Monday, August 15, 2022

How Do You Value Cryptocurrency

Bitcoin Vs Fiat Currencies Vs Precious Metals

How Do Cryptocurrencies Work & Gain Value? | Cryptocurrency Explained For Beginners | CP B& W

You might naturally be asking yourself what the potential advantages of cryptocurrencies are. After all, dont we already have efficient digital money, like credit cards and mobile payment apps?

Historically, there are two types of money. Precious metals and fiat currencies. Cryptocurrencies are a new, third type.

Precious Metals

For thousands of years across several continents, humans have traded valuable commodities as forms of value, to make bartering easier. Any material that has scarcity and desirability and that can be divided into small amounts works well enough, but gold and silver are the near-universal choices.

Gold in particular is rare and pretty, extremely resistant to reaction , and easily malleable into coins and bars, which made it pretty much perfect as a form of money, at least until the modern age. Its no longer practical or even possible to walk around paying gold and silver for things you want to buy, unless government currencies go back to using a direct gold standard. It also has plenty of industrial use due to its chemical properties, but its price level keeps most of its use for money and jewelry.

The main advantage that gold still has is that no government has price control over it. It has inherent value and scarcity all on its own, and is recognized everywhere. Investors view it as catastrophe-insurance, because it will always have at least some form of value and offers protection against inflation, fraud, and economic collapse.

Fiat Currency

A Variety Of Factors Can Influence The Value Of Bitcoin And Other Cryptocurrencies

You may wonder what makes cryptocurrency valuable, given that it’s notoriously volatile. It’s not uncommon for Bitcoin to increase or decrease in price by 5% or even 10% on any given day. Smaller cryptocurrencies can have even wider price swings.

After reading this article, you’ll have a better understanding of what makes cryptocurrency valuable and why the price might swing violently within a single day.

Is Cryptocurrency Simple And Safe For My Business

To be able to use cryptocurrency in your business, you need first to set up a wallet. This is the location that stores all of your transactions with cryptocurrency assets such as Bitcoin or Ethereum. Bitcoin wallets are very secure and safe, offering multiple safeguards to ensure your money is protected.

However, cryptocurrency itself is not as predictable as regular currency. Due to its volatile nature, it can cost a company a ton of money if the market heads in the wrong direction.

Some companies may not want to accept payments or pay with cryptocurrency because they do not know how accounting for cryptocurrency will work on their financial statements or during tax season. Thankfully, theres an easy way to solve this: with a virtual accounting partner.

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No 2 Coin Supply And Allocation

While Bitcoin doesnt have a project team as such, most altcoins do. The project team can be thought of as the company. They are the people behind the coins idea, marketing effort and bringing it to fruition. When valuing a cryptoasset, look at the official website and try to understand the background of the company, the skills of its management and its developers.

This is like looking at an investors prospectus of a company. It can sometimes reveal useful facts to consider before putting money into a specific coin. One important fact to check is whether there was a premine. A premine is when insiders of the company are able to mine the coin before the public. In essence then, a premine allows insiders to accumulate coins at virtually no cost.

This is similar to the founders of a new company awarding shares to insiders before an initial public offering .

The existence of a premine in which insiders hold a substantial portion of the coins value can be a cause for concern. Many in the crypto community consider the practice of premining to be unfair.

This is especially true if the projects reason for existence doesnt seem very compelling. A large, concentrated insider holding will also mean that the coin has greater centralized control.

An inflationary coin, just like fiat currency, discourages hodling and encourages higher spend velocity. On the other hand, a deflationary coin like Bitcoin encourages hodling because people see it as a long term store of value.

Quantity Theory Of Money

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The century-old equation to value money that anyone who ever took a macroeconomics class has learned is:

MV = PT

  • M is the money supply
  • V is the velocity of money in a given time period
  • P is the price level
  • T is the transaction volume in a given time period

If you double the money supply of an economy, and V and T remain constant, then the price P of everything should theoretically double, and therefore the value of each individual unit of currency has been cut in half.

The majority of mainstream economists accept the equation as valid over the long-term, with the caveat being that theres a lag between changes in money supply or velocity and the resulting price changes, meaning its not necessarily true in the short-term. But the long-term is what this article focuses on.

