13 November 2020
Cryptocurrencies are still a vague topic in the minds of millions of people throughout the world.
Not many people know how these currencies work and how they gain value.
Do cryptocurrencies increase and decrease in value similar to the American dollar? How does Cryptocurrency gain value in general?
Are there any noticeable differences?
The truth of the matter is that cryptocurrencies are volatile.
Market highs and lows are common and give off the impression that cryptos are challenging to deal with.
However, if you know how cryptos gain value, making an investment can be a lucrative opportunity.
Below, you’ll learn about the common factors that affect the value of cryptocurrencies.
How Does Cryptocurrency Gain Value?
Cryptocurrency is actually similar to other traditional forms of currency as far as value is concerned.
These digital currencies gain value based on the scale of market involvement, such as the coin’s utility, scarcity, and user demand.
The reality of this value is much more complicated than this.
Most digital coins available on the market are issued by blockchain-related corporations that operate on a private scale.
As a result, crypto values can fluctuate depending on the efficiency and image of these companies.
Let’s explain these factors in further detail.
To make a cryptocurrency (or any type of currency) valuable, you must first make it useful.
Thus, the term coin utility is derived to define how useful a digital coin is on the market.
Any digital currency is a manifestation of blockchain technology, known by insiders as a decentralized digital ledger.
To increase the utility of crypto, it must be highly accessible within a specific blockchain ecosystem.
Let’s use Ethereum, a blockchain platform for example.
It’s impossible to use the platform without an Ether, a digital coin that’s particularly designed to fuel native transactions akin to Ethereum.
Accordingly, the value of the platform relies strongly on the demand for its services.
The utility of crypto coins can also include voting rights, a mode of exchange within a blockchain ecosystem, and dividend payments.
Scarcity, in this sense, relates to the finite nature of cryptocurrencies.
In a perfect world, cryptocurrency demand should surpass its supply in order to appear more valuable.
For example, the finite supply of Bitcoin never reaches past 21 million coins.
Bitcoin, being the world’s most popular cryptocurrency, clearly has high value due to equal demand.
In an effort to increase its value, some cryptocurrencies apply the “burning” mechanism to achieve equilibrium with supply and demand.
Perceived Value of the Project
The value of any crypto relies on the progress and viability of the project’s development.
Projects that keep achieving their milestones, continue developing, launch user-friendly software, and establish lucrative partnerships will appear more valuable on the market.
All of these are indicators that can affect the value of a specific cryptocurrency and contribute to positive sentiment of the project.
Market cap is the direct indicator of crypto’s value on the market.
You can calculate this index by multiplying the individual price of a coin by the total circulating supply.
Market cap = Price of a coin x Total circulating supply
If Coin A has 200,000 coins on the market with each one being worth $3, the market cap would be approximately $600,000.
If Coin B has 100,000 coins on the market with each one being worth $4, its market cap would be worth approximately $400,000.
Although the individual price of Coin B is higher than Coin A’s. The total value of Coin A makes it the more valuable crypto.
For this reason, the market capitalization index is an effective indicator of the true price of a cryptocurrency.
To understand how Satoshi pricing relates to crypto value, it’s important to start from the beginning.
Satoshi Nakamoto is the pseudonym of an anonymous person or group of people who created bitcoin.
As a tribute to this collective, the smallest unit of bitcoin is named Satoshi.
A Satoshi is equivalent to 0.00000001 BTC.
Satoshi pricing uses this basic figure as a yardstick and the only point of reference in trading.
The perfect analogy to put this in better terms is USD.
Just like how USD is the point of reference to trade not only fiat, but gold, oil, and other commodities, Satoshi pricing works in the exact same way.
To obtain most cryptocurrencies, buying bitcoin is a first.
As you’ve read above, supply and demand can drive cryptocurrency market values.
Limited supply and high demand, particularly, can increase these values.
To take it a step further, the massive adoption of a crypto can rise values exponentially.
This can happen because cryptocurrencies naturally have their supply capped at a limit for economic reasons.
An increase in demand with this limit can cause values to soar.
To take advantage of this economic see-saw, multiple cryptocurrencies have increased its applicability.
For example, PayPal has enabled users to buy and sell Bitcoin after forging a partnership with the cryptocurrency.
This introduces more people to bitcoin, resulting in the mass adoption of the digital coin by more than 300 million Paypal users.
When more people are able to use a cryptocurrency in their everyday lives, the demand will undoubtedly grow.
As such, the value of the crypto will increase.
This is why innovation in the cryptocurrency market is crucial.
The more cryptocurrency can be used in banking, e-Commerce, physical transactions, and other methods, the more valuable it’ll become.
Also, more people will be willing to use bitcoin if tailors to their needs.
What Have You Learned?
Overall, cryptocurrency is like any other fiat.
Its value depends on a combination of both tangible and intangible factors.
Ultimately, the value of cryptocurrencies will grow over time if mass innovation continues in the market.
If one day people are able to use bitcoin and other digital currencies in grocery stores as a primary means of purchase, values will skyrocket.
For now, cryptocurrencies are still an interesting form of money with outstanding potential for applicability.
We hope you found this article helpful. Here at Dchained, we strive to educate and make people feel comfortable with cryptocurrency investment. This is only a small bit of all the information we have to offer. If you’re looking to get started with cryptocurrency investing, be sure to check out our Ultimate Beginner’s Crypto Course