How Do Cryptocurrencies Gain Value
The first time I learned about cryptocurrencies I was completely baffled.
So are prices purely set by how much people would pay for them? I thought.
The oversimplified answer is pretty much.
But as we peel the layers back further, we discover that the demand dictates the price, but the following variables tend to dictate demand:
- Limited supply
What Causes A Cryptocurrency To Increase In Value
Traditional currencies, like the US dollar and UK pound, are backed by a commodity like gold, and their prices are mostly determined by the basic rule of trading: supply and demand. Their value is somewhat imaginary since it was derived from the governments statement that it actually holds worth and the two independent parties are ready to put their trust in that value. In layman terms, currencies have value because the government says so, and the participants in transactions believe them.
Cryptocurrencies, on the other hand, are not regulated by any authority, and exchange markets are free and open for everyone to trade. Supply varies from coin to coin, some have a fixed number of coins from the start, while others keep changing the quantity. This means that inflation is non-existent. Cryptos are not backed by any goods and yet their prices keep fluctuating all the time.
Therefore, how is the value of the cryptocurrency determined and how can we predict the future variations? Here are some possible factors that should be taken into account.
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.
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External Drivers Of Cryptos Value
External factors also influence the value of a cryptocurrency, including the words or tweets of high-profile figures like Musk. In June 2021, the billionaire drove up the value of cumrocket, an alternative coin for adult creators, by nearly 400%. But he also sparked a price dip of more than 7% in bitcoin after he suggested he was breaking up with the cryptocurrency.
Diana Biggs, a former HSBC executive who now leads cryptocurrency startup Valour, notes that cryptocurrencies are still in their infancy and market caps tend to be relatively small. This contributes to their volatility and makes them susceptible to the influence of individuals. Still, the more big companies invest, the more individuals will find it hard to move the market, Cooper notes.
That investment is already happening. Ten years ago, bitcoin was deemed a tender of the dark web. Now PayPals millions of American wallet holders can spend bitcoin like they would the dollar. And the first major US bank, Morgan Stanley, has begun offering global clients access to bitcoin funds. Buy-in from the establishment is growing, and fast.
Biggs also cites greater government clarity around crypto usage as a major driver in cryptocurrencys route to adulthood and thus a more predictable value. This month, El Salvadors decision to become the first country to adopt bitcoin as legal tender sent the coins value up 6%.
Written byRuby Hinchliffe
Announcement And Upcoming Events
Demand can go up because of an announcement that a company is going to accept crypto payments, or because people are speculating on its future value.
An example of how a company accepting crypto payments would affect demand:
If Company a accepts Bitcoin as payment, then later announces that they will stop accepting Bitcoin for purchases due to the volatility in the market, people who were holding Bitcoins may sell them off.
This happened not too long ago when Elon Musk started accepting BItcoin in his company we all saw how Bitcoin projected afterward.
A similar thing happened when he started pushing DOGE coin.
Months on, he later tweeted that Tesla would no longer accept bitcoin as payment due to environmental concerns about its heavy energy use. This caused a significant drop in the value of Bitcoin.
Is when a coin is to get listed on a popular cryptocurrency exchange like Binance or Coinbase.
Getting a coin or a token listed on an exchange like Binance is a big deal because it gives the coin or token instant credibility. Hence drives its value up.
Monitor any new coin or token listed on popular exchanges, youll notice a huge surge in its value.
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Mass Adoption By Community
Another thing I think that causes cryptocurrency value to increase is how many people want it.
The more people who use bitcoin to buy goods and services or trade with one another, the greater its value becomes because there will be an increased demand for bitcoins from others.
The more people who are invested and know about how cryptocurrency work, the higher demand will be for them.
The thing that makes me think this is because theres a lot of new cryptocurrencies every year with newer technology than their predecessors .
With all these new investments in cryptocurrencies, theyll need time to get used to, so as the number of investors grows over time, eventually, mass adoption by the community will cause increased interest and therefore make crypto values go up when someone wants one but cant buy it yet because no sellers are available due to high demand or low supply.
Whats Behind The Crash
In the case of Ecuador, they banned the Currency, while some other countries gave cryptocurrency official status as currency for tax purposes. The lack of legal framework in many countries is still a hurdle, as legal precedents for cryptocurrency are still being set. And due to the limited ability to control cryptocurrency on the open internet can mean it can be used against the will of a government even.
China has repeatedly cracked down on cryptocurrencies, with a market crash following most announcements. For example, in February this year, China blocked all websites relating to trading in the currencies, prompting an immediate 15pc fall in bitcoin and 20pc drop in Ethereum. Earlier bans of initial coin offerings in the country had a similar negative impact on their value.
