Cryptocurrencies are the latest “big thing” in the digital world and have now been recognized as part of the monetary system. In fact, enthusiasts have labeled it ‘the money revolution’.
In plain terms, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created through special computing techniques called “mining.”
The acceptance of currencies, such as the US dollar, the British pound and the euro, as legal tender is due to the fact that they have been issued by a central bank; However, digital currencies, like cryptocurrencies, do not depend on public trust in the issuer. As such, several factors determine its value.
Factors that determine the value of cryptocurrencies
Principles of free market economics (mainly supply and demand)
Supply and demand is a major determinant of the value of anything of value, including cryptocurrencies. This is because if more people are willing to buy a cryptocurrency and others are willing to sell, the price of that particular cryptocurrency will rise and vice versa.
Mass adoption of any cryptocurrency can send its price skyrocketing. This is because many cryptocurrencies have their supply capped at a particular limit, and according to economic principles, an increase in demand without a corresponding increase in supply will lead to an increase in the price of that particular commodity.
Multiple cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrency to pressing personal life issues as well as day-to-day crucial cases, intending to make them indispensable in everyday life. .
If a fiat currency, such as the USD or GBP, inflates, its price rises and its purchasing power falls. This will cause cryptocurrencies (let’s use Bitcoin as an example) to rise against that fiat. The result is that you will be able to acquire more of that fiat with each bitcoin. In fact, this situation has been one of the main reasons for the increase in the price of Bitcoin.
History of scams and cyber attacks
Scams and hacks are also core factors affecting the value of cryptocurrencies as they are known to cause wild swings in valuations. In some cases, the team behind a cryptocurrency may be the scammer; they will raise the price of the cryptocurrency to lure unsuspecting people and when their hard-earned money is invested, the scammers shorten the price and then disappear without a trace.
Therefore, it is imperative beware of cryptocurrency scams before you invest your money.
Some other factors to consider, which have an impact on the value of cryptocurrencies, include:
- How cryptocurrency is stored, as well as its usefulness, security, ease of acquisition, and cross-border acceptability
- Strength of the community supporting the cryptocurrency (this includes funding, innovation, and the loyalty of its members)
- Low associated risks of cryptocurrency as perceived by investors and users
- news sentiment
- Market liquidity and cryptocurrency volatility
- Country regulations (this includes the banning of cryptocurrencies and ICOs in China and their acceptance as legal tender in Japan)