Correlation of Scarcity and Price in Tezos' Proof-of-Stake Model

There are certain key elements of each cryptocurrency that can help us to determine what 'benefits' might affect its price appreciation. The 'Tezos' crypto that trades as 'XTZ' symbol, has a few important elements that shouldn't go unnoticed by potential investors. Proof of effect lies in the fact that the currency has increased in value by 85% in this year alone.

Each cryptocurrency is a mechanical ecosystem based on mathematics. Essentially, they allow us to create our own financial rules and unlock scalability and productivity for developers and investors alike. But how does the price of each crypto rise and fall - and what are the deciding factors behind the price changes?

Supply & Demand

Like anything humans trade, the attribution of value is always based on supply and demand. If no one is buying, then the price will stagnate and usually drop as investors run for the hills. Part of the reason cryptocurrencies are so volatile is that they are heavily affected by market psychology - fear and greed.

This is true, mostly because cryptocurrencies are not physical goods (like food, clothes, or medical supplies) that are absolutely necessary for human consumption. Instead, the appeal to buy a cryptocurrency is based on its ability to be utilized for growth (by developers with 'dapps' or by investors who see the value of the coin's utility.) Another important factor that comes into play for investors is 'liquidity.'

Liquidity

When a lot of 'buying and selling' is happening, two things occur that are appealing to traders/investors. The first is 'opportunity.' When a cryptocurrency is being bought and sold by many people, the price changes frequently. The more the price changes, the more opportunities for a trader to make profits (by buying low and selling high, or by trading 'shorts and longs'.)

The second is the price spreads are smaller. The more traders are actively trading a coin, the more orders are being placed in the competition. This means it's easier to get in quickly and get out quickly. This effectively lowers the risk for the trader when placing orders, especially on the short term for minimum exposure.

Scarcity

Think of scarcity this way: What are the chances that if you walk outside, you will find a rock somewhere on the ground? Not any special rock, it doesn't matter what size the rock is - just a standard rock. The chances are pretty good, huh? Now, imagine you find a plain-old-rock and you try to sell it to someone.

Now, if you are a great salesman, you might be able to accomplish this - but the rock really doesn't have much value (even if your sales pitch is worth gold!)

Imagine instead, you walk outside and you find a REAL diamond laying in your driveway. What do you think are the chances of that happening? Probably a lot less likely. If you tried to sell that diamond to someone (after having it verified as real) it could be worth a lot of money, right?

This is because diamonds are rare. Even if they weren't and someone hoarded all the diamonds in the world, they would still be rare because the rest would not be in circulation - you get me?

Scarce = valuable.

But wait... there's one thing missing. People have to be interested in real value...

Underlying Value

Gold is valuable, but not just because it's 'pretty-looking'. It is the most powerful electronic conductor that we are aware of (on earth) and so we use it for building electronics. It plays a key role in our ability to build the technology of today. Whether you are reading this on a phone, a tablet, or a computer, the device you are utilizing to read this article has a LOT of gold in it.

Gold is malleable, beautiful, unique, rare, and USEFUL. These elements give gold its underlying-value. Similarly, cryptocurrencies have an underlying-value, though it is always speculative (since it is a digital good.) The underlying value of a cryptocurrency is based on how it can be utilized and what benefits it can offer to the person who purchases it with fiat (or other cryptos.)

Balancing Scarcity, Underlying-Value, and Liquidity

All of these play their own important role in the price we are met with when we hit the markets. The consensus models that our beloved cryptos are built on have an effect on each element of evaluated price - whether it be proof-of-work (Bitcoin), proof-of-stake (Tezos), or federated-Byzantine-agreement (Stellar).

The consensus models decide how the nodes in our decentralized networks operate and communicate with one another. Each platform is different and the 'rules' of each consensus model effect elements such as transaction speed, energy consumption, and potential earnings from mining or staking.

Benefits of Tezos Model

Let's do a short assessment of Tezos (XTZ) and some of the elements that may potentially affect its future price.

Underlying-Value

Tezos is built on a proof-of-stake consensus model. Proof-of-stake models do not allow for mining, but Tezos does provide the ability to earn by 'staking.' All a person must do is to 'stake' and hold the coin in certain wallets and be afforded an automatic APY (or earned interest.) The APY for holding Tezos in a Coinbase wallet is currently 4.9%. Also, the model is currently used by developers to create new and potentially valuable projects, which adds valuable utilization potential to the coin.

Liquidity

This can have a positive effect for multiple reasons. The ability to earn interest in money for investors is a clear benefit, increasing the underlying-value of holding the coin. The fact that investors have to hold the coin in their wallets to earn increases the chances they don't spend their holdings, but doesn't decrease the chance that they will continue buying more.

Scarcity

What's that mean? It means that people can buy Tezos and hold it, effectively taking large portions of it off the market - increasing the scarcity while increasing the price. The appeal to buy Tezos doesn't diminish, but the coin continues to become more scarce - driving up the price.

Conclusion:

Tezos may be an up-and-comer over the next few years. The project has jumped from the top 20 list of cryptos, to the top 10 already this year. With its staked (called 'baked' on Tezos platform) rewards, Tezos may be rising like a yeasted loaf in the years to come.

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Disclaimer:

This is not investment advice. Cryptocurrency markets are volatile and there is always risk involved with investing. This article is an educational exploration of value. Your choices are your responsibility. Educate yourself before buying any cryptocurrencies. I will not be liable for any gains or losses you may incur.

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