Understanding What Determines Bitcoin’s Price
Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to bitcoin. Contrarily, bitcoin prices are influenced by the following factors:
- The supply of bitcoin and the market’s demand for it
- The cost of producing a bitcoin through the mining process
- The rewards issued to bitcoin miners for verifying transactions to the blockchain
- The number of competing cryptocurrencies
- The exchanges it trades on
- Regulations governing its sale
- Its internal governance
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.
Who Can Use Cryptocurrencies
One of the most important and beloved characteristics of cryptocurrencies is the fact that everyone can use them. It does not discriminate on one’s social or financial status, religious affiliation or where you live. You do not even need the internet to be able to use them. So long as you have access to the many ways it can be traded or exchanged then you can use them. In fact citizens, companies, governments and different types of organizations from around the world use them.u00a0
Cryptocurrencies are so free to use that during its early days a lot of secret transactions in the dark web were executed using cryptocurrencies. This resulted in the common, but false notion that most cryptocurrency transactions come from illicit activities. While there is no denying that some transactions might indeed be, the same can be said with other government-issued currencies. Commercial usage of cryptocurrencies has been increasing throughout the years as more government discovers the many benefits of its underlying technology. More than ever, governments are now looking into leveraging this new asset type and its technology.
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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
The Legal Concern Of An Unregulated Global Economy
As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Money laundering issues are also present in regular bank transfers, however with bank-to-bank wire transfers for instance, the account holder must at least provide a proven identity.
Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.
Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.
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How To Indicate Crypto Value
Market capitalization is a straightforward index of the coins value. It identifies by multiplying the total circulating supply by the individual price of the coin. The formula market cap is Total Circulating Supply * Price of each coin. For instance, coin A has 200,000 coins in circulation each one is worth $3, so the market cap of the crypto would be 200, 000*3=$600,000. Coin B has 100,000 with each worth $4 the market cap would be 100,000*4= $400,000. The price of Coin B is obviously higher nevertheless, the total value of Coin A exceeds.
The Aspects that Determine the Rise and Fall in Value of a Cryptocurrency
- It is worth buying a coin when the manipulation from Ponzi scheme, the government, and other third-party interested personas side is happening as the price automatically goes down. And when a ton of trading volume is going on and the price ranges, its a red flag of losing extra money shortly.
- Airdrops. The idea of the airdrop in the crypto market is a promotion of virtual currency projects at blockchain-based startups via having a cryptocurrency user trading in the project when it lists as an initial coin offering on an exchange platform.
- Coin burning. The process of removing coins from circulation reducing the total supply forever.
- Rebranding is one more element that affects the loss in value.
- Hardfork. A fundamental change to a coins network protocol that validates previously invalid blocks and transactions value, or vice-versa.
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.
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The Underlying Technology Of Bitcoin: Blockchain
Let us begin by dissecting the wordu00a0 u201cCryptocurrency.u201d It is the combination of the words Crypto and Currency. u201cCryptou201d is the short word for cryptography, a practice of securing sensitive information from unintended parties. While u201cCurrencyu201d is a medium of exchange, commonly known as money and circulated as banknotes and coins. Therefore we can deduce cryptocurrency as cryptographically secure money. Of course, this is an oversimplification and we will add on this definition through the course of this article.u00a0u00a0
It must be noted that cryptocurrencies are not tangible.u00a0 Unlike banknotes and coins, cryptocurrencies do not have a physical form. They are represented by account balances and addresses, transactions and their own native networks. Cryptocurrencies only exist within the digital realm and oftentimes represent real-world objects like money. This is the very reason why they are cryptographically secured, to make sure they are not being reproduced arbitrarily.u00a0
People who are new to cryptocurrencies may think that this new asset type is easily reproduced since they are digital. They often times liken it to a piece of data that can be replicated with simple keystrokes similar to copying computer files. However, there is nothing further from the truth as developers of cryptocurrencies have created highly sophisticated mechanisms that can secure data stored within its network.
Legal Status Tax And Regulation
Because of bitcoin’s decentralized nature and its trading on online exchanges located in many countries, regulation of bitcoin has been difficult. However, the use of bitcoin can be criminalized, and shutting down exchanges and the peer-to-peer economy in a given country would constitute a de facto ban. The legal status of bitcoin varies substantially from country to country and is still undefined or changing in many of them. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.
According to the Library of Congress, an “absolute ban” on trading or using cryptocurrencies applies in nine countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, Vietnam, and the United Arab Emirates. An “implicit ban” applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.
