Sunday, August 14, 2022

# What Determines The Value Of Cryptocurrency

## Calculating Bitcoin And Altcoins Value

Price Volatility: Who Determines the Value of Bitcoin and Other Cryptocurrencies?

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.

## Bitcoins Price Vs Value

When buying or selling any financial product, its important to distinguish between price and value. The price is the current cost, or what someone is willing to pay for something right now. The value, on the other hand, is what something is worth, and price doesnt always equal value.

For example, in the stock market, the value of a share of stock is determined by analysts reviewing the companys financial performance and prospects. Bitcoin, on the other hand, isnt backed by a specific company or service, which makes it harder to find an intrinsic value for the digital currency.

Whether or not bitcoin has intrinsic value is an ongoing debate, and its important to consider both sides of the debate before investing in bitcoin. If the skeptics are right, bitcoin could dramatically fall in price, as many believe Bitcoin is just a bubble that will eventually pop. But if the bulls are right, there could be many more crypto millionaires in the future.

## How Do I Protect Myself

If youre looking to buy a cryptocurrency in an ICO, read the fine print in the companys prospectus for this information:

• Who owns the company? An identifiable and well-known owner is a positive sign.

• Are there other major investors who are investing in it? Its a good sign if other well-known investors want a piece of the currency.

• Will you own a stake in the company or just currency or tokens? This distinction is important. Owning a stake means you get to participate in its earnings , while buying tokens simply means you’re entitled to use them, like chips in a casino.

• Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of work to comb through a prospectus the more detail it has, the better your chances its legitimate. But even legitimacy doesnt mean the currency will succeed. Thats an entirely separate question, and that requires a lot of market savvy.

But beyond those concerns, just having cryptocurrency exposes you to the risk of theft, as hackers try to penetrate the computer networks that maintain your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those arent typical risks for investing in stocks and funds on major U.S. exchanges.

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## 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

## What Is The Highest Value Ever Reached For One Bitcoin

In April 2021, the price of bitcoin briefly surpassed \$60,000 for a single bitcoin. On April 14, Bitcoin hit a peak price of \$64,863, which remains the record as of this writing. After falling to around \$30,000 per bitcoin in July 2021, the price has since rebounded.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Also Check: How To Cash Out Bitcoin On Cash App

## Crypto Scams Are Increasing

There are two main types of crypto scams.

• Fake opportunities to buy crypto
• Using your own crypto to invest or pay for something
• Scammers try to trick people into investing in fake opportunities to buy crypto. Watch out for these tactics:

• false promises of very high returns
• fake endorsement from celebrities or government agencies
• people who contact you through social media or text messages
• using dating apps to establish a romantic connection and gain trust
• multiple or constantly changing bank accounts used for transfers

Rhett is scammed \$97,000 by a fake endorsement

Rhett saw an article on a news website about The biggest deal in Shark Tank history, that can make YOU rich in just 7 days!

Rhett was interested in trading Bitcoin, so he provided his contact details. Soon, an Account Manager named Max began calling Rhett. Max called often, pressuring Rhett to open a trading account and make a deposit. By depositing between \$40,000 and \$50,000 upfront, Max promised Rhett he could earn at least \$15,000 per month.

Max promised Rhett that the money he deposited would be safe because he would have total control of the account. Its more or less moving your money in your left pocket from your right pocket, Max said. Max promised Rhett that he could withdraw his money whenever he wanted to.

Rhett deposited more money in the hope he could recoup his losses. Rhett ended up depositing and losing a total of \$97,000.

## Crypto Is Not Regulated

Many crypto-assets and other digital assets are commonly not considered to be financial products. Because of this, the platforms where you buy and sell crypto may not be regulated by ASIC. This means you may not be protected if the platform fails or is hacked.

When a cryptocurrency fails, investors will most likely lose all the money they put in. In most countries, cryptocurrencies are not recognised as legal tender. You’re only protected to the extent that they fit within existing laws.

