How is Cryptocurrency Valued and What Affects the Price of Cryptocurrency?
Of late, you might have heard a lot of your family, friends, and acquaintances talking about a new currency called Cryptocurrency. They might mention it’s the future for purchasing goods and services or a good investment.
Before investing in cryptocurrency like BitCoin, you might want to know what it is and its particulars.
We will define what Cryptocurrency is and how it is valued.
What is Cryptocurrency?
Cryptocurrency has created a system of money and space to safely deposit funds similar to a bank. The difference being that cryptocurrency doesn’t rely on a bank and instead is completely reliant on its users.
In essence, Bitcoin is a directive currency. Nothing backs up cryptocurrencies. Since people believe cryptocurrencies have value and use it to pay for goods and services, it creates value. This value continues to grow.
What Affects the Price of Cryptocurrency?
There are numerous important factors and features to which cryptocurrencies react.
CRYPTOCURRENCY’S SUPPLY AND DEMAND
The government controls the supply of the circulating paper currency. Meaning, if the government decided to print more paper currency, the value of it will decrease.
The supply of a cryptocurrency cannot be increased or decreased by a government or other authority. For instance, there are only twenty-one million Bitcoins — a form of cryptocurrency — ever created, and they can be divided only one-hundred million times. When more people demand a limited supply, the price and value increase.
Bitcoins are created through a process called Bitcoin Mining. It involves solving mathematical problems and presenting it in proofs. The mathematical problems are becoming increasingly more difficult to solve and more expensive to produce. Therefore, the combination of the high demand and the increasing cost to produce Bitcoin drives up the price.
ENERGY NEEDED TO FORM A BLOCKCHAIN
The software and hardware required for mining a cryptocurrency like Bitcoin use large amounts of electricity to protect blockchains.
Blockchains are produced when a proof of work is submitted to a Bitcoin mining pool or cloud mining group. As the proofs become more difficult to solve, the energy use increases. This, in turn, increases the price.
DIFFICULTY LEVEL OF THE BLOCKCHAIN
Cryptocurrencies have a higher comprehended value and worth when the blockchain is more secure. However, when the security becomes higher so does the Bitcoin mining difficulty level.
As discussed in the previous section, a higher mining difficulty level leads to higher energy costs; and therefore, higher prices and value.
One of the key features of cryptocurrencies is its uses. If there’s not a utility value for cryptocurrencies, then there’s no perceived value.
Currently, you can either use cryptocurrency to pay for goods or services or to create an investment.
How the World Recognizes Cryptocurrency
Cryptocurrencies rely heavily on the public for its prices and worth. The more people know about cryptocurrency and decide to invest in it, the higher the price goes.
Sometimes, the price can vary depending on how the public reacts to an improvement in cryptocurrencies.
There are many cryptocurrencies that people do not recognize or have a smaller market. As a result, their prices are significantly lower than popular cryptocurrencies such as Bitcoin and Ether.
Other cryptocurrencies often feel the effect of a rise or fall in Bitcoin’s price. With fluctuations in Bitcoin’s price, other cryptocurrencies might increase or decrease in response.
For example, Litecoin mirrors whatever price fluctuation Bitcoin is going through.
Since people have known about Bitcoin the longest, and it is the most well-provisioned cryptocurrency, it can influence others. Bitcoin is, therefore, also known as the fallback currency.
Similar to the public, the mass media also has an influence on cryptocurrency. The news reports can reflect a positive or negative perception about cryptocurrency.
This perception can be used as a method to control and influence the price.
THE NUMBER OF INVESTORS
The amount invested and the number of investors can change the prices.
There are a few scenarios that could occur:
- Investors use a large number of their assets to buy many shares of the market. They try to increase the price by advocating positive things about cryptocurrency.
- Investors buy many shares of a smaller coin and cause price fluctuations.
- People jump on the bandwagon and decide to invest and it increases the price.
Cryptocurrencies can originate from a scam.
Scammers persuade people to invest large amounts of money to create a new cryptocurrency. Their ulterior motive is to steal money from the initial investors.
Cryptocurrency scammers are easily caught because of the blockchain. When this event occurs, the value of the coin drops off.
There are many cryptocurrencies on the market which hold no practical or usage value. This makes it difficult for other cryptocurrencies to catch the public’s eye and increase in value. They are competing in a market full of worthless currencies.
There are other cryptocurrencies trying to mimic Bitcoin, which affects the price.
In some cases, the new coin does well and has proportional price fluctuations to Bitcoin. In others, it doesn’t do as well.
TRUST IN PAPER CURRENCY
When people begin to trust their paper currency system, it causes them to put more of their money and assets in that system.
Bitcoin and other cryptocurrencies are affected as a result.
GOVERNMENTAL REGULATIONS AND LAWS
The government’s behavior can affect the price and value of cryptocurrencies.
If the government tries to impose tax or asset regulations, it can cause the prices to decrease.
Alternatively, if a government makes cryptocurrencies a country’s legitimate currency, then there would be a progressive effect.
This commentary discussed extensively what cryptocurrency is and how its price and worth is determined.
Although there are many features that affect price, belief in it is the most important since nothing backs it up.
We hope this article informed you about the topic and gave you a start if you were interested in investing.