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How Do Cryptocurrencies Gain Value?
Cryptocurrencies are increasingly becoming the most innovative technology on the planet. As more people start to invest in cryptocurrencies, its use in everyday life will become more apparent.
Though, while cryptos are highly used in today’s society, there is still an air of mystique around the currency? Most people are fascinated with how cryptos work and how they gain value?
Do cryptos gain value like traditional fiat currency, or is some unique valuation process in play? If you’re searching for answers, you can find them all down below to learn about how do cryptocurrencies gain value.
What Causes Crypto Values to Change
You’d be surprised to know that crypto values fluctuate similar to other fiat currencies. The value of these digital currencies depend on three main economic factors that will be explained below:
- Utility – This is defined as how much a particular coin is used. The more a coin is used, the higher the demand is. In simple economics, more demand necessitates a higher supply. A higher supply then results in a higher value.
- Scarcity – Some coins, as their supply grows, begin to inflate. To adjust for inflation, a coin could become scarce and have a limited supply. Coins in limited condition are bound to have more value than unlimited ones.
- User Demand – This is similar to utility. If users are demanding a particular coin, its value will naturally increase.
As you can see, all of these factors are interchangeably related to one another. If the utility of a coin increases, its user demand will also increase. Yet, it may or may not be scarce.
However, if scarcity increases, utility and user demand can still increase. It all depends on the coin that’s being mentioned. Unfortunately, understanding the value of cryptos goes further than determining its market involvement.
For example, most coins are issued by private corporations. The value of these coins can depend sharply on the productivity and profitability of these companies. To help you obtain a focused view of crypto value, let’s dive in deeper to coin utility.
How Coin Utility Affects its True Value
For a coin’s value to increase, its utility must increase also. To put it simply, a coin must have significant real world uses in order for its value to improve. Cryptos are currency, which means that the public expects them to be used like a normal coin would.
If a particular coin can’t be used in grocery stores, gas stations, and other common places where people make monetary transactions, then what would be the point in the public investing in the coin.
Bitcoin, being the most universal cryptocurrency available, can be used almost anywhere. Even financial giant, Paypal, has allowed bitcoin transactions on its platform. Due to this bitcoin’s wide acceptance in the real world, it is currently the most valuable coin in the market.
This is the perfect example of how coin utility affects its value. The more a coin can be used in different aspects of life, more people will use it. As utility grows, a coin’s value will soon follow.
What is Scarcity?
In this sense, scarcity is defined as the finite nature of a cryptocurrency. After everything that was just explained, the high demand of a coin must necessitate similar supply in order to achieve a high value.
But, cryptocurrencies operate much like the USD. Just because the USD is in high demand doesn’t mean the Federal Government will continue printing dollars. This will only cause mass inflation and lower the value of the dollar.
For example, bitcoin will never exceed 21 million coins. This is done to maintain market equilibrium according to its supply and demand. Some currencies will resort to “burning” their currencies to achieve this balance.
A coin’s objective in all of this is to maintain a degree of scarcity, which will make it more valuable in the market. Although it was just explained that a coin should be accessible, it must not be too available in supply or its value will decline.
The Project’s Value Also Matters
Now unlike fiat currency, cryptocurrencies are identified as projects or separate entities. This is because these currencies are still new and not widely innovated. In any case, investors view cryptos as companies.
A project’s success can drive more investors to pursue it. For example, projects that hit their milestones, increase their utility, and constantly innovate will appear to be more valuable on the market.
Market Capitalization Also Plays a High Role
Market capitalization is always indicative of a coin’s market value. You can calculate market capitalization by multiplying the price of a coin by the total supply of the coin. Here is the formula for market capitalization:
Coin price x total supply of coin = market cap
Let’s use an example of how market capitalization works regarding value. If Coin A has 300,000 coins and each one is worth $4, the market capitalization would be estimated at $1,200,000.
If Coin B has 200,000 coins on the market and each coin is worth $5, its market cap will be worth $1,000,000. Although the cost for Coin B is higher than Coin A’s, the latter is the more valuable coin.
Market capitalization is a great indicator to determine the value of a particular cryptocurrency.
What Have You Learned?
The value of cryptocurrencies can fluctuate due to a myriad of different values. As you begin to become more familiar with coins and the crypto market, you’ll be able to make a fair assessment of a coin’s value.
You may be asking, “why does a coin’s value to a consumer.” Well, the answer is simple. A coin’s value matters to an ordinary consumer or investor because people only want to use a currency that’s usable and available.
Cryptocurrencies are still pretty new in regards to innovation. Selecting a coin that can be used in ordinary transactions means a lot to consumers. Valuable coins promise to help consumers spend their currencies in their everyday life.