Bitcoin Lemon Markets?
In a crucial time when there is so much buzz over investing in bitcoins and risks/ benefits involved in doing so, this article ties in perfectly with current issues as well as the Akerlof’s lemon markets evaluation. This article offers more insight to lemon markets and sites that there is more to lemon markets than equilibriums and collapsing markets. It elaborates on the five conditions that may lead to lemon market occurrences. The first being information asymmetry, where the buyers cannot accurately determine the true quality of the product they are being offered. The second, skewed incentives, a concept in which sellers have an incentive to make their products appear to be of higher quality. Sellers have no way of disclosing the quality of the products and this is this makes it hard for the buyers to differentiate the good from the bad. There is a high variation of seller qualities and the seller products are predominantly low quality. The last concept is that there is a lack of quality assurance and guarantee.
With all the above in mind, from class we know that there may exist multiple equilibria and that the market may collapse, but there are also two other possible possibilities. The first, negative bubbles. This is a scenario in which the products in the market are still being sold but at a lower value than the sellers’ value. When the market price falls to a sufficiently, the potential for buying increases and the people with little knowledge about the markets begin to purchase the products. The second scenario is the positive bubbles, when the ‘experts’ exit the market and the fundamental value of the products increase. This reminded me of the wisdom of crowds theory.
And how does this all tie to bitcoins and ICOs(Initial Coin Offerings). The article is a reminder for people to beware of ICO lemon markets. ICO markets can also result in lemon markets leading to people investing money in ‘lemons’ therefore leading to losses. This can be applied to bitcoin markets as well.
Source: https://medium.com/@avtarsehra/icos-and-economics-of-lemon-markets-96638e86b3b2
http://www.allenovery.com/publications/en-gb/Pages/Economics-of-Initial-Coin-Offerings.aspx