Cost and price: two different worlds of trading

There is a common mistake among inexperienced market participants — they take the current price as the true value of an asset. But this is far from the same thing. Although in classical economics, the price should reflect the value of a product, in financial markets, it works completely differently. Price here becomes more of a tool to attract investors and traders rather than an objective reflection of the asset’s real worth. Understanding this difference is key to smarter trading and market analysis.

Why the market price diverges from the real value

The market is structured so that prices are actively influenced by emotions, speculation, and fleeting crowd sentiments. Sometimes, prices surge rapidly to new highs, only to crash just as quickly. This happens because the market often operates on the logic of “demand creates supply.” When buyers aggressively purchase an asset, the price rises not because the real value has changed, but because the volume of buying physically pushes the supply upward. Conversely, when a wave of selling builds up, pressure drops the price, regardless of whether the intrinsic value of the asset has changed.

The demand and supply mechanism: why prices rise and fall

Imagine a regular store before the holidays. Green peas usually cost $1 per can. But a week before New Year’s, demand skyrockets several times over — people are preparing festive dishes. Sellers, seeing the increased demand, immediately raise the price to $1.20 to maximize profit during this period of heightened interest. But once the holidays are over, demand drops, and stores are forced to return the price to $1 — the original cost.

Cryptocurrency exchanges work the same way. A wave of hype causes a sharp increase in demand, and the price soars. But this rising price does not mean the real value of the asset has increased proportionally. It’s simply a result of an imbalance between the number of buyers and sellers at that moment.

Reversion to value: when the illusion dissipates

Sooner or later, the price reaches a level where even the most active buyers lose interest. At this point, demand pressure weakens, and what professionals call a “reversion to value” begins. This is the process where the price returns to its true value — the one the asset has based on fundamental factors.

The key idea here is that price and value are two different variables. The price can be inflated two or three times due to speculation, but the value remains relatively stable. Sooner or later, these two indicators must converge. When traders start selling at the peaks, and buyers stop supporting the rising demand, a reversion occurs. This is a natural market self-regulation mechanism that brings the price back to its true worth.

How to determine the real value of an asset: practical tools

To avoid catching price peaks and entering at the worst points, traders use technical tools to identify the genuine value. The two most reliable are RSI (Relative Strength Index) and Bollinger Bands.

RSI in a 14-period format shows the market’s equilibrium point around the 50 level. When RSI stays above 70, the asset is considered overbought — the price has detached from its value upward. When RSI drops below 30, the asset is oversold — the price has fallen below fair value. The 50 level on RSI marks the zone where the price is roughly in balance with its intrinsic worth.

Bollinger Bands work similarly. They consist of a moving average that indicates a central line of the value. When the price approaches the upper band, it signals overbought conditions. When it drops to the lower band, it indicates oversold conditions. When the price stays near the middle band, it suggests the market is close to equilibrium between real value and speculative movements.

These tools help traders distinguish short-term price fluctuations from the long-term value of an asset. That’s why experienced market participants never confuse these two concepts and rely on technical indicators for more informed decisions.