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How Cryptocurrencies Work
Cryptocurrencies, also known as virtual currencies or digital currencies, are a form of electronic money. They do not physically exist as coins or notes. A cryptocurrency unit, such as a bitcoin or ether, is a digital token. These digital tokens are created from code using an encrypted string of data blocks, known as a blockchain.
The Reserve Bank of Australia’s website explains how cryptocurrency and blockchain technology works.
Cryptocurrencies are used as payment systems to execute contracts and run programs. Anyone can create a digital currency, so at any given time there can be thousands of cryptocurrencies in circulation.
Hear how Crypto-assets work and what to think about before investing.
Keeping Books And Records
If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party
- the exchange records
- the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation
- the mining pool details and records
For more information, please review our link on keeping records.
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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
How Users Increase Crypto Value
There are also a few methods how users increase cryptocurrency value
- Buy low, sell high using the classic investment strategy, users can increase the value of crypto by buying and holding coins. The buying increases demand and hence crypto value increases.
- Mining the act of mining Bitcoins or altcoins can be profitable. It also impacts the supply of cryptocurrencies.
- Increasing utility as more institutions invest in crypto and accept it as a form of payment, its utility increases. As a user, you can contribute to this process. This will increase the value of cryptocurrencies over the long term.
- Media coverage crypto prices fluctuate according to media coverage. Users can impact this through their social media accounts.
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Why Currencies Have Value
Currency is usable if it is a store of value, or, to put it differently, if it can reliably be counted on to maintain its relative value over time and without depreciating. In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having a relatively stable value.
Rather than require individuals to carry around cumbersome quantities of cocoa beans, gold, or other early forms of currency, however, societies eventually turned to minted currency as an alternative. Still, the reason many examples of minted currency were usable was that they were reliable stores of value, having been made out of metals with long shelf lives and little risk of depreciation.
In the modern age, minted currencies often take the form of paper money, which does not have the same intrinsic value as coins made from precious metals. Perhaps even more likely, though, individuals utilize electronic currency and payment methods. Some types of currencies rely on the fact that they are “representative,” meaning that each coin or note can be directly exchanged for a specified amount of a commodity.
However, as countries left the gold standard in an effort to curb concerns about runs on federal gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that parties will accept that currency.
Blockless Chains: Directed Acyclic Graph
Blockchain has become a household name of the underlying technology that powers cryptocurrencies, however, it is not the proper name for such technology as there are other u201cblockchainsu201d that are essentially block-less. We have used blockchain throughout this article for convenience and familiarity, but the more accurate term that we should use is Distributed Ledger Technology . One of these u201cblock lessu201d DLT is what we call Directed Acyclic Graph . Like blockchain, it is a method on how data are stored and retrieved in a distributed ledger to achieve consensus.
A DAG does not use blocks, and transactions are added directly on the distributed ledger. Instead of using blocks it uses a group of nodes that can exist simultaneously. These nodes are connected like branches of trees which enables it to have more than one parent node. This means that the system can start processing other transactions without having to wait for the previous transaction to finish. We can think of it as a more efficient way of storing data where more transactions can be validated at the same time. This makes this technology more scalable compared to blockchain.u00a0
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Increased Regulation In 2021
The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The Financial Action Task Force has defined cryptocurrency-related services as “virtual asset service providers” and recommended that they be regulated with the same money laundering and know your customer requirements as financial institutions.
The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets , which aimed to provide a comprehensive regulatory framework for digital assets in the EU.
On June 10, 2021, The Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.
Things Needed To Start Using Cryptocurrencies
Cryptocurrencies and its underlying technology blockchain have many moving and fluid parts. It is oftentimes overwhelming even just to begin. To help new users to hit the ground running we will share with you several things they need to know about this nascent industry. We will begin with the things we need to know about using the Bitcoin Network then move towards the many other use cases cryptocurrencies are used outside the realm of the finance sector. Let’s start by doing our own due diligence.
Know What You Are Getting Into
DYOR is one of the most important activities when you enter the crypto space. This means u201cDo your own research.u201d There are many legitimate resources out there about cryptocurrencies. Do not limit yourself to using only one source of information. Be aware that there are many who are SHILLING and FUDDING cryptocurrencies. These are tantamount to spreading fake news. Shilling is the act of promoting a project for the sole purpose of profiting from new investors. Fudding, on the other hand, is spreading fear, uncertainty, and doubt without proper evidence of their claim.
u00a0Check Regulatory Environment
Create Your First Crypto Wallet
Register On A Cryptocurrency Exchange
Familiarize Yourself With Crypto Information Sites
How to Acquire Cryptocurrencies
Free cryptocurrency giveaways
Work for it
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