What Is Cryptocurrency And Should I Invest In It
10 Minute Read | September 27, 2021
Cryptocurrency. Its the hot buzzword of the investing world these days. But what is cryptocurrency really? Ever heard of Bitcoin, Dogecoin, Litecoin, XRP or Ethereum? Nopethey arent embarrassing rock band names from the 90s. Theyre actually types of cryptocurrency . And theyre trending everywhere you look.
But the million-dollar question here is, should you invest in cryptocurrency? Despite what every loudmouth on the internet yells at you from their digital soapbox, buying cryptocurrency isnt a safe bet for your investing future. But well get to that in a minute. Lets unpack what in the world crypto is first.
Why Crypto Is So Volatile
Crypto is worth what people are willing to pay for it.
This means that the price of crypto-assets can fluctuate at extreme levels based solely on market speculation. Factors that can influence the price of crypto include:
- media focus
- public announcements
- the actions of individuals who hold large amounts of a crypto or who influence the price through social media
Where And How Do Cryptocurrencies Get Their Value
You can find numerous digital currencies on market days. But have you ever wondered where and how do they get their value?
Cryptocurrencies gained a massive popularity due to the use and trend of online financial services. While Bitcoins were the first and most popular crypto in the market, other coins also emerged. The main purpose of these cryptocurrencies is to provide a digital currency decentralized form that can serve as a traditional currency alternative.
Every trader is aware that cryptos are volatile. Most people think that they are tricky to deal with due to the news popping up daily about their highs and lows. However, cryptocurrencies still offer one of the most lucrative trading opportunities out there. That is as long as you know how their value is being formed.
Behind the cryptocurrencies value
In the same way with other currencies, cryptos can their value according to the community involvement scale. These are coins utility, scarcity, or user demand.
Keep in mind that any digital coin is issued by a private blockchain-related company. So, you also need to consider other factors of the cryptocurrency value bad on the companys efficiency and image. These include perceived value and the projects viability.
- Coins utility
- Cryptos scarcity
- Project perceived value
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Why are cryptocurrencies valuable
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What Gives Crypto Its Value
Where does crypto get its value? Where does anything get its value?
Its really quite simple: If enough people agree that something is valuable, it becomes valuable. That was how ancient currencies like gold or even cowrie shells derived their value, and this applies to the value of artwork. It doesnt matter why people desire something, only that the desire exists in high enough volumes. This is the point at which economic value is generated.
The given price of an underlying asset will depend on the characteristics of the market and, just like many central bank currencies, each token in the crypto space has different characteristics to prevent depreciation and help retain its value in the market.
The characteristics of a good currency are:
Crypto tokens also have a lot in common with company shares, or equity. In the stock market, a companys worth is called market capitalization, which is calculated by multiplying the companys stock price by the number of shares held by all shareholders.
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Does Cryptocurrency Have Real Value
Cryptocurrencies have experienced significant increases in value in the last year. … To be effective, currencies have to be mediums of exchange and stores of value. So, the value of a currency is in its ability to do those things efficiently and effectively: facilitate transactions and act as stores of value.
All the same, what is Cryptocurrency based on?
What Is a Cryptocurrency? A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technologya distributed ledger enforced by a disparate network of computers.
As well as, how is the value of Cryptocurrency determined? Bitcoin pricing is influenced by factors such as: the supply of bitcoin and market demand for it, the number of competing cryptocurrencies, and the exchanges it trades on.
Finally, what factors give Cryptocurrencies their value?
What gives cryptocurrencies value?
- Utility. A token has utility if you can use it for something. …
- Use case. The value of a cryptocurrency comes in part from its perceived use case. …
- Partnerships. Partnerships are a very common talking point for a lot of crypto projects. …
- Incentives. …
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Why Does Cryptocurrency Have Value
So why does Bitcoin, Ethereum, or DogeCoin have any real-world value at all? This isnt a technology question but rather one of human psychology and sociology.
We use specific materials in the physical world as a proxy for value. For example, a material such as gold certainly has intrinsic value as a metal, but it doesnt have any objective value as something used for trade.