If you know any three of the variables, you can solve for the final one. In other words, we can rearrange it into:

P = /T

From that point, P will give us the inverse ratio of Bitcoin to whatever currency we use for our T variable. In other words:

Bitcoin Value = 1/P = T/

The total number of bitcoins in existence is a little under 19 million, and it will max out at under 21 million over the next several years based on its algorithm. Thats the easy part.

Now we have to come up with estimates for V and T, which is the hard part.

The velocity of the United States M1 money supply hit a high of over 10 in 2007 and is now around 4.

PwC estimates that global money laundering is $1-$2 trillion per year.

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How Do I Buy Cryptocurrency

While some cryptocurrencies, including bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.

To buy cryptocurrencies, youll need a wallet, an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as bitcoin or Ethereum. Here’s more on how to invest in bitcoin.

Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as eToro, Tradestation and Sofi Active Investing. Robinhood offers free cryptocurrency trades .

Cryptocurrency Trading Vs Investing

As you learn how to buy and trade cryptocurrencies, you must differentiate between crypto trading and investing. What is the difference? Which is better? And, how do you take advantage of this distinction to effectively make your trades? The two terms are often used interchangeably, but they are different.

They are only similar to the extent that the end goal is the same gaining profit from your activities. They are different in that results from trading activities are generally expected within a short to medium-term period. This could be anything from minutes or hours to a few days or weeks. With investing, the trader is in it for the long haul. Were talking about months all the way to years or even more.

As a beginner, you probably want to choose a trading strategy that involves medium to long-term trading and investing. This will typically require more time to research and analyze your trades before committing.

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How Does Cryptocurrency Work And How Is Its Value Determined

To understand that, we need to first know how a cryptocurrency is different from a fiat currency . The biggest difference is that a fiat currency is backed by governments and declared as legal tender. It derives its value from the fact that two parties in a transaction put their trust in that value. Most countries operate in a fiat currency system, where central banks and monetary reserves control the supply of money, and, as such, indirectly control inflation.

Cryptocurrencies are not regulated by governments they are decentralised. Most countries are yet to accept them as legal tender. Cryptocurrencies will also generally have a fixed supply, therefore their devaluation through inflation is unlikely.

Other than that, both have similar characteristics. Both can be a medium of exchange to buy products and services and both have a relative store of value.

Determining Price Of Cryptocurrency

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The most effective way the price of a cryptocurrency coin is determined is by its demand. Heavy demand from buyers will push the value of a digital coin upwards. Conversely, if a coin has a high token supply with little demand, then its value will drop. Other factors that influence the price of a crypto coin include the level of token utility i.e., how useful the token is. A difficult mining process would mean it is more difficult to increase the supply of the coin and cause upward pressure on the price when demand is high.

Also Check: How To Cash Out Your Bitcoin

Does Coinmarketcapcom List All Cryptocurrencies

No, we do not list all cryptocurrencies at CoinMarketCap. As a company and team, we are very aware that not all coins and projects have good intentions. While we cannot guarantee to exclude them all, we have a vetting process that each coin goes through before it is listed on the site. If we suspect that a coin or project is a scam, it does not get listed.

Bitcoins Value Vs Valuation

When buying or selling any financial product, its important to distinguish between price, value, and valuation. The value is the current price, or what someone is willing to pay for something right now. Valuation is a complicated analysis of an investment.

Bitcoin’s value is the current market price its intrinsic or actual value is difficult to pinpoint.

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What Is The Price Of One Bitcoin

The price of a single bitcoin is determined by several factors, including supply and demand, competition, and its regulation. News developments also influence investor perception about cryptocurrency.

The intrinsic value of one bitcoin can be estimated by computing the average marginal cost of production of a bitcoin at any given point in time, based on the block reward, price of electricity, energy efficiency of mining hardware, and mining difficulty.

On Nov. 10, 2021, bitcoin reached an all-time high of $68,790.

Fa Vs Ta Which Is Better

How Cryptocurrency Prices Work, Explained

It entirely depends on the trader profile. Do you want to be the kind of trader that prefers to get in and out of trading positions multiple times a day ? Then crypto technical analysis will be your best friend. Instead, do you prefer to research and make informed bets every time ? Then a mix of both is the way to go.

Note: As a trader, you cant have enough tools in your arsenal. Applying both FA and TA will give you the best chance of identifying the best trading and investing opportunities in the crypto market. This is because the two techniques complement each other in so many ways.

