Can someone ELI5 where all the financial value that is currently held as crypto assets (~$2.5 trillion USD) came from?
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(Yes I have a masters in economics and have worked in crypto since 2017 and I still want the dumb version)
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Bunch of people have jumped in to explain how the current valuation is based on the price the token can sell for today, and not the sum of what people have paid for it. Sweet. We've got that part covered:
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Replying to @utotranslucence
great question. just to add to what gary said about last price value — you can think about the basic transactions that lead to a valuation: imagine a toy economy
1. first bitcoin ever mined is sold from satoshi for $10 to a barista at a cafe. they hold it.
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valuations are total nonsense though. the number basically assumes there are an unlimited number of buyers waiting to buy at the current market price which is just wrong, more wrong the less liquidity there is in the market. in reality there’s an order book
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i.e. a demand curve - some number of buyers wanting to buy at the market price, some more wanting to buy at slightly lower, etc. etc. if you somehow sold to all those people simultaneously you might end up with a # way lower than the valuation
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I product managed the implementation of an orderbook on a decentralised exchange once, I know this bit. I guess I knew but didn't fully take in that valuations based on current price x no of assets would just be massively overvalued because most people won't pay marginal price...
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nice. the extreme case, right, is i make a shitcoin and my friend and i perform a single transaction, we can drive the valuation arbitrarily high but there’s no liquidity and no order book. people don’t like to talk about this but i’ve never heard a counterargument ¯\_(ツ)_/¯
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this is something i learned from critch - there’s really no such thing as a “market price,” it’s a convenient abstraction that becomes asymptotically more useful the more liquidity there is. what’s real is the specific set of bids and asks in the order book at a given time
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the “sell off all the coins for way less than the valuation” thing is even worse than it sounds bc if everyone *actually tried* to sell all the coins no one would buy them! it’s actually impossible to realize everyone’s gains simultaneously! this kinda stuff drives me nuts