31 March 2022
2 min read
The Impact of Information Asymmetry in the Cryptocurrency Market

The world of crypto investments is split between distinct dichotomies. on the one hand, there are crypto enthusiasts who are on top of the developments made by DeFi applications (dApps) that are constantly introducing innovative ways to upheave the aged financial system. on the other hand, are the masses who are perplexed by the technology and the protocols that DeFi aims to replace as financial literacy was never encouraged by institutional finance for nearly a century — creating a culture of insufficient information about capital markets.

Information is an important commodity in financial markets as it forms the basis of decisions and analysis. In the world of digital currencies, the abstract concepts that are not translated for common understanding are creating a culture of elitism that is preventing a large demographic from reeling in the benefits of DeFi.

To begin with, the crypto market is too much to take

Whether it is understanding the underlying blockchain technology, the multiple dimensions that cryptocurrencies function on, their ever-expanding scope, the market fluctuations, the crypto market requires richly informed investors who can constantly keep themselves updated. The dizzying pace of innovation within the crypto market is only expanding and its exclusivity to certain investors leads to “information asymmetry.”

Information asymmetry in the crypto market

In simple terms, information asymmetry means unequal distribution of information between the parties involved. when it comes to DeFi or the crypto-sphere, the early adopters — whether they are enthusiasts or technologists — tend to have more in-depth information which enables them to make more informed decisions as compared to novice investors who don’t have access to relevant or updated information. The profit generated in this case is at the expense of the masses who don’t have the information that their counterparts do.

A prominent cause for the volatility prevalent in the crypto market is this information gap amongst investors. The clickbait content forwarded by media outlets and fed to readers under the guise of “expert opinions” is often not verified and can influence investment sentiments. when tesla states that it won’t accept payments through crypto, its price drops whereas when elon musk mentions ‘doge’ on his twitter, the price of dogecoin rises.

The lack of understanding of the rules of the crypto markets and the high speculation make it challenging for both new and a majority of experienced inventors too, to navigate their way and profit from this growing investment avenue. It is not only important to gather information for informed investment decisions, but the quality and accuracy of the information also needs to be verified. for most who are new to the crypto market, access to this information is challenging. However, to mitigate the volatility in the crypto market, investors will have to work on securing information from reliable avenues so that the market is not heavily influenced singularly by investor sentiments. Or till such a time that an intelligent aggregation platform is available that addresses both complexity and information asymmetry, and enables the mainstreaming of DeFi.

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