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Does The Value Of Cryptocurrencies Change
The value of cryptocurrencies changes over time. Unlike fiat currencies, the issue of new coins is not controlled by a central bank but by an algorithm that predetermines how many new coins will be issued over time.
The most prominent feature of cryptocurrencies is their decentralized naturethe digital records are stored on thousands of computers around the world rather than in one central database.
One of the reasons for this decentralized nature is to prevent a single entity from having total control over the currency. This prevents censorship in theory, it cannot be regulated and restricted by any government or organization. The problem with this self-regulation is that there is an absence of direction and no responsibility when issues arise. If a person is scammed in a transaction, there is no way to seek legal redress.
Cryptocurrency transactions are irreversible so if a transaction goes wrong it can cause significant problems for both the buyer and seller. This nature of cryptocurrency has been used by cybercriminals to scam people. In one case, hackers pretended to be from the government of Dubai and convinced some companies to make payments to them in Bitcoins rather than the legitimate bank.
It is worth noting that cryptocurrencies can be hacked or suffer technical problems themselves. There have been several cases of hackers stealing large sums of cryptocurrency through cyberattacks on the exchanges holding the currency.
How Crypto Affects Financial Markets
Future Of Digital Coins
Many believe that the biggest hurdle facing cryptocurrencies is their poor fundamentals. None of the digital coins, for instance, has yet proved its fundamental value as a currency that will be readily accepted by a huge population as a medium of exchange. This is in contrast to national currencies such as the U.S. dollar which are widely accepted by people as money. So crypto, in essence, continue to be viewed as a gamble by most. Governments across the world have not been keen on allowing cryptocurrencies to be used as alternative money as they view private currencies as a threat to their sovereignty.
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Why Is Market Cap Important
Price is just one way to measure a cryptocurrencys value. Investors use market cap to tell a more complete story and compare value across cryptocurrencies. As a key statistic, it can indicate the growth potential of a cryptocurrency and whether it is safe to buy, compared to others.
To demonstrate, lets compare the market cap of two fictional cryptocurrencies.
If Cryptocurrency A has 400,000 coins in circulation and each coin is worth $1, its market cap is $400,000.
If Cryptocurrency B has 100,000 coins in circulation and each coin is worth $2, its market cap is $200,000.
Even though the individual coin price of Cryptocurrency B is higher than Cryptocurrency A, Cryptocurrency As overall value is double Cryptocurrency Bs.
Still, its also important to note that many cryptocurrencies market cap can swing dramatically due to their volatility.
Factors Affecting Cryptocurrency Value
A big chunk of the cryptocurrencys value is dependent on its utility. Any cryptocurrency is primarily a manifestation of using a decentralized digital ledger. To utilize your crypto coin, you must understand the need to make it usable within a specific blockchain ecosystem. Further, its worth noting that a crypto coins utility may also include dividend payments, mode of exchange within a blockchain ecosystem, voting rights, etc.
Since its introduction in 2009, Bitcoin has made its way as the most widely used digital currency at present. Engineers of Bitcoin stipulated in the protocol that the coin supply would be pegged at over 20 million. To give a clearer view, the collection of bitcoin ranges around 18 million in 2020. Meaning, its safe to say that scarcity can drive value higher. In other words, using an ideal setup, the demand should excel the supply of the coins to make them more valuable.
A projects perceived value also affects cryptocurrencys worth and would mostly rely on the projects overall viability and growth. Of course, for a project to keep developing, achieve one milestone after another, and establish more profitable partnerships or launch user-friendly software, it directly impacts its value in the markets eyes. These large indicators all contribute to the positive sentiment around the project and affect its cryptocurrency value.
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What Is An Ico
ICO stands for initial coin offering. Many of the smaller projects in the crypto space and a few of the largest ones raised money from private investors around the world in the crypto equivalent of a crowdfunding campaign. Investors would send funds usually in the form of Bitcoin to the project and receive coin or tokens in return. Most ICOs happened in 2017 and early 2018 and used Ethereum as a platform of operation via the ERC-20 standard. In 2018, the United States Securities and Exchange Commission clarified their rules relating to fundraising for assets, which made it much harder for new cryptocurrency projects to issue their own tokens in this way. Since the appearance of the SEC guidance and the organizations heightened interest in regulating ICOs for U.S. citizens, the number of ICOs has been reduced substantially.
No 1 Its Reason For Existence
A cryptocurrency should, above all else, have a compelling reason for existence. What problem does it solve that other coins dont? What market is it chasing? What is its potential for widespread adoption? A cryptocurrency project should have a website that readily answers these questions.
Look for the whitepaper. The whitepaper ought to explain the rationale behind the coins launch, its business model and give you an idea of the aspirations of the team behind it and how feasible the goals are.
