Since the introduction of cryptocurrencies to the financial world, their popularity keeps surging to a phenomenal level. With its popularity, a lot of investors, even non-investors, have started investing in many digital coins that are available today. To understand how a cryptocurrency’s value is determined, let us first differentiate the difference between fiat currencies from cryptocurrency. Fiat currency is the type of money that is backed by a certain government that issued it in the first place. Examples of this fiat currency are Yen, Pound, Euro, US dollars, and many others. Its value is based on the public’s faith in the one who issued the currency. Most countries still operate using a fiat currency system, where monetary reserves and central banks control the money supply and thus control inflation indirectly.
Now for cryptocurrency, since they are designed to be decentralized, it is not regulated by any government. Its value is determined by its demand. The higher the demand for this type of currency, the more it will push the value of cryptocurrency upwards. On the contrary, if a coin has a high supply of tokens with very little demand, its value will drop. In this article, we will know some of the factors that affect the value of cryptocurrency.
Supply
This is the major influencer when it comes to the value of cryptocurrency. The supply of digital coins changes over time as new coins are being released or mined. Since there is a limit of about 21 million coins that can be mined and over 18 million coins have already been mined to date, the scarcity of coins that are being mined increases its value.
Plus, when you buy and sell cryptocurrency, the values can also change depending on the crypto exchange platform you’re using. A good example of that is illustrated in a guide from Debt Bombshell, which collates the best crypto exchanges in Australia and discusses how they differ in features, hidden costs, and transaction fees.
Adoption by masses and cognizance of the crypto concept
This factor goes hand in hand as more and more countries are adapting to the digital world especially among young people who are eager to venture out and test the waters of the financial world, trading in cryptocurrency is their new “to-do” list. A research conducted among young people aged 18-30 in Europe particularly in UK, Italy, and Germany has shown 63% of them do not fully understand how cryptocurrency works but at the same time, 62% of the same respondents said that they are willing to invest in crypto after taking some crypto course. The same study has been conducted in the US, where insufficient knowledge about crypto is their main obstacle in pushing through with their decision to make an investment.
Regulations
Prohibition and Legalization of the use of cryptocurrency in a country is another factor that affects its value. There are countries such as Indonesia, Iran, Vietnam, Turkey, Egypt, and China among others who do not allow the use of cryptocurrency. The banning of cryptocurrency in trading and limiting the operations of crypto mining infrastructures affects the supply and demand of digital currency. Since the idea behind crypto is decentralization, it cannot be regulated by a government. This technology can be used by individuals or citizens to bypass capital controls and it can also be used by cybercriminals in financial jurisdictions until crypto’s ecosystem is not yet mature.
Costs of production
By this, we mean, the cost of producing Bitcoin through the process called “mining”. This factor is the bulk of the direct fixed cost for the electricity and infrastructure that is required to mine a cryptocurrency. Miners of cryptocurrency sometimes spend a fortune on mining machines that are equipped with very expensive processors. In addition to the machines and computers that they use, these miners also have to think about the electricity cost that crypto mining incurs. They also would not mind if they can see that the value of the digital currency is not high enough to offset the cost of the process. In Bitcoin, for example, the difficulty level of its puzzle algorithms can speed up or slow down its production and overall, affects the supply and price.
Market capitalization and Coin Reputation
Market Capitalization or market is the indicator that keeps track and measures the market values of cryptocurrency. This is used by various investors to compare the value of each cryptocurrency. In easier terms, this factor reflects the popularity of a particular coin. So the higher the market cap that a digital currency has, the higher its value in the market. It also follows that when a cryptocurrency like Bitcoin has a higher reputation in the current market compared to other crypto coins out there like Ripple or Litecoin, the higher the value is placed on the currency since they are being adopted by mainstream businesses.
Competition
With over 6,000 crypto coins out there, the price for each digital currency is affected. By competition we mean, competition between cryptocurrencies and competition among the exchanges done in trading platforms. Since dealing in cryptocurrency is highly volatile, it also follows that when a certain crypto coin faces an issue with regard to its supply or demand, its price fluctuates. One of the reasons for the fluctuation of price is the “speculative bets” that investors do. That is why the concept of “winner-takes-all” does not really apply to this kind of technology because the value is still majorly dependent on which coin these investors predict will be the most profitable as time goes by.
In summary, since the prevailing medium of exchange is still the government-backed money, one of the safe ways for investors or those who are interested in investing in digital currency in the future would be to look at all the current global values of all the sores of value and all mediums of exchange used for cryptocurrency, compare them, and calculate each of their projected value. This is not to emphasize that you should solely focus on the price itself because it may always fluctuate. What you should always consider is the market cap that is attached to it. You will often see some social media influencers who will do predictions that a particular digital currency will outdo the other but you should also make your own deductions with regards to this. Ask yourself if that prediction is reasonable for it to take effect in the near future considering its current market capitalization. It may seem like a lot of work but if done right, you can also benefit from it.