Money used to be a stand-in for diamonds, oil, or gold. In other words, the total amount of money was equal to stockpiles of actual commodities that backed the currency. This commodity currency has fallen out of favor, and countries like the USA use fiat currency. In other words, the US Dollar is worth something because the US government says it is. Its backed by a more abstract measure of economic power.
Cryptocurrency has more in common with commodity currencies than fiat currencies in the sense that it requires effort to extract more of it and that at any given time, theres a limited supply of it.
Cryptocurrency gains value as soon as people decide its worth trading something valuable for. On May 22 in 2010, the first commercial Bitcoin transaction happened when someone paid 10,000 BTC for two pizzas valued at $40. With a base value established, the currency could trade because two parties had agreed on their value and other parties followed suit. Today those 10,000 BTC are worth just short of $60,000! How did they become so valuable?
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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How Do Cryptocurrencies Have Value
If a bitcoin isnt backed by a government and doesnt exist in the real world, how is it worth anything?
And if it only exists behind a computer screen, how is its value determined? In this article, Ill answer both of these questions and more. So, read on if you want the definitive answer on where cryptocurrencies get their value.
First, we need to quickly define exactly what a currency is
How Does Cryptocurrency Work
Cryptocurrency is exchanged from person to person on the web without a middleman, like a bank or government. Its like the wild, wild west of the digital worldbut theres no marshal to uphold the law.
Heres what we mean: Have you ever hired a kid in your neighborhood to mow your lawn or watch your dog while you were out of town? Chances are, you paid them in cash. You didnt need to go to the bank to make an official transaction. Thats what its like to exchange cryptocurrencies. Theyre which means no government or bank controls how theyre made, what their value is, or how theyre exchanged.
Because of that, cryptocurrencies are worth whatever people are willing to pay or exchange for them. Yep, its pretty wild.
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What Does It Mean To Mine Cryptocurrency
A crypto miner is a computer that verifies transactions before they are added to the blockchain. In the case of Bitcoin, transactions are added in 1MB blocks, but the exact size varies from one type of currency to the next.
When a block of transactions is verified and added to the chain, the miner that verified the block is repaid for that work in newly minted or unearthed cryptocurrency. In this way, people are motivated to provide the computer equipment and energy needed to power the currency.
Validating transactions isnt challenging for modern computers, so how is the reward for validating a new block awarded? This is where it gets a little weird, but it makes sense.
The miner must present the validated block of transactions and the answer to a challenging cryptographic puzzle to be awarded. Basically, its like youve been given a combination lock, and you have to guess the combination over and over until you get it. For a four-digit lock, youd have to guess 10,000 times before getting it right. If you and someone else compete to guess the combination first, whoever can make the most guesses in the shortest amount of time has the highest chance of hitting on the right combination.
This is what happens with mining, except there may be billions or trillions of possible combinations. Hence, you need a lot of computing power to get enough guesses in to have a chance of being first and getting the juicy rewards.
What Gives Cryptocurrency Its Value And Price
Ever wondered how cryptocurrencies get their value? What gives a digital asset like crypto their price? Keep reading to learn more.
Recently, newsfeeds related to cryptocurrency are bombarded with all-time high price updates. Community mantras like Buy the dip! and Hodl! echo across social media channels. People normalise the skyrocketing prices of crypto coins, which have made many early adopters quite wealthy. So, what exactly gives cryptocurrency value?
Is this for real? This is the most commonly asked question. Though simple, this question bears a powerful set of questions and assumptions that are commonly held by onlookers who observe cautiously at the apparent mania:
- Are cryptocurrencies overrated and overpriced?
- What is the intrinsic value of a cryptocurrency?
- How is something that is unregulated trusted by large financial institutions?
These are very good questions that need to be asked more often. Therefore, this article attempts to look at cryptocurrencies under a proverbial critical thinking microscope and tries to answer these questions as thoroughly as possible.
