What Gives Cryptocurrency Its Value
All cryptocurrencies are valuable due to both their technological aspects and economical aspects. People tend to focus on one aspect more than the other, yet both technology and economics are powerful factors that ultimately determine the valuations for cryptocurrencies.
There seem to be two kinds of investors in the crypto space those who believe in the potential of blockchain, the technology behind cryptocurrencies, and those who only speculate on the maximum future value of a crypto asset given the current external factors and the cryptos intrinsic properties.
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How Does Cryptocurrency Gain Value In Time
While the soaring prices of cryptocurrencies often make the news, it can be challenging for newcomers to understand why they have any value in the first place. Thats why were dedicating this article to explaining why some cryptos gain a lot of value over time.
We cover all the key factors that make cryptos valuable and influence their prices, including the effects of supply and demand, exchange listings, mining costs, legal regulations, and more.
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Will Bitcoin Appreciate Long
Bitcoin has a fixed supply cap of 21 million BTC, which is rewarded to miners for securing the network. Every four years or so, the supply rate is halved, making BTC more and more scarce with time. BTC isnt the only cryptocurrency with this kind of periodic supply rate reduction. Various altcoins also follow a depreciating supply schedule. Since only a limited number of BTC will ever exist, even lost coins contribute to the assets scarcity.
Cryptocurrencies offer an impressive value proposition in that you can invest small amounts and make huge profits, but that doesnt mean there isnt any risk involved. In fact, most cryptocurrency investors minimize risk by diversifying their portfolios into multiple assets.
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Inflation Of Fiat Currency
The price of the cryptocurrency would change with respect to that of a fiat currency. If the price of fiat currencies falls, the price of the cryptocurrency will go up. You will be able to get more of that fiat currency when you sell your cryptocurrency. As central banks in some economies keep printing more money and keeping interest rates artificially low, the value of cryptocurrencies will rise.
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.
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Where Can I Buy Cryptocurrencies
Digital assets can be bought, sold, and in some cases, stored on various cryptocurrency exchanges on the web. The two main types are centralized and decentralized exchanges.
- The simple approach: Centralized exchanges function in the same way that traditional exchanges facilitate trading. An orderbook is used to collect bid and ask data and match traders in real-time. The price of an asset is calculated from the supply/demand ratio on the orderbook.
- An alternative technical approach: Decentralized exchanges have gone through multiple iterations over the last decade. Attempts to use an orderbook system with DEXs have resulted in slow exchanges with very little liquidity. The lack of incentives for market makers. With the introduction of Automated Market Makers , modern DEXs are posing a threat to some established CEXs. Instead of using an orderbook to track bid/ask information, current DEXs lock pairs of tokens in liquidity pools. The ratio of the tokens in the pool determines their price, and liquidity providers are rewarded for staking and contributing to the pools liquidity.
Kriptomat provides a mobile app and desktop account with a remarkably easy-to-use interface for buying, selling and storing cryptocurrency securely.
Understanding The Role Of Liquidity Plays In Price
Liquidity is the ability to buy and sell an asset, without impacting its market price. Cryptocurrencies with higher market caps are usually more liquid, so large buy and sell orders are less likely to impact price movements compared to those with lower market caps.
As cryptocurrencies gain more liquidity over time, their prices become relatively less volatile. Bitcoin is the most liquid cryptocurrency on the market. It has the highest market cap of any cryptocurrency and almost every major exchange lists it.
In contrast, many mid-cap altcoins are listed only on a couple of exchanges and dont see nearly as much trading activity.
As a result, the values of these cryptocurrencies tend to move up and down more for each large buy order or sell order.
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Proof Of Stake Vs Proof Of Work
Most cryptocurrencies fall into two broad categories: proof of stake and proof of work .
If you put up cryptocurrency as a bond to insure the work of a validator, this is called staking the cryptocurrency. You earn more cryptocurrency over time if you do this, similarly to the way you earn more cash over time by putting it into a savings account. A coin that can be staked like this is called a PoS cryptocurrency.
Some examples of PoS cryptocurrencies include Avalanche , Fantom , Harmony , Solana , and Cardano . Most newer cryptocurrencies are PoS.
However, the two largest cryptocurrencies by market cap, Bitcoin and Ethereum, are PoW coins. This means they are created by burning electricity, a process called mining. You cannot stake PoW cryptos to earn more crypto.
Did You Know: If youre looking to purchase crypto, youre likely going to do so on an exchange. That said, not all of them are created equal. Read more on that in our guide to determining if an exchange is legit.
Depending on which category a crypto falls into, there are different factors that cause it to rise in price. So Ill discuss each of them separately.
The next section is about PoS cryptos.
Investment Of Big Funds
There will be significant investment funds such as hedge funds pensions and many others in between those new investors. Some Organizations are already keeping together crypto investment funds, but when substantial investment shops get confidence to add altcoins to their portfolios, values will jump higher. So, you have to keep an eye on the latest news for announcements from more top investors.
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Outstanding Issues Around The Cryptocurrency Market
With cryptocurrencies still in the early innings, there are many issues surrounding its development. Its interesting to contemplate the philosophical and political implications of cryptocurrencies. Cryptocurrencies are inherently political because they challenge the traditional social contract that societies operate under. According to this theory, members of society implicitly agree to cede some of their freedoms to the government in exchange for order, stability, and the protection of their other rights. By creating a decentralized form of wealth, cryptocurrencies are governed by code alone.
Its no wonder, then, that the accounting treatment, regulation, and privacy issues surrounding cryptocurrencies and blockchain have yet to be fully determined. The following section will discuss these tangible aspects of cryptocurrency development.
