Cryptocurrency is a type of digital asset that is created to work as a medium of exchange. You can use cryptocurrency to conduct financial transactions, control the creation of additional units, and can verify a digital payment. One of the key characteristics of cryptocurrency is, it is volatile. The price of the cryptocurrency can go high or low in a matter of space. There is no way you can determine the price of cryptocurrency and the main reason is cryptocurrency is not a physical product and doesn’t have a centralized organizing body. So, how does cryptocurrency gain value?
Buying and selling of cryptocurrencies by traders directly affect the cryptocurrencies market and it has a great impact on the value gain of cryptocurrency. Cryptocurrency is not governed or backed by a central authority. Therefore, the cost of production, competition, internal governance, legal requirements, etc. directly affect the prices of crypto to gain or decrease the value.
What Is Cryptocurrency?
A cryptocurrency is a virtual currency that is secured by cryptography and can be used to buy goods and services. Basically, a cryptocurrency is a collection of binary data and it is designed to work as a medium of exchange. For cryptocurrency, transactions are internet-based and are recorded in a blockchain. The blockchain stores the transaction history for each unit and is used to prove ownership. You can consider cryptocurrency as virtual tokens. These tokens can be programmed to record financial transactions and other valuable information. You can trade cryptocurrency and it is a new trade in the crypto world. Crypto trading is different. Here, traders buy and sell cryptocurrencies just like trading shares. Usually, the crypto monetary system impacts the cost of crypto trading.
Types Of Cryptocurrencies
There are various types of cryptocurrencies available. Among them the three broad categories of cryptocurrency are –
Bitcoin is the original cryptocurrency; in fact, it is a capped cryptocurrency. When 21 million Bitcoins are mined no new Bitcoin will be mined. As a capped currency, you will be able to use bitcoin as a store-of-value investment tool. Therefore, investing in Bitcoin is compared to investing in gold. The mining system of Bitcoin is based on Proof-of-Work. It means bitcoin miners are computing the complex calculations to keep the Bitcoin blockchain running. Miners can earn newly minted bitcoins as a reward for their work.
It is the alternative to Bitcoin and it is the result of a Bitcoin fork. There are various types of Altcoins available. You will be able to find the differences between Bitcoin and altcoins in the blockchain itself. Some Altcoins have uncapped supply and some Altcoins have made the blockchain faster. Moreover, Altcoins use various methods to authenticate transactions. Some Altcoins use Proof-of-Work systems, while others use Proof-of-Stake consensus. The second method replaces miners with validators. Moreover, Proof-Of-Stake mining requires less energy and fewer resources than Proof-Of-Work systems. Therefore, Proof-of-Stake consensus is more convenient and affordable.
Tokens are created to use smart contracts or tokens as a form of currency. Tokens don’t have a blockchain and are used on decentralized applications (dApps). Tokens don’t have any physical thing. You can use the Tokens to purchase from the dApps and get discounted fees. These features have increased the popularity of Tokens every day.
How Cryptocurrency Gain Value
Like all the currencies, cryptocurrency also gains value based on the scale of community involvement. The community involvement includes demand, scarcity, or coin’s utility. However, most of the cryptocurrencies are issued by private blockchain-related corporations therefore, many factors play a vital role in the price gain of cryptocurrency. Below are some important factors that make cryptocurrencies valuable.
1. Coin’s Utility
In order to make the cryptocurrency valuable one needs to make it utile. Primarily, each cryptocurrency is a manifestation of using a decentralized digital ledger which is known as blockchain technology. So, if you want to make the crypto useful, then you have to make it usable within a certain blockchain ecosystem. For example, if you want to use Ethereum, then you can’t use it without Ether. Therefore, the value of Ethereum mostly depends on the demand for the platform’s services.
2. Scarcity Of The Crypto
Scarcity indicates the finite nature of digital coins. It means the demand for Cryptocurrency will excel the supply of the coins and make it more valuable. For example, the supply of Bitcoin will never go beyond 21 million coins. Therefore, Bitcoin enjoys excellent demand and a rise in value.
3. Perceived Value Of The Project
The value of cryptocurrency also depends on the overall viability and progress of the project development. If the project continues to keep developing and archive one milestone after another then it will help grow the value of cryptocurrency. Moreover, developing user-friendly software also increases the value of cryptocurrency.
4. Market Cap
Market Cap is another very important factor that helps cryptocurrency to gain value. In fact, market capitalization is a direct indicator of the coin’s value on the market. You can easily determine the Market cap by multiplying the total circulating supply by the individual price of the coin. Here is the theory –
“Market cap = Total Circulating Supply * Price of each coin”
For example, if coin “A” has 200,000 coins circulating on the market and each coin worth 3$, then the market cap of the crypto would be 200, 000*3=$600,000. Same way, if coin “B” has 100,000 in circulation and if the price of each coin is $4, then the market cap of that coin would be 100,000*4= $400,000. Here, the price of coin B is higher than coin A but the total value of Coin A is higher than coin B.
5. Cost Of Production
The cost of production also has a great impact on the price of cryptocurrency. For example, the price of Bitcoin in crypto markets is closely related to its marginal cost of production. The production cost of Bitcoin is fixed and it is infrastructure and electricity cost. Bitcoin mining requires lots of investments. It means the miner has to spend money on building mining machines equipped with expensive processors. So, the indirect cost of Bitcoin mining can affect the overall supply of Bitcoin and also the price of Bitcoin.
6. Traders Hold Cryptocurrency
This is a very effective way of gaining value on a cryptocurrency. Many crypto traders buy and hold the currency for dividends. It means the crypto buyer will keep the currency in circulation and also get paid for holding it. This way, the crypto trader doesn’t have to buy the currency. There are many crypto coins available that follow this method and one prime example is “Komodo.” Stacking cryptocurrencies is another great way to earn from various outlets and coins as well as help the cryptocurrency gain value.
FAQs About How Does Cryptocurrency Gain Value
How Users Can Increase Cryptocurrency Value?
There are many ways users can increase cryptocurrency value. Some common methods are –
1. Buy low, sell high
2. Mining cryptocurrencies
3. Increasing utility
4. Media coverage
Can Cryptocurrency Be Converted To Cash?
Yes, you can convert cryptocurrency to cash but to do so, you have to use cryptocurrency exchanges. Through, cryptocurrency you will be able to convert all types of cryptocurrencies to cash.
How Is The Value Of Cryptocurrency Determined?
The main factor that helps to determine the value of cryptocurrency is the direct costs and opportunity costs of producing a coin. Bitcoin is the prime example of how the value of cryptocurrency is determined. Bitcoin has a high cost of production therefore its price is also high.
Why Does Crypto Go Down At Night?
Crypto traders can trade cryptocurrency outside of the workweek. Usually, the price of cryptocurrency fluctuates more on weekends because of less volume, margin trading, and other factors.
Which Timeframe Is Best For Crypto Trading?
Usually, the type of trade and holding period determines the best timeframe for crypto trading. Many expert traders follow a general rule and they use a ratio of 1:4 or 1:6, such as a 1-hour chart for entries and a 4-hour chart for spotting the trend.
Last Updated on February 8, 2022 by
Magalie D. is a Diploma holder in Public Administration & Management from McGill University of Canada. She shares management tips here in MGTBlog when she has nothing to do and gets some free time after working in a multinational company at Toronto.