Why is Cryptocurrency Worth Anything: What Is Its Value, and What Determines It
Cryptocurrency is a revolutionary new type of money. Gold or other precious metals back fiat money. At the same time, cryptocurrency is not supported by anything. However, it has value because people attach importance to it and use it as an exchange unit.
The cryptocurrency was created as a unit of exchange and a base for storing assets that do not depend on central banks.
Factors Affecting the Value of Cryptocurrencies
There are significant factors that create the value of cryptocurrencies. Namely:
- The usefulness of the coin. To make cryptocurrency valuable, you need to make it worthwhile. First of all, any cryptocurrency is the use of a decentralized digital ledger. It’s blockchain technology. So, to make your valuable cryptocurrency, you need to make it usable in a specific blockchain ecosystem.
- Deficit of cryptocurrencies. Scarcity means the limited nature of digital coins. In an ideal scenario, the demand should exceed the supply of coins to make them more valuable.
- Value of the project that is perceived. The cost of any cryptocurrency depends on the overall viability and development process of the project. Those projects that are constantly developing are becoming more valuable in the market. They create user-friendly applications and software services, thereby creating profitable partnerships.
The main difference between cryptocurrency and fiat money is the absence of an emission center. And the algorithms for creating the money itself are calculated. At the same time, it is envisaged that a certain amount will be gradually poured into the market over time, the amount of which will be set in advance.
As an emission realized mining. It’s a reward to everyone who provides the power of their PCs for calculating the algorithm.
This revolutionary system makes it possible to exclude the injection of cryptocurrency that has not been authorized. Thus, there is simply no way to print a certain amount of cryptocurrency because it has no physical form. It is also not possible to write a program that will replenish the balance of your wallet because the system monitors all transactions and takes them into account. Another advantage of the system can be considered its decentralization, which means it is more resistant to external influences.
How Is the Price of a Cryptocurrency Formed?
As with any asset, several essential factors affect the price of a cryptocurrency. The main ones are:
- Supply and demand. Demand creates supply and increases the price of an asset if there is a shortage in the market. If there are fewer and fewer coins on the market, then the demand for them increases as the price rises. Buyers push the price upward by continuing to buy the asset. Minor but no less critical factors can increase demand:
- Staking. Crypto market players frequently invest long-term and do not plan to say goodbye to the asset in the coming years. That is why they buy a cryptocurrency and use staking to generate additional income in tokens.
- Mining. It also has a massive impact on the pricing of many cryptocurrencies that work on Proof-of-Work. And for the most profitable mining, the necessary industrial capacities. The cost of electricity and the depreciation of equipment, which becomes obsolete every day, are included in mining.
- Distribution of coins. Each cryptocurrency has its emission. In some projects, it is limited, but in others, it is not. Suppose the distribution of coins is fundamentally unfair, and some players have more than all others combined. In that case, the price can quickly fall at the slightest desire of leading players to sell the asset.
- Mass media. The price of a cryptocurrency rises when everyone starts buying it. The mass media, famous personalities, or analysts can whip up the excitement.
- The usefulness of the token. If the cryptocurrency is helpful at specific points, it will be in demand. As soon as cryptocurrency becomes useful, more people need it. And its price, of course, goes up.
Like any currency, cryptocurrencies acquire their value based on user demand, scarcity, or the usefulness of the coin. Private corporations associated with the blockchain have released most of the digital currencies to the market. Despite this, factors related to the image and efficiency of these companies influence the value of the cryptocurrency.