Opening A Trading Account
The details behind opening an account and trading will be covered in the next lessons. If meanwhile, you want to open an account with a broker feel free to do so. you can get yourself familiar with the terms and conditions, the interface and the overall services of the broker/s you choose. Remember you can start trading and practicing with a demo account.
At Tradimo we have partnered with the two most reputable brokers when it comes to cryptocurrencies. When you open an account from this page and deposit you will get offers exclusively for Tradimo learners.
Go ahead and explore!
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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.
Bitcoins Price Vs Value
The price of BTC refers to how much it costs to buy a Bitcoin. So if the price of Bitcoin is $50,000, that means it costs $50,000 to buy one whole Bitcoin. The price of Bitcoin is most commonly displayed in USD, but it can also be priced in other currencies.
Sometimes the words price and value are used interchangeably. However, the value can also be what you think its worth or why its useful. For example, some people value Bitcoin because its decentralized or allows them to make payments anywhere, anytime. Others see it as a store of value and a good long-term investment.
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How Can I Profit From Cryptocurrencies
The point of any investment is to make you money, and cryptocurrency investments can make your money work in more ways than one. Created as a solution to the scalability and energy consumption issues with Bitcoins Proof-of-Work algorithm, Proof-of-Stake has crept into many blockchain-based projects over the last couple of years. Instead of rewarding miners for running computations to validate transactions, Proof-of-Stake rewards stakers for providing liquidity by locking tokens up into a smart contract. Depending on the token, rewards range from variable APR on the staked token to entirely new tokens that can be staked further. Decentralized Finance is a hotbed for staking protocols, and hacks in the last year have led to millions drained from various DeFi platforms not exactly where youd want your life savings. Some staking implementations allow network participants to delegate their stake to validator nodes, striking a balance between security and risk. Others offer rewards for merely holding assets in their wallets for fixed periods. This ability to stake offline from a hardware wallet makes things much more enticing for long-term investors, providing security from malicious actors on the network. The most sensible approach to profiting long-term for the majority of people may be to accumulate a diversified portfolio of cryptocurrencies and re-balance the portfolio periodically. A topic we will explore in future guides.
A Monetarist Valuation Of Bitcoin
In order to place a value on Bitcoin, we need to project what market penetration it will achieve in each sphere. This article does not make a case for what the market penetration will be, but for the sake of the valuation, we’ll pick a rather arbitrary value of 15%, both for Bitcoin as a currency and Bitcoin as a store of value. You are encouraged to form your own opinion for this projection and adjust the valuation accordingly.
The simplest way to approach the model would be to look at the current worldwide value of all mediums of exchange and of all stores of value comparable to Bitcoin and then calculate the value of Bitcoin’s projected percentage. The predominant medium of exchange is government-backed money, and for our model, we will focus solely on that.
Roughly speaking, M1which includes M0 and is worth about $4.9 trillion as of 2020will serve as our current worldwide value of mediums of exchange.
M3 minus M1 is worth about $45 trillion. We will include this as a store of value that is comparable to Bitcoin. To this, we will also add an estimate for the worldwide value of gold held as a store of value. Though some may use jewelry as a store of value, for our model, we will only consider gold bullion.
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Buying And Storing Crypto
You can buy or sell crypto on a crypto trading platform using traditional money. Crypto is kept in a unique digital wallet or hardware wallet.
A users wallet has a set of private keys that are used to authorise outgoing transactions on the blockchain network. A wallet may be a software or hardware wallet. A hardware wallet stores these private keys on a secure hardware device not connected to the internet. This can protect the users wallet from hackers.
Scam alert: an increased number of Australians have reported losing money through crypto-asset or cryptocurrency scams.
How Does Bitcoin Make Money
New Bitcoins enter into circulation through a process called mining. The miners are rewarded for doing so and will continue mining new Bitcoins until they reach the maximum supply of 21 million.
People can also make money from Bitcoin by investing in it and selling it later at a higher price. However, Bitcoin is also a type of money itself and can be held and used as such.
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Their Availability On Currency Exchanges
A cryptocurrency needs lots of people wanting to buy it for it to increase in price. However, if a cryptocurrency is not listed on many exchanges, its naturally harder for the masses to acquire.
Also, whether a cryptocurrency is listed on the most popular exchanges can have a significant impact on its price. For example, many coins see a boost in price after being listed on a leading exchange like Binance or Coinbase.
How Are New Bitcoins Created
The Bitcoin supply is limited by code in the Bitcoin blockchain. The rate of increase of the supply of Bitcoin decreases until Bitcoin reaches 21 million, expected to happen in 2140. As Bitcoin adoption increases, the slowing growth in the number of Bitcoins assures that the price of Bitcoin will continue to grow.
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What Makes Cryptocurrency Valuable
It boils down to investor confidence. The more confident crypto buyers are about the prospects or potential for positive developments of a particular coin, the more likely they are to want to own the coin. On the other hand, a loss of confidence can lead traders to sell their crypto holdings, pushing down the token valuation.
Some of the things traders look at in a cryptocurrency that determine how they value it include the activities of deep-pocketed investors, fundamental developments to its native blockchain, adoption, and application, and influencer upgrades and downgrades, among other things. These factors come into play to determine why the cryptocurrency is valuable.
Regulatory activities in a particular industry can affect demand for a cryptocurrency. That is the case for XRP and the SEC lawsuit. The news of the lawsuit saw the XRP price tumble as investors temporarily lost confidence in the tokens future, complicated further by the centralized nature of the token.
This goes both ways. When investors are optimistic about a sector, every cryptocurrency in that industry could do well regardless of how each token is doing. Confidence in the broader market can also push up the value of a token, just as was the case in 2021 when a bullish performance of bitcoin sent cryptocurrencies to new all-time highs.