Cryptocurrency is the rave of the moment in the digital financial world and is now acknowledged as part of the monetary system. Fans have even called it the “money revolution”.
Cryptocurrencies are clearly decentralized digital assets that can be traded between users without the need for a central authority. Most of them are created using special computer techniques called extraction.
Acceptance of currencies such as the US dollar, British pound, and euro as legal tender depends on their issuance by a central bank. However, digital currencies such as cryptocurrencies do not depend on the public’s confidence in the issuer. Hence, several factors determine its value.
Factors that determine the value of a cryptocurrency
- Free market principles (mainly supply and demand)
Supply and demand are a major determinant of the value of any item of value, including cryptocurrencies. This is because the price of that particular cryptocurrency rises as more and more people are ready to buy a cryptocurrency and others are ready to sell it, and vice versa.
- Mass adoption
Mass adoption of a cryptocurrency can drive up the price. This is because the supply of many cryptocurrencies is limited to a certain limit, and according to economic principles, an increase in demand without a corresponding increase in supply leads to an increase in the price of that particular product.
Several cryptocurrencies have invested more resources to ensure their mass adoption and some are focusing on the applicability of their cryptocurrency to pressing personal life issues as well as critical cases of daily life to make them indispensable in the everyday life.
- Fiat inflation
When a fiat currency like USD or GBP is inflated, the price increases and purchasing power decreases. For this reason, cryptocurrencies (let’s use Bitcoin as an example) are breaking out of this fiat. As a result, you can get more of that fiat with every bitcoin. In fact, this situation was one of the main reasons for the rise in the price of Bitcoin.
- History of fraud and cyberattacks
Fraud and hackers are also critical factors affecting the value of cryptocurrencies, as they are known to cause sharp fluctuations in valuation. In some cases, the team behind a cryptocurrency could be the crooks. They will raise the price of the cryptocurrency to attract unsuspecting people, and when their hard-earned money is invested, the crooks will lower the price, which will then disappear without a trace.
Hence, it is necessary to avoid cryptocurrency scams before investing your money.
Some other factors to consider that affect the value of cryptocurrencies are:
- How cryptocurrency is stored, as well as its usefulness, security, ease of registration, and cross-border acceptance.
- Power of the community that supports cryptocurrency (this includes funding, innovation, and member loyalty)
- Low risks associated with cryptocurrency according to the perception of investors and users.
- News mood
- Market liquidity and cryptocurrency volatility
- National regulations (this includes the ban on cryptocurrencies and ICOs in China and their acceptance as legal tender in Japan)