For instance, you may use FA to determine that an asset is worth investing in. What you may not uncover with FA, however, is the right time to invest. For this, you will have to rely on technical analysis. Conversely, if you are using TA to work out future price movements for a given asset, you can use FA to confirm whether or not the price trend you are witnessing is poised to continue.

Therefore, there are advantages to using either technique over the other at various moments in your research, but to have a more complete picture, use both.

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Important: Before You Start Trading Cryptocurrencies

To make your crypto experience even more convenient, we have prepared an extremely detailed guide where we take a deep dive into the industrys best cryptocurrency news aggregators, data websites, tools, and portfolio trackers that every crypto trader should be aware of. Therefore, we highly recommend you read our Master Bitcoin in 2021 guide and know more about what unique tools the industry offers. This guide was prepared by a professional crypto data analyst and investor.

Heres the short breakdown of the information youll find in our aforementioned guide:

Begin With Small And Clear Amounts

This rather sounds counterintuitive but it is one of the most important principles if you want to make the best of your trading journey. The volatility of cryptocurrencies could empty your portfolio as a beginner, therefore, it is only safe to explore at first with small amounts that you can afford to lose.

These amounts should be a small percentage of your income, especially as a beginner. This way youd have a specified budget for cryptocurrency investment.

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The Fall Of The Gold Standard

With World War I, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.

At the same time, a desire to return to the idyllic years of the gold standard remained strong among nations. As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and U.S. dollar became the global reserve currencies. Smaller countries began holding more of these currencies instead of gold. The result was an accentuated consolidation of gold into the hands of a few large nations.

Then, in 1934, the U.S. government revalued gold from $20.67/oz to $35/oz, raising the amount of paper money it took to buy one ounce to help improve its economy. As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation.

Calculating Bitcoin And Altcoins Value

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Lets finally talk about how to calculate a cryptocurrencys value. While there are no specifically outlined methods to calculate a cryptos worth, we can use some approaches. One way is to directly take an unconverted price from an exchange and convert it into US dollars or any other applicable currency. Other methods include:

  • The quantity theory of money. This method values crypto as a medium exchange. It uses an equation to value money MV= PT. . If M doubles while V and T remain constant, P will also double. If we replace Bitcoin with money, its value will be P=/T. The formula can apply in finding Bitcoins worth if we know the total number of them in existence.
  • Pure store of value: percentage of net worth. This applies to Bitcoin, particularly as its considered the most valuable currency and is used as a store of value, just like gold. Its one way that analysts speculate possible price movements in Bitcoin like they do with gold. The global gold value is at $10 trillion, while the worlds net worth is over $300 trillion. If Bitcoins market capitalization attains half of the gold value of around 1.5% global net worth and the total number of Bitcoins existing at that time is 20 million, each Bitcoin will be valued at $250,000. If it only achieves a 10% gold value or about 0.75% global net worth, each BTC will be worth $ 50,000. The pattern can continue with changes in the projected percentages that Bitcoin can achieve.

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The Different Types Of Cryptocurrency

The various types of cryptocurrency have continued to grow, and will keep on doing so, with the increase in interest expressed by the modern person. At present there are three main forms of cryptocurrency Bitcoin, altcoins and Tokens.

Bitcoin was created in 2008 and led the beginning of a new financial era, after years of its primary use being trading goods on the dark web in 2017 Bitcoins market erupted. By the end of 2017 each Bitcoin was valued at $20,000, turning most of its investors as millionaires. Bitcoin is best compared to gold mining nodes are rewarded for verifying transactions with new Bitcoins.

However, the market is unregulated making it very volatility, and the price of Bitcoins can rise and fall on the Luno Exchange daily. This is because the Luno doesnt set the price, but the traders buying and selling on Luno does, so it is the ongoing interaction between buyers and sellers which increases the value.

Altcoins are mainly alternative versions of Bitcoins, but with minor changes, however not all are similar some have been created for specific goals and purposes. Some altcoins use different algorithms, instead of miners they use stalkers to verify transactions for rewards. Their major difference is that stalkers do not need to rush to verify a block before anyone else, the wait their turn. This means much less electricity is used and it reduces overheads tremendously, meaning even more of a profit can be made.

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