Cryptocurrencies are the latest “big thing” in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts have labeled it a “money revolution.”
Clearly, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, with most of them being created through special computing techniques called ‘mining’.
The adoption of currencies such as the US dollar, the British pound and the euro as legal tender is because they are issued by a central bank; however, digital currencies, such as cryptocurrencies, do not rely on the public’s trust and confidence in the issuer. As such, several factors determine its value.
Factors that determine the value of cryptocurrencies
Free Market Economy Principles (basic supply and demand)
Supply and demand is a major factor determining the value of everything valuable, including cryptocurrencies. This is because if more people are willing to buy cryptocurrency and others are willing to sell, the price of that particular cryptocurrency will increase and vice versa.
The mass adoption of any cryptocurrency can kick its price up to the moon. This is due to many cryptocurrencies whose supply is limited to a certain limit and, according to economic principles, an increase in demand without a corresponding increase in supply will lead to higher prices for that particular commodity.
Many cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrency to pressing privacy issues as well as resolving everyday cases with the intention of making them irreplaceable in everyday life.
If a fiat currency, such as USD or GBP, inflates, its price rises and its purchasing power declines. This will lead to an increase in cryptocurrencies (let’s use bitcoin as an example) with respect to this fiat. The result is that with every bitcoin you will be able to acquire more of this fiat. In fact, this situation was one of the main reasons for the rise in bitcoin prices.
Fraud and cyber attack history
Fraud and hacking are also major factors affecting the value of cryptocurrencies, as they are known to cause wild changes in valuations. In some cases, the cryptocurrency support team may be fraudsters; they will pump up the price of cryptocurrency to attract unsuspecting individuals, and when they invest their hard-earned money, the price is shortened by scammers who then disappear without a trace.
Therefore, it is imperative that you watch out for cryptocurrency fraud before investing your money.
Some other factors to consider that affect the value of cryptocurrencies include:
- How cryptocurrency is stored, as well as its usefulness, security, ease of acquisition and cross-border acceptability
- The strength of the cryptocurrency-backed community (this includes funding, innovation and the loyalty of its members)
- Low related risks of cryptocurrency as perceived by investors and consumers
- New moods
- Market liquidity and cryptocurrency volatility
- State regulations (this includes banning cryptocurrency and ICO in China and accepting it as legal tender in Japan)