects, and why the price of tokens in the secondary market fluctuates violently.

As we all know, in the stock market, there is a formula for market valuation:

Market Cap = Price * Equity

Correspondingly, the blockchain also has a valuation model, namely:

The value of a single token * the total number of tokens = the total valuation of the blockchain

Therefore, when we look at the quality of a blockchain project and whether the token is worth having, we usually look at the project’s prospects and the total number of issued tokens. It is not difficult to see from the above valuation model that when the total number of tokens is constant, the value of tokens is proportional to the total project valuation.

That is: single token value = (1/total number of tokens) * total valuation or TOKEN (value) = K*Totel (value)

Among them, 1/total number of tokens is a constant K.

It should be pointed out that although the value of a single token is proportional to the total valuation, the secondary market price of the token is not necessarily equal to the value of the token, and there will be situations of overvaluation, flatness or undervaluation. The reason behind this is because the transaction price comes from the buying and selling behavior of investors in the secondary market. There is often a price imbalance compared to the actual value of the token.

The price formation mechanism of the secondary market

The price in the secondary market is formed by pairing bids from buyers and sellers. According to the mode, it is divided into three types: matching transactions (centralized transactions), market-making transactions (also called intermediary transactions), and agreement transactions (not commonly used). In the final analysis, it is the will of the buyer and the seller to decide. Professionally speaking, the buyer is called the long side and the seller is called the short side. The strength of the two sides determines the direction of price fluctuations.

Take a simple example. In a market with 100 apples, suppose the buyer controls 95 apples and the seller controls only 5 apples. The market price is $10. According to human psychology, of course, buyers want to buy apples at a lower price, and sellers want to sell apples at a higher price.

In the above case, if a buyer bids $11 for an apple, which is significantly higher than the market price, then the seller can easily sell one and the deal is done. At this point, the buyer has 96 apples and the seller has only 4 apples. Immediately after, the buyer pays another $12 to buy an apple, and the seller is willing to make the deal. As a result, the buyer holds 97 apples and the seller has only 3 apples. And so on. When the buyer reaches 100 apples, the situation on both sides reverses.

Because the seller has no apples, and the buyer buys all the apples. So the roles of the two sides were reversed. It turned out that the seller turned into a buyer because there was no apple, that is, a long party; and the original buyer became a seller because he wanted to sell an apple, or a short party.

At the same time, it is assumed that the original seller (now the buyer) has a strong rigid demand effect. So here comes the question. If the seller sells an apple for $15, the transaction price is calculated as $15. According to the market value calculation principle, the market value of the seller becomes 99*15=1485 USD. Immediately afterwards, the seller sells an apple at a price of $20, and the market value of the apple it holds becomes 98*20=1960 dollars. If you sell another one for $30, then the market value becomes 97*30=$2910. Obviously, this is a process of continuously pushing up the market value. At the same time, since the total market value of the original 100 apples is $1,000. This means that in the process of pushing up prices, it is a process in which the market value continues to be overestimated, bubbles continue to form, and risks continue to accumulate.

shock

In the above case, the original buyer turned into a bear after taking control of the market Apple. By continuously pushing up prices, you can fully enjoy the wealth appreciation brought by controlling the market. But everything has a limit. For example, when the price reaches a certain value, the market is not filled, so what should the short side do?

Obviously, he will try to sell at a lower price until there is a deal. And when the price continues to be lowered, as the number of buyers becomes more and more, the seller will try to increase the price to sell.

It came and went, which created a shock.

underestimate

Similarly, in the above case, if the buyer has strong financial strength and only 3 apples in his hand, if he wants to control the market, then what will he do?

With only 3 apples in hand, first he will collect some apples. Because of his large financial strength, he can be regarded as a single market buyer. So the good play began.

As a buyer, if he bids $6, $7, and $8, respectively. Obviously, other sellers naturally refused to sell because the price was significantly lower than the market price, which also meant that there was no transaction. At this time, the buyer can completely entrust others to use his three apples to make a deal. For example, the transaction price is 8 yuan. So, in the price trend, the price fell to 8 yuan.

Then, the next day, the buyer sold the purchased apple to the helper at a price of 6 yuan, so the price became 6 yuan again.

And so on. When the market sellers panic, some sellers who hold apples think, let’s sell, sell early and get back some costs.

As a result, buyers have more apples in their hands. In the end, the buyer collected enough apples, but the cost was extremely low. Compared with the market price, there has been a serious undervaluation.

How to view the secondary market trend of QTC

It is not difficult to find from the above cases that when a buyer prepares to enter the secondary market, because of the need to collect tokens, its price must fall, and it is seriously deviated from the value of the token itself. There are two main reasons: first, the expectations of token holders are too high; second, the number of buyers is scarce.

But we can see from the relationship between price and value, how serious the price deviation is, but eventually the price will return to the track of normal value. The valuation trend of blockchain projects basically determines the value of future tokens.

As a blockchain project, when we evaluate the future valuation of this project, it is mainly based on two aspects. One is to look at the computing power of this blockchain. Because behind the computing power, it corresponds to the number of network nodes and memory capacity. When the computing power of a main chain is greater, its value must also be greater. The second is to look at the ecology of the project. The stronger the ecological project, the stronger its cash flow and profitability.

As a benchmark for Google’s QitChain, its plan of three cores and two radiation belts will definitely push the project’s valuation higher in the future. Therefore, although the secondary price trend of QTC is still underestimated. But from the perspective of long-term investors, underestimation is an opportunity.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-view-the-token-fluctuation-in-the-secondary-market/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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