The old saying is to only invest in what you understand. This view isnt fashionable in a newly emerging technology like blockchain, because many of the concepts are ground-breaking. However, the project team should address this with a clear and concise business case. If it reads like mumbo-jumbo, it could be there to fool you. Its therefore probably best to move on.
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Perceived Value Of The Project
Each value of a digital currency depends on the overall capability and progress of the project. One-on-one projects that continue to make breakthroughs, build profitable partnerships, or launch user-friendly software become more valuable to the market. All of these are indicators that greatly contribute to the positive feelings about the project and affect the value of cryptocurrency.
Run An Initial Dex Offering For Your Crypto Token
ICO is now an old school term. IDO is the latest trend in selling your tokens in big quantities. In an ICO you will need to spend time and money to market your tokens. In an IDO, the platform where you launch your token brings all their user base to checkout your token and buy it at a special price. Usually an Initial Decentralized exchange Offering is done before listing it in a DEX exchange. In an IDO you sell certain percentage of your tokens to investors at a special price. IDO sales usually start and finish in just minutes with the token getting over subscribed. All you need to do is get your token listed in a famous IDO platform and the sales is automatically taken care. Some of the famous IDO platforms out there are Polka Starter, BSC Launchpad, PanCakeSwap IFO, Lemonade, Super Starter, Tronpad, DAO Maker etc.
Looking to get your Cryptocurrency token listed in an IDO launchpad? you can contact some experts HERE.
To be continued
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Cryptocurrency Supply And Demand
The value of anything is determined by supply and demand. If demand increases faster than supply, the price goes up. For example, if there’s a drought, the price of grain and produce increases if demand doesn’t change. The same supply and demand principle applies to cryptocurrencies.
The supply of a cryptocurrency is always known. Some, such as Bitcoin, have a fixed maximum supply. Others, like Ether , have no cap on supply. Some cryptocurrencies have mechanisms that “burn” existing tokens to prevent the circulating supply from growing too large and slowing inflation. Burning a token means sending them to an unrecoverable address on the blockchain.
The monetary policy of each cryptocurrency is different. Bitcoin supply increases by a fixed amount with each new block mined on the blockchain. Ethereum offers a fixed reward per block mined, but it also pays out for including “uncle blocks” in the new block, which helps facilitate the efficiency of the blockchain. As a result, the supply increase isn’t as fixed. Some cryptocurrency supplies are dictated entirely by the team in charge of a project, which can opt to release more of a token to the public or burn tokens to manage the money supply.
How To Start Mining Cryptocurrencies
Mining cryptocurrencies requires computers with special software specifically designed to solve complicated, cryptographic mathematic equations. In the technologys early days, cryptocurrencies like Bitcoin could be mined with a simple CPU chip on a home computer. Over the years, however, CPU chips have become impractical for mining most cryptocurrencies due to the increasing difficulty levels.
Today, mining cryptocurrencies requires a specialized GPU or an application-specific integrated circuit miner. In addition, the GPUs in the mining rig must be connected to a reliable internet connection at all times. Each crypto miner is also required to be a member of an online crypto mining pool as well.
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How Does Bitcoin Supply Affect Its Price
Since Bitcoins introduction in 2009, its bitcoin supply has been diminishing. Every four years, the cryptocurrency undergoes a halving event during which miner rewards are reduced by half on average. The decline in supply corresponds to increasing demand due to news media coverage and its price volatility. A combination of shrinking supply with a boost in demand has resulted in surging bitcoin prices.
Cryptocurrency Price Follows The Simple Economics Of Demand And Supply But There Are Some Other Factors As Well
Cryptocurrencies are not regulated by governments or any single entity they are decentralised
- All cryptocurrency trades automatically get entered into a public ledger
- Node count measures how many active wallets exist on the network
- To know about a cryptocurrency, a person can visit an online exchange
Cryptocurrencies have been available to the public for nearly a decade now, but their popularity is a relatively new phenomenon. A lot of people have now started investing in one of the many digital coins available today. The process of creating these coins called Mining is limited to the geeks, who work on powerful computers to solve complex mathematical equations to create virtual currencies like Bitcoin, the oldest and most popular of them all. Based on the idea of decentralisation, the blockchain technology behind these coins plays an important role in sustaining them and making them secure.
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How Do You Track The Value Of Bitcoin
Bitcoin’s value depends on your financial circumstances and investing goals. Bitcoin’s price is publicly available at any time through most cryptocurrency exchanges, along with cryptocurrency news and market websites. CoinMarketCap is one of the larger and better-known cryptocurrency valuation and data websites and is a trusted source of bitcoin price data. If you have an account at an exchange or brokerages like Coinbase, Robinhood, Gemini, Binance, eToro, or FTX, you can view the current price in your trading app or account online.