If there’s one thing we all know about cryptocurrencies, it is that they fluctuate. Stories about people earning millions during cryptocurrencies often make headlines – but so do stories of people losing everything during the downturn. Also, since there is no physical product or centralized organization, nothing can be said about it, “Look, it’s good, crypto values will rise now.” So how does cryptocurrency value increase?
In this article, we will take a look at what influences the valuation of digital currencies and how does cryptocurrency value increase.
What is cryptocurrency?
A digital currency is simply a digital asset. The name of the currency is because experts created it to work as a medium of exchange in the same way we now use Fiat currencies.
Transactions happen base on the Internet and will record in a Blockchain. The blockchain shows the transaction history of each unit and will use to prove ownership. Digital assets are best represented as virtual tokens. These tokens are meant for the internal system and can be programmed to record financial transactions and other valuable information.
Using it as a monetary system is still the most profitable feature of cryptocurrencies. This allows users to send digital currencies between the parties in exchange for the goods and services provided. Because digital currencies will not control by any central authority, it has unique advantages. There are usually little or no processing costs. There is less government control and regulation. This means that portable digital currencies are inflation-resistant and transparent in their transaction history.
Cryptocurrency trading is a new and growing feature in the world of digital currencies. Trade is separate from the use of crypto as a monetary system. Instead, users buy and sell digital currencies, like buying and selling shares in a company. Buying stock gives you ownership of a company while buying a token gives you ownership of that digital currency. In the US tax system, cryptocurrency transactions will treat as stock transactions. This shows how users make more money from the world of digital currencies.
Just as the desirability of its products affects a company’s stock price, the cryptocurrency monetary system affects the cost of cryptocurrency trading. The value of a cryptocurrency is primarily influenced by supply, market demand, availability, and competing digital currencies.
How does cryptocurrency value increase?
Cryptocurrency can gain value on exchange platforms. It increases in value based on supply and demand.
The supply of a cryptocurrency depends on how many new coins are being mined and how many current owners want to sell their coins.
The demand for a cryptocurrency depends on many factors. Demand will be increased based on how useful it is to own the coins. This means if the crypto monetary system works well (i.e. fast transactions and low fees) if smart contracts become more commonplace, and if more businesses start to accept crypto, the demand for crypto will increase. Additionally, there is an increased demand for cryptocurrencies as a store of value investment.
How does cryptocurrency value increase? Like any market, the value of cryptocurrencies fluctuates based on the market’s perception of its value at any given time. These fluctuations may be rooted in some of the supply and demand factors mentioned above or can happen as a result of hidden market factors.
How does cryptocurrency value increase: The Factors?
Like any other currency, digital currencies derive their value based on the scale of community participation (such as user demand, scarcity, or usefulness of coins). However, given that most digital coins on the market are issued by private blockchain companies, some of the cryptocurrency value factors stem from their image and performance (such as project durability and perceived value). Let’s get an overview of what makes cryptocurrencies valuable.
To make a cryptocurrency valuable one needs to make it utile. Any cryptocurrency is primarily a manifestation of using a decentralized digital ledger — Blockchain technology. So to make your crypto coin utile, you need to make it usable within a certain blockchain ecosystem.
Let us take Ethereum as a use case. You cannot start using the Ethereum platform without an Ether — a coin, specially tailored to “fuel” the transactions within the Ethereum platform. Accordingly, the value of Ethereum depends on the demand for the platform’s services.
Crypto coins utility can also include dividend payments, mode of exchange within a blockchain ecosystem, voting rights, etc.
Scarcity of the Crypto
Rarity stands for the finite nature of digital coins. In the great scenario, demand must increase the supply of coins to increase their value. For example, the limited supply of bitcoin never exceeds 21 million coins. As the most popular cryptocurrency on the market, Bitcoin is in high demand and its value is increasing. To increase value, some currencies apply a so-called “burning” mechanism that destroys part of the coin supply.
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.
How does cryptocurrency value increase by users?
There are also a few methods how does cryptocurrency value increase by users:
- 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.
What Are the Different Types of Crypto?
There are already dozens, if not hundreds, of different cryptocurrencies, with more emerging every week. Some of the more well-known cryptocurrencies include:
That said, there are currently three broad categories of cryptocurrency:
Each of these types of crypto will discuss in more detail below.
The original cryptocurrency, Bitcoin, is a digital currency with a cap. This means that after mining 21 million bitcoins, it will no longer be mined.
Having a limited currency means that bitcoin can be used as a value-saving investment tool. Investing in foreign exchange reserves of value can be compared to investing in gold. Although there is some trading value in gold, it is mostly used as a value store.
Bitcoin uses a Proof-of-Work mining system. This means that a network of miners performs complex calculations to maintain the bitcoin blockchain. Miners receive freshly minted bitcoins as a reward for their work. Proof-of-Work allows Bitcoin to attach physical value to its transaction system. A bitcoin is worth a certain amount of computing power.
Altcoins are alternative versions of Bitcoin, but with minor modifications. They are often the result of bitcoin forks. There are several types of altcoins.
Some of the major differences between bitcoins and altcoins will find in the blockchain itself. Also, some altcoins have a cap without a cap that changes the way coins will use. Some altcoins have accelerated the blockchain, which speeds up both mining and transactions.
Altcoins also sometimes differ in the authentication method used to authenticate transactions. While some altcoins use proof-of-work systems, others use a stock-proof consensus, which replaces miners with validations. Proof-Of-Stack mining requires much less energy and fewer resources than Proof-Of-Work systems because Proof-Of-Work miners have to do a lot more “work” to mine the blocks.
You can also use Altcoins to create smart contracts. These smart contracts can execute automatically based on specific conditions. There is no need for third-party intervention and therefore they can be done immediately. You can use smart contracts in various transactions such as assets, stocks, and gas, which makes them a very interesting investment.
Tokens are using smart contracts or tokens as a form of currency. They have no blockchain and users can use them in decentralized applications (dApps).
Crypto coins use the mining and blockchain process as a physical measure of currency. This is similar to the way reserve banks previously had gold reserves backed by their fiat currencies.
Tokens, on the other hand, represent nothing physical. Users can use them to buy from dApps, and they can use them to discount fees and voting costs, which makes them increasingly popular. This is similar to separating Fiat currencies from the gold standard.
Mainstream cryptocurrencies such as Bitcoin and Ether trade on multiple exchanges. Just about any cryptocurrency exchange will list the most popular tokens.
But some smaller tokens may only be available on select exchanges, thus limiting access for some investors. Some wallet providers will aggregate quotes for swapping any set of cryptocurrencies across several exchanges, but they’ll take a fee for doing so, increasing the cost of investing. Furthermore, if a cryptocurrency will thinly trade on a small exchange, the spread the exchange takes may be too big for some investors.
If a cryptocurrency becomes listed on more exchanges, it can increase the number of investors willing and able to buy it, thus increasing demand. And, all else being equal, as demand increases, the price goes up.
How does cryptocurrency value increase? Finding value in cryptocurrency
If you understand the core principle of supply and demand behind what gives cryptocurrency value and the factors influencing them, you can make better cryptocurrency investment decisions. So, if you believe demand is going to increase for reasons X, Y, and Z and don’t think supply will keep up, that cryptocurrency could be a good investment. But be aware that governments still don’t have best practices for regulating cryptocurrency, which makes it a particularly risky and volatile investment no matter what.