Also Check: How To Track Cryptocurrency Prices

## Who Sets Bitcoins Price

The value of bitcoin is determined by the same market forces that influence the value of any other good or service. If more people want to buy than sell, prices will likely increase. If there are more sellers, the price tends to fall. This is similar to the stock market, real estate, and most other open marketplaces.

Bitcoin has a fixed maximum supply of 21 million coins, and as of Sept. 23, 2021, nearly 19 million coins have already been created. This concept is comparable to outstanding shares in the stock market.

When an open buy order and sell order meet at a common price, the order executes. That final trade price is the current bitcoin value. You can find the most recent bitcoin price using a site like CoinMarketCap or a public blockchain explorer, which is a site that lets anyone review any bitcoin transaction thats ever taken place.

You may find that some exchanges list different prices for bitcoin. This is because some exchanges operate independently of the open market and serve only their members, so prices may vary slightly from the overall market. This sometimes benefits members because you may be able to buy bitcoin without paying network fees, which may be more than the exchanges fees. Additionally, with some exchanges, including eToro, there is a fee called a spread in the bitcoin price, which makes it slightly higher than the .

## Forks And Governance Stability

How Is The Value Of A Cryptocurrency Determined

Because bitcoin is not governed by a central authority, it relies on developers and miners to process transactions and keep the blockchain secure. Software changes are consensus-driven, which tends to frustrate the bitcoin community, as fundamental issues typically take a long time to resolve.

The issue of scalability has been a particular pain point. The number of transactions that can be processed depends on the size of blocks, and bitcoin software is currently only able to process approximately three transactions per second. While this wasnt a concern when there was little demand for cryptocurrencies, many worry that slow transaction speeds will push investors towards competitive cryptocurrencies.

The community is divided over the best way to increase the number of transactions. Changes to the rules governing the use of the underlying software are called forks. Soft forks pertain to rule changes that do not result in the creation of a new cryptocurrency, while hard fork software changes result in new cryptocurrencies. Past bitcoin hard forks have included bitcoin cash and bitcoin gold.

## How Does Bitcoin Make Money

Unlike stock, bitcoin does not represent ownership in a company or entity. Owning bitcoin is owning digital currency, much like owning US\$1 is owning paper currency. Bitcoin miners earn rewards for completing blocks of verified transactions, and owners of bitcoin make money as the price per coin increases. For example, if you purchased 100 coins at \$65.52 on July 5, 2013 and held it until its all-time high of \$61,683.86 on March 13, 2021, you would have \$6,168,386.

## Understanding Marginal Cost Of Production

The marginal cost of production is an economics and managerial accounting concept most often used among manufacturers as a means of isolating an optimum production level. Manufacturers often examine the cost of adding one more unit to their production schedules.

At a certain level of production, the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The key to optimizing manufacturing costs is to find that point or level as quickly as possible.

Marginal cost is an important factor in economic theory because a company that is looking to maximize its profits will produce up to the point where marginal cost equals . Beyond that point, the cost of producing an additional unit will exceed the revenue generated.

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## Why Did Value Of Cryptocurrencies Soar In 2020

As explained above, the value of cryptocurrencies is determined through a basic demand-supply function. There were simply too many people interested in buying cryptocurrencies and investments were pouring in.

An important point to note is that even though the supply of Bitcoins increases every day, Bitcoin units available for sale today are less than in 2017, limiting its availability.

Many experts believe the pandemic also contributed towards the massive investor confidence in Bitcoin since traditional assets lost value in the year.

Corporate investment also saw a big surge, and companies now own approximately 4.5 per cent of the worlds Bitcoin supply, valued at 4.5 million dollars. Square, an American merchant services aggregator invested 1 per cent of its total assets into Bitcoin is one such example.

Also read: The big court cases that will determine fortunes of Indian banks in 2021

## Factors That Determine The Value Of Cryptocurrency

Cryptocurrencies are fundamentally volatile and as such, their value remains a mystery to a lot of people deemed as outsiders of the cryptocurrency community.

