NOTE: It bears repeating, I write my own posts, without copying and pasting from ChatGPT, and surprisingly, I type everything on my cell phone.

NOTE 2: This post does not apply to all cryptocurrencies, especially not to BITCOIN. It applies to most of the so-called altcoins.

In this post, I will try to explain how the prices of a crypto asset are formed, and show the numerous differences between Economics and Financial principles. Yes, they are different areas (without going into detail, one is social science and the other is resource management).

I see that many people here put their hard-earned money into cryptocurrencies, without knowing how the price formation of an asset works.

The vast majority will respond, “how stupid, everyone knows it’s demand X supply.”

WRONG.

Demand X Supply = one of the foundations of economic science, obviously it has an impact on prices, but not in the way you are thinking.

The prices of most assets are formed through an algorithm, called AMM (and other variables, but with the same mathematical concept) and Liquidity Pools.

Mathematical concept of CONSTANT PRODUCT. (If you don't know what the term PRODUCT means in mathematics, go study more)

Liquidity pool, without going into too much detail on the subject (if you notice interest in the subject, I will write another post in more detail, in this one I will give concepts and the necessary formulas, but in a superficial way, since it is a subject that few who are not familiar with it will be able to grasp quickly):

When you lock assets into a network of Liquidity Providers (LPs), to provide liquidity to the asset on an AMM platform.

Not to be confused with staking.

Example:

• An ETH/USDT pool can contain:

• 100 ETH

• 100,000 USDT

• This pool allows anyone to buy ETH using USDT or vice versa.

AMM Mathematical Formulas

Constant Product Model:

X*Y=K

• x : amount of a token in the pool (e.g. ETH).

• y : amount of the other token in the pool (e.g. USDT).

• k: constant that does not change, ensuring the balance of the pool.

When someone buys or sells tokens on the AMM, it adjusts the pool balance to ensure the total value of k is preserved.

I'll stop here, there's a lot missing, there are several mathematical formulas.

If people are interested, I'll finish the article, but I'm racking my brains not knowing if anyone is interested...

Anyway, if you think the subject is irrelevant, no offense, put your money in fixed income, direct treasury. Money does not accept carelessness and rudeness. Here's a tip.