The Invisible Hand: Why Do Retail Investors' Actions Affect Coin Prices?

The father of economics, Adam Smith, proposed a concept over 200 years ago - the invisible hand. In simple terms, it means that everyone is pursuing their own interests, but these selfish actions, when combined, can actually drive the entire market to operate in a direction that benefits society.

This sounds a bit magical, but it's particularly easy to understand in the cryptocurrency market.

Why do cryptocurrency prices adjust themselves?

The coin prices you see on the exchange are not set by some big player, nor are they decided by the project team. Every buyer and seller trades based on their own thoughts—some buy because they are optimistic, while others sell out of fear. Thousands of trading decisions come together to form the true market price. This process is completely decentralized, with no one in control, and it accurately reflects the real supply and demand relationship in the market.

For example, if a project suddenly releases good news, investors evaluate it and find it valuable, leading them to start buying. Demand rises, and sellers also sense the opportunity, raising their prices. The price continues to climb. Conversely, high prices will attract new bottom-fishers while discouraging some previous buyers. Ultimately, a balance is found—this is the process of market pricing, without any centralized manipulation, entirely based on the rational (or irrational) decisions of the participants.

The “Invisible Hand” in the Crypto World

Especially evident in the cryptocurrency market:

High-quality projects attract capital inflow — Good projects have real applications or innovative mechanisms, and smart money will buy them once identified, driving up the coin price. A higher coin price makes it easier for project parties to raise funds and attracts more developers and users. This is the process of resources automatically flowing towards high-efficiency directions.

Garbage Coin Automatic Clearance — Speculative coins without fundamentals, once the wind changes, buying dries up, and prices collapse. This in turn warns the market not to blindly follow the trend anymore. Funds will thus withdraw from inefficient projects and flow to places with real value.

Self-sustaining liquidity — Some want to exit quickly, while others see opportunities at the bottom; traders with different goals meet at various price levels, keeping the market active. There is no central exchange or market maker forcibly maintaining order; trading volume and depth are formed naturally by the participants.

But this theory has a big problem

The premise is: all participants have sufficient information and can make rational judgments. But in reality?

• Information Asymmetry — Large whales, project teams, and market makers possess significantly more information than retail investors. They know first, act first, and retail investors can only react later.
• Irrational Emotions — FOMO into the market when seeing others making money, panic sell when the market drops. This is human nature, hard to change. It leads to frequent excessive fluctuations in cryptocurrency prices, not a balanced price.
• External shocks — Black swan events, policy changes, sudden security vulnerabilities, the market cannot predict. The invisible hand is caught off guard by these.
• Negative Effects — The failure of a certain project may drag down the entire ecosystem, with retail investors becoming the ones left holding the bag. In the process of market self-regulation, there will be no compensation for small retail investors who have been cut off.

Insights for Retail Investors

Although the invisible hand is not perfect, understanding it can help you make better decisions:

1. Do not go against the market. On-chain data, candlestick charts, trading volume, etc. are all reflections of the collective opinions of market participants. If the trend is set, opposing it with a small position will only lead to being harvested.

2. Focus on Fundamentals. Short-term coin prices are driven by sentiment, while long-term prices are driven by value. Metrics such as TVL, daily active users, and technological progress are what the market will ultimately recognize.

3. Information asymmetry is crucial. While it is unrealistic to completely avoid information asymmetry, paying attention to on-chain analysis, on-chain smart money flows, and large holder movements can at least narrow the gap.

4. Risk management is the first line of defense. The market can be irrational, but your positions cannot be. Set stop-losses properly, avoid going all-in on a single project, and maintain sufficient risk buffer.

The invisible hand is indeed at work, but its efficiency is limited. Understanding this is much more reliable than blindly following trends or trying to predict the market.