Explained: How Does Cryptocurrency Gain Value?
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- November 5, 2021
Many cryptocurrencies are unpredictable, with constantly changing values that reach new highs and lows at dizzying speeds. For those looking to invest in or purchase crypto, it’s natural to have questions about these fluctuations. It’s common to wonder, “how does cryptocurrency gain value?” and “what determines the price of a crypto coin?”
Whether you’re just curious about the inner workings of the crypto markets, or you’re hoping to better understand what influences the value of a coin before you jump into the market, we’ve got you covered! Read on as we consider some of the factors that determine what determines the value of cryptocurrency.
Browse This Content:
- How Does A Currency Gain Value?
- How Does Cryptocurrency Gain Value?
- How Do Market Fluctuations Affect My Investment?
How Does A Currency Gain Value?
First and foremost, it’s important to understand that any currency has value because people have faith that it does. Take government-backed currencies for example: while they are no longer backed by the gold standard or any other physical commodity that would provide more concrete value, they still have value because they can be traded again and again for more goods and services.
Another critical factor that determines the value of a currency is its ability to be a store of value. A currency with a store of value is one that is reliable and stable enough to maintain its value over time without depreciating. It’s crucial for a nation to have a stable currency that is a store of value for their economy to function, as there must be an incentive for citizens to work for, earn and spend the currency.
There are many other factors that contribute to what a currency is worth. The following are all markers of a successful currency:
- Supply: A supply that is not unreasonably high or low, which could lead to an economic crash. Learn more about supply, demand and inflation here.
- Divisibility: The ability to divide it into small enough increments to cover every available good and service.
- Utility: Being useful and convenient in comparison to bartering for goods and services.
- Transportability: Having transferability between two people, or for other types of currency.
- Counterfeitability: Being difficult to counterfeit.
With a base knowledge of what a currency needs to have value, we can better understand the value that digital currencies have today. For example, if we hold cryptocurrencies to this standard, we would find:
- Many of them have a significant supply
- They are highly divisible
- Easy to transport and transfer with low fees
- Blockchain technology makes them nearly impossible to counterfeit
However, these are just some of the factors that influence the value of a given crypto coin, as crypto and fiat (government-issued) currencies are not one in the same.
So, How Does Cryptocurrency Gain or Lose Value?
As with any other kind of currency, cryptocurrencies need to demonstrate their value to have value! The value of a crypto coin will be affected by the factors listed above and countless more that will fluctuate over time.
While it would take a much longer article to definitively and completely answer the question, “how does cryptocurrency gain value?,” we can consider some of the following most influential factors:
Supply and Demand
The same market forces that influence the value of a good or service contribute to the value of cryptocurrencies. Simply put, currencies gain value when the demand is higher than the supply; if more people want to buy a coin than sell it, the price of it will increase, if more people want to sell a coin than buy it, the price of it will decrease.
Having the right amount of supply can also influence the value of a coin. Generally speaking, scarcity drives prices upward. As an example, Bitcoin is capped at 21 million coins, and the rate at which new coins are brought into circulation is designed to slow down over time. This can create a scenario where the demand increases faster than the supply does, driving the price upward.
The technology that powers a coin is important when determining what it is or could be worth. Blockchain technology, for example, has proven to be extremely useful in more than just one way. Not only does it work to make global crypto transactions possible without the need for an intermediary such as a bank, but it has also been the basis for thousands of other altcoins.
Ethereum in particular utilizes the blockchain in an entirely new way. Not only did the creators of Ethereum believe in the value of decentralized currency, but also in the value of a decentralized internet; Ethereum uses blockchain technology to host applications that are decentralized from the internet. In other words, blockchain technology is proving to be far more valuable and useful than a digital ledger. All in all, the possible use cases of a coin’s technology can affect its value just as much as its ability to be used for day-to-day transactions.
News and Culture
Like any other kind of investment, outside factors can influence a coin’s value such as government regulation and legislation, world events and public opinion. For example, back on September 24, 2021, China declared cryptocurrency transactions illegal, leading to a significant Bitcoin price drop. Considering the new and speculative nature of cryptocurrencies, it has to be expected going forward that news, events, media and more will continue to affect the high volatility of cryptocurrencies.
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How Do Market Fluctuations Affect My Investment?
There are a whole host of reasons why crypto enthusiasts participate in buying, selling and investing in crypto coins:
- Many can find that crypto coin transfers offer less barriers than wire transfers when it comes to sending money internationally, with low transaction fees and relatively fast speeds.
- Those who prefer to bank privately can effectively “be their own bank” without having to share any personal information.
- Investors can capitalize on the volatility of the crypto markets, and even join large online communities to discuss crypto news.
But regardless of what you’re using cryptocurrency for, the way that crypto markets fluctuate will have an effect on your holdings! That’s why it’s always important to be attentive and informed about the coins you’re invested in. While your personal investment strategy is your own, anyone who holds crypto can benefit from staying informed about cryptocurrency by:
- Keeping up with happenings in the crypto space and news events in general,
- Signing up for news alerts for the coins you’re invested in,
- Participating in discussions around cryptocurrency online, and more.
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