Economics 101: Supply and demand in the case of cryptocurrencies | Author Ata Tekeli | The Capital | July 2021
The basic concepts of economics, including cryptocurrency.
If you have ever been exposed to an economics course, the first thing to teach is the law of supply and demand. Now, we will discuss the law of supply and demand through examples.
There are two ways to study this law: the law of supply and the law of demand interact to determine the market price and the quantity of all goods and services in the market.
It is necessary to understand the laws of supply and demand to understand the entire concept of economics and study the cryptocurrency market.
Supply side of law
In economics, when the supply increases, the price will fall. As the increase in supply reduces the current market price, users tend to demand more goods. When we look at the opposite situation, when prices fall, producers reduce supplies to increase commodity prices.
Legal demand side
Consumer demand is one of the determinants that can drive commodity prices. If consumers need more goods, prices will rise. As a result, producers will produce more goods to obtain more income. When prices increase, the demand for goods decreases.
When a shortage occurs
When prices fall, consumers tend to demand more goods. However, producers often do not produce goods and services. There will be short-term shortages due to reduced supply to increase prices for profit and consumer demand for goods increases. After the shortage occurs, the market adjusts to the initial equilibrium.
When surplus occurs
When prices rise, consumers need fewer goods, and producers produce more to generate more profits. However, if the user does not purchase the product, there will be surplus. After the surplus occurs, the market adjusts to the initial equilibrium.
Expected to effectively affect supply and demand. When a supplier believes that an increase in commodity prices will increase the supply to generate another profit. On the other hand, when suppliers think that certain goods will increase, they will supply more goods to the market.
Taste is one of the determinants of supply and demand, because consumers tend to ask for more of a certain product when they like someone. When producers find a commodity that consumers really like, they will produce more of this commodity to generate more profits.
Cost is one of the main determinants of supply and demand. Costs vary with technology, machinery, labor, and capital. Because price is directly related to cost, under normal circumstances, manufacturers will do their best to supply more goods.
Bitcoin mining rates
Bitcoin mining relies on the principle of supply and demand. When people want more cryptocurrencies, the difficulty of Bitcoin mining will increase in response to demand. More importantly, Bitcoin mining rewards are also halved every four years. When we look at these results, in the long run, increasing demand and decreasing supply will increase the price of Bitcoin over time.
USD-backed stablecoin minting
The minting of various stablecoins is another example of the law of supply and demand. Since stablecoins are linked to assets, when the price of stablecoins rises, stablecoins will lower their value by supplying more products to the market. When the price of a stablecoin is lower than the value of the underlying asset, the supply will be reduced to increase the price.
On the other hand, stablecoins are the main source of liquidity in the cryptocurrency market. When liquidity is needed to support the market, the dollar-backed stablecoin will expand the supply to meet the increasing demand for liquidity. However, when the demand for liquidity decreases, stablecoins burn their supply to maintain their value.