All of us are aware of the volatility of cryptocurrencies. Every day, we see news about recent crypto highs and lows in our news feeds, giving the impression that crypto is a tricky concept.
In spite of this, investing in crypto can still be a profitable investment if you understand how its value is created. The following article summarizes common factors affecting the value of digital currencies and indicators, reflecting the true value of each of them.
Where does the crypto value come from?
Bitcoin, like all currencies, gains its value from community involvement (like the demand for, scarcity, or use of the coin). Having in mind that most digital coins on the market are issued by private blockchain-related corporations, some aspects of crypto value will be based on the image and efficiency of these corporations (such as viability and perceived value of a project).
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The utility of a coin
The only way to make a cryptocurrency valuable is to make it useful. A cryptocurrency is a manifestation of the blockchain – a technology that uses a decentralized digital ledger. You need to make your crypto coin usable within a certain blockchain ecosystem in order to make it valuable.
Let’s take Ethereum as an example. Ethereum cannot be used without Ether – a digital currency that is used to fuel the Ethereum platform’s transactions. Therefore, the value of Ethereum is determined by demand for the platform’s services.
Furthermore, cryptocurrency’s utility can also extend to dividend payments, the ability to exchange on blockchains, voting rights, etc.
The scarcity of cryptocurrencies
Scarcity refers to the finite nature of digital coins. The ideal scenario would be for the demand to exceed the supply of the coins, making them more valuable. Bitcoin’s finite supply never exceeds 21 million coins, for example. Therefore, Bitcoin enjoys great demand on the market and a rise in value as the most popular crypto. In order to increase the value of their coins, some currencies apply a “burning” mechanism, which destroys a part of their coin supply.
Project Perceived Value
A cryptocurrency’s value like that of Bitcoin is determined by the overall viability and progress of the project. A project that keeps developing, achieves milestones one after another, establishes lucrative partnerships, or launches user-friendly software becomes more valuable in the market. These are all indicators of the positive sentiment the project has gained, which affects the price of its cryptocurrency.
Which is more important, the Market Cap or the Price of a coin?
A coin’s market capitalization tells you exactly how valuable it is on the market. The market cap index can be calculated by multiplying the circulating supply by individual prices.
How can we determine the crypto value using Satoshi pricing?
Starting at the beginning. Bitcoin was created by Satoshi (the pseudonym anyway). The crypto community has named the smallest unit of Bitcoin after him/her/them.
This means that a Satoshi is equal to 0.00000001 BTC, and Satoshi pricing uses this unit to calculate the price of most of the 1500 cryptocurrencies that exist.
USD is a perfect analogy for this. The USD serves as the point of reference for not only fiat currency but also oil and all other commodities? It’s the same thing. Getting most cryptocurrencies is usually done by buying Bitcoin first and storing it on a Bitcoin Wallet
As a result, Bitcoin and cryptocurrencies are considered volatile, with high fluctuations everywhere. However, with technology giants and influential people all showing an interest in blockchain and digital ledgers, and with governments around the world scrambling to figure out ways to regulate cryptocurrency, cryptocurrency is surely a term that is here to stay, and, dare we say it, the future of all money.
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