Why Use Cryptocurrency When Government
TE: Cryptocurrency is peer-to-peer, so you’re not having all of these middle processors like banks involved, and transactions are faster. If you are using your debit card or your credit card, it’s really not instant settlement. They make it look like it, but it’s not â that’s why people can file chargebacks or have âpendingâ transactions. What crypto does is provide instant settlement, because it doesn’t have to go through any bank or centralized financial institution. Once you send it, that’s it, unless they send it back to you. It really is less red tape than moving money, therefore making it more affordable than services like Western Union or MoneyGram. It could actually be cheaper in the long run for you to use crypto to move money to people across the world. Thatâs one of the things that differentiates it from paper money.
Moneyâs value is about how you value it, and that can easily be transferred. Creating a cryptocurrency is largely about community too. When you build a community around something, youâre investing in its shared value.
VF: The question is, how do you calculate this value? You canât apply traditional valuation to cryptocurrencies because they don’t generate cash. A lot of these values really depend on who is looking at it and on who is trying to do the valuation.
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.
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Why Is Crypto So Popular
Some people believe cryptocurrencies could replace regular currencies within 5 years time.
Those involved in crypto argue that they will democratise currency by getting around the reliance on banks. On the surface, anyone with access to a computer can mine for cryptocurrency, and with the current value of a single Bitcoin set at £34,000, anyone can become very wealthy.
Cryptocurrency transactions are usually processed in a matter of minutes, unlike bank transfers that might take days. The person involved and details of the transaction remain relatively anonymous.
What Increases A Cryptocurrency Value
- A coin creation comes with direct costs and opportunity expenses that impact the estimation of the currency.
- Once the need for fiat money abates, the value and price of a coin scale up.
- The usability of a cryptocurrency majorly boosts its value which can be witnessed through the number of exchanges being completed on online swap tools.
- Node count is another pointer and stands for the number of active virtual wallets assessment. Here is how to check it on the landing page of crypto: scan for the node count and the market capitalization of a specific crypto coin compare those two markers with different crypto.
- And, eventually, as it has been mentioned above, supply and demand. Regardless of individuals preferring to purchase or sell a coin, the effectiveness goes up either way.
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What Does Blockchain Have To Do With Cryptocurrency
Well, most cryptocurrencies employ blockchain technology to record transactions. Some of the most attractive features of blockchain are transparency, security and improved traceability. A good example of the blockchain technology is Bitcoin. Bitcoin employs a decentralized blockchain network. It is made up of thousands of computers, or nodes, that are in different geographic locations and operated by separate entities. Each node has a full record of the data stored in the blockchain. If anything is changed in one node, the others can cross-reference each to identify the source of incorrect information. In order for a system or information in the decentralized network to be changed, the majority would have to agree.
Okay Then Why Should I Invest In Or Use Cryptocurrency
Part of the appeal of cryptocurrency is that it can be exchanged across borders without international fees or limitations on who can send or receive it. In essence, all one needs is internet access. Banks are essentially cut out of the picture and there is little regulation. Not only that, making online purchases using cryptocurrency is easier than ever. Moreover, cryptocurrencies can be a safer mobile payment option as they do not require personal data to be stored online. While cryptocurrencies are known to be volatile with high fluctuations, there is no denying its growth in use and popularity since 2009, when Bitcoin was first introduced to the public. Maybe youre not quite ready to take the crypto-plunge, but if you like having autonomy and higher levels of privacy, educating yourself on this newer form of currency is a good idea.
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Utility Of A Cryptocurrency
In order for a virtual currency to become valuable at all, it has to also be utile. Cryptocurrencies are basically manifestations of the usage of decentralized digital ledgers, which is the basic principle of the blockchain technology. To make a new crypto coin utile, those behind it have to make it usable and worth in the ecosystem of a certain blockchain. What this means is that a crypto cannot have value if it is not useful.
For example, the second most valuable currency in Ethereum is a good model. This is in fact a whole platform, which you cannot use without the Ether that is the currency that fuels the Ethereum platform transactions. Therefore, it is crucial to own, spend, buy, trade, and transfer Ether if one is to use this innovative platform. The more in demand the whole system is, the more Ethereum will be worth per single coin. On the other hand, Bitcoin and most of the other coins are used for payments, exchange in a blockchain ecosystem, and many other things. This makes them utile, and in turn, valuable.