So, what drives the value of cryptocurrency? There are factors that can help determine the value of cryptocurrency. Lets look at a few of them:

## Your Money Could Be Stolen

Be aware that a hacker can potentially steal the contents of your digital wallet.

Your digital wallet has a public key and a private key . However, crypto-asset systems allow users to remain relatively anonymous and there is no central data bank. If a hacker steals your crypto-asset, you have little hope of getting it back.

Using a wallet thats held offline, called a hardware wallet or cold storage, may provide additional protection.

## Supply And Demand For Bitcoin

The price of Bitcoin is determined in the same way that the value of the U.S. dollar is determined: supply and demand. Like fiat currency, when the demand for bitcoin increases, the price increases. When demand for bitcoin falls, the price falls.

On the supply side, Bitcoin is a unique asset in that its new supply schedule is absolutely inelastic it is completely immune to fluctuations in demand. When most goods, including fiat currency and gold, experience a rise in demand, producers react by increasing production and returning prices to an . When demand for bitcoin rises, thanks to the difficulty adjustment, production of new bitcoin does not rise.

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## Factors That Determine The Value Of Virtual Currencies

In the world of virtual currencies, we can find significant differences with the traditional financial model. One of them, its value, but what really determines it? Every cryptocurrency is a different world. The value of these currencies is not connected to the behavior of a particular economy and depends on the supply and demand of tokens.

No one controls them because they come directly from the blockchain technology. They don’t even require confidence to support them, as it happens with central banks. In countries with a fiduciary system, where banks manage and control the cash supply for the economy to function, it is more likely to have a crisis, as in Venezuela.

However, with virtual currencies it is more difficult for this to happen, especially since they have a fixed supply. The decrease in its value through inflation is virtually non-existent. Its value is backed by easily comparable characteristics: the rate at which the crypto-market changes, the increase of individuals trading with cryptocurrencies, etc.

## Determining The Value Of Crypto

How the Value of CryptoCurrency are determined

While its easy to conflate crypto with bitcoin, there are actually around 4,000 such currencies in circulation around the world, more than the number of fiat currencies in existence. The number of cryptos is likely to keep growing, largely because its so easy to develop a new coin, which in basic terms is simply computer code generated by open-source software designed to transact value online.

The way a coin is developed, and for what purpose, has a massive bearing on its value. While there are thousands in existence, the top 20 coins are believed to constitute around 99% of the market by volume, according to crypto website CoinDesk.

Much like fiat currencies, the price of cryptocurrencies is heavily swayed by supply and demand. But its also determined by the cost of production. Look at the use case of a coin, says Edward Cooper, Revoluts head of crypto. He emphasises utility as the most important component in a cryptocurrencys value. How much technical engineering is going on to update the protocol? What is the calibre of the founding team?

For bitcoin, that utility is solving the problem of wealth storage, while ethereum, the worlds second-largest cryptocurrency, can be used as the foundation for apps. This compares to dogecoin, which was created in just two hours as a joke and enjoyed a nearly 20% value boost when Musk tweeted: One word: Doge.

The more big companies invest in crypto, the more individuals like Musk will find it hard to move the market

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## What Crypto Coins Will Be Valuable In The Future

• There are over 1.17 trillion dollars in market cap for Bitcoin .
• The market cap of Ethereum is over \$520 billion
• A market cap of over \$88 billion is held by Binance Coin .
• The market cap of Tether is over \$70 billion
• There are over 66 billion dollars in market cap for Cardano .
• The market cap of Solana is over \$60 billion
• The XRP currency is worth
• ## How Are Cryptocurrencies Valued

Unlike fiat currencies, the value of bitcoin and other cryptocurrencies do not depend on how well a government is performing, the inflation rate, or the economical status of a country. But fiat and cryptocurrency have one similarity: the value of cryptocurrencies also majorly depends on how much trust and demand they have in the market.

There are several factors that affect the market demand for a cryptocurrency. Lets go through them.

Also Check: How To Start Your Own Crypto Coin

## 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

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