One thing we can be sure of about cryptocurrencies is that they are extremely volatile. There have been a handful of people that became millionaires by investing in crypto and we all hear about them in the news, but, on the flip side, there are others who also lose their investments.
Also due to a lack of a centralized governing body and a physical product, it is hard to point out when the prices of cryptocurrencies are going to increase. So, how does cryptocurrency gain value? Through the guide below, we will highlight what impacts the value of cryptocurrency and how do cryptocurrencies gain value. But first, let’s polish the basics.
What is Cryptocurrency?
In the most simple terms, it is a digital asset. The reason why it is called a currency is that it was made to be a medium of exchange just like fiat currency. All the transactions are carried out on the internet and documented on a blockchain. A blockchain is distributed ledger technology that records crypto transactions and shows every transaction and proves its ownership.
As cryptocurrencies are not centrally governed, it has some incredible advantages such as no processing fees, fewer regulations, and less government control. This translates to resistance to inflation, transparency in transactions, and portability.
Crypto trading is a new and growing concept in the crypto realm and is different from a monetary system. In crypto trading, traders buy and sell crypto tokens just like they would buy and sell shares of a company. When you buy a share, it gives you ownership of the company. Buying cryptocurrencies, on the other hand, gives you ownership of that particular cryptocurrency.
Just as the appeal of a product affects the share price of a company, the cost of crypto trading is impacted by the crypto monetary system. The main factors affecting the value of a cryptocurrency are supply, market demand, availability, and competition.
How Does Cryptocurrency Gain Value?
Crypto exchange platforms are the places where cryptocurrencies mainly gain or lose value. The supply and demand of the coins have an immense effect on their value. Let’s know-how.
Supply and Demand
The supply is determined by the mining of new coins and current owners willing to sell their coins. Whereas, the demand relies upon many factors.
For one, the demand for a cryptocurrency increased due to its usefulness. This means if the transactions are fast on the blockchain and the fees are low, the blockchain offers smart contracts, and businesses start using the blockchain network and adopt the native coin, the demand for that particular cryptocurrency will go up. On a side note, the demand for cryptocurrencies has increased as they are seen as a store of value investment.
So, to find out how do cryptocurrencies gain value, their value is based on the aforementioned supply and demand factors. The supply and demand fluctuate and it affects the price of cryptocurrencies as well.
Other than supply and demand, the internal governance of the coin also impacts the value of a cryptocurrency. However, crypto networks don’t stick to a static set of rules. The projects are developed based on what the community uses them for.
A few tokens are also known as governance tokens, giving them the power to vote for the future of the project, even how it is used or mined. To decide what changes the governance of a token has to go through, stakeholders have to come to a consensus.
For instance, Ethereum is updating its blockchain from a proof-of-work consensus algorithm to a proof-of-stake algorithm. This upgrade will replace the use of expensive mining equipment with low-energy staking, impacting the value of Ether.
Undoubtedly, investors look for coins with stable governance. Even though the government is flawed they prefer the devil they recognize instead of the devil they don’t. As a matter of fact, stable governance that is hard to alter impacts the pricing i.e keeps the prices stable.
On the contrary, a slow software updating process can affect the value of a coin. However, an update that takes months to execute may hurt the current stakeholders.
In the crypto market, there are thousