Note: Bitcoin can be a solution to the problem of information asymmetry in the economy

In almost all markets, sellers know more than buyers. A phenomenon known as information asymmetry and its occurrence can eventually lead to a market crash. According to some analysts, Bitcoin is a solution to this phenomenon, and its investigation can provide deeper insight for its long-term investors.

Noelle Acheson, former Head of Research at CoinDesk and Genesis Trading at a note CoinDesk has analyzed Bitcoin with a long-term view by examining the similarities between the changing outlook of the digital currency market and the macroeconomics.

You’ve probably heard the story of George Akerlof’s “Used Car Market.” In his important article, this Nobel laureate economist showed that the lack of information asymmetry between the buyer and the seller about the quality of used cars (in a situation where sellers usually know more than buyers), causes high-quality cars to leave the market and lower average prices. The hypothesis of information asymmetry, which is called the mechanism a choice (Adverse Selection) is known, it can eventually lead to the destruction of the market.

The market bias theory has faced many negative reactions over the past years; Especially from people who rightly point out that the used car market isn’t dead. However, this theory raises an important question: What does the person I’m buying from know that I don’t?

Michael Spence, the economist who won the Nobel Prize in Economics together with George Akerlof, by extending this mechanism to the labor market, the theory marking (Signalling) and introduced over-reliance on credentials. While the lack of information asymmetry is one of the main concerns of the Securities and Exchange Commission, many have examined how this affects the stock and bond markets. Issuers of assets almost always have more information than buyers in the target market, and sellers have different motivations and possibly different information sets than buyers when trading.

However, this does not apply to the price of Bitcoin and other similar digital currencies.

Bitcoin has no closed-door management meetings to make decisions that affect its future earnings. Nothing about Bitcoin changes before everyone knows, and no changes to its codes will be made without public agreement.

Hence, Bitcoin is a commodity like wheat and gold. We all know what they are and have accepted that their characteristics will not change anytime soon. If we treat Bitcoin like wheat and gold, we know exactly what we will get.

This assumption is very important for legislators. The Securities and Exchange Commission is right in this case that some digital currencies should be treated like securities. Like project tokens that depend on a small leadership team, a team that hopes to make a profit from their efforts. But Bitcoin has no leadership team.

Some may argue that the core developers of Bitcoin are its leaders, but they only serve the community and have no role in maintaining the network. Additionally, Bitcoin’s financial transparency rules are designed to provide investors with access to this information. It is difficult to imagine a more transparent mechanism than blockchain decentralized networks.

Symmetry of information is also very important in creating market structure. Take lending, for example. In traditional finance, borrowers have a more accurate picture of what they want to do with their requested capital. But it may be different from what they say to the lender, who compensates for the lack of transparency of information with paperwork and the use of mathematics to calculate the creditworthiness of the account. Even when collateral is required for a loan, there is uncertainty: Is the house, yacht, or painting really worth the appraised value? The risk of this valuation is compensated by applying the interest rate on the loan.

In digital currency lending mechanism, there is no information asymmetry beyond Counterparty Risk. Codes are open-source and verifiable, ownership of cryptocurrencies is relatively simple, and their market value can be easily determined 24 hours a day, 7 days a week, every day of the year.

Digital currency securities can be more volatile than their traditional counterparts. But this problem can be compensated by increasing loan-to-value ratios. Also, the relative simplicity of transferring these collaterals, even in a programmed manner through execution by smart contracts when certain conditions arise, removes another layer of uncertainty and hassle in lending.

This is a huge achievement for the digital currency industry. Lending based on valuable digital currency collateral has the potential to be much safer, more efficient, and more widespread than traditional collateral due to information asymmetry. Last year’s cryptocurrency market crises generally occurred due to a failure in risk management and collateral, often resulting from a lack of experience and oversight. We can hope that the market has learned from the mistakes and improved the standards. Regulation can also play an important role, requiring cryptocurrency lenders to publish collateral and loan-to-value policies.

Looking more broadly, we can only now begin to understand how the market’s infrastructure would evolve if it focused more on liquidity and services and less on requirements designed to compensate for unequal access to information. As well as allowing regulators to devote more resources to the pursuit of intentional crimes, financial transparency assets can lead to lower transaction costs and increased capital efficiency for savers and their originators.

I will never say that networks like Bitcoin are the solution to all problems of information asymmetry. However, I believe that the transparency, decentralization, and open source nature of some distributed systems can change the way some market-based activities are conducted by removing layers and adding a new form of simplicity.

Finally, these new systems influence economic selection theory by showing that not all markets need to involve the intangible expectations of buyers and sellers, and that pricing based on these expectations does not always need to be trusted. In an era where the market economy is increasingly becoming an information economy, transparency and verifiability play more important roles in shaping trading habits.

It is clear that these statements are general and cover the undervalued assets of the cryptocurrency market. Some projects are started by small teams that can manipulate the token, some blockchains are not decentralized, some assets are not backed by reliable reserves, and some tokens are based on untested incentives. But a stable network like Bitcoin offers an alternative solution to the problem of financial transparency by limiting the technology and the risk of human manipulation.

Since the concept of the used car market article never entered the age of the digital economy, I don’t think that the lack of information asymmetry would be common in the market. However, in an age where we don’t know what to do with more information than is being generated and collected, today’s markets still face the same problem of information asymmetry as in the past. For the first time, we now have a technology that reliably embeds an asset’s financial information into the asset itself. Although its impact is felt in shaping services in today’s marketplace, its evolution will ultimately shape the structure and expectations we have of marketplace services in the future.