There has been a very interesting mystery that has been occurring for many years. It’s known as the paradox of value or the water-diamond paradox. Many economists and philosophers have tried to figure it out without much success. The main idea behind this is the contradiction that although water is essential for survival, its price in the market is much lower compared to the price of diamonds. We all know that diamonds don’t have much practical use in our everyday life, especially compared to water.
The concept of utility is the main thing behind this contradiction. As we just mentioned, water is very important to all of us, and its utility value is incredibly high. On the other hand, diamonds are an expensive luxury item with limited practical use, making their use value very low. At the same time, when we compare the prices of both in the market (not in all places in the world, but overall), the price of a diamond is many times higher than the one of water. This raises the question of what determines the market value and what are the most important factors that affect it. Is utility the main factor behind the market value or there is something else?
In the world of cryptocurrencies, a very similar discussion has been taking place for a long time — likely since the birth of this new type of market. Most investors believe that crypto prices should be and are very much related to utility. However, as we have already seen from the water-diamond paradox, maybe this is not always valid.
One reason for this could be that the price is not dependent only on the utility but also on other factors like supply and demand, for example, which can affect price action regardless of the utility. Another important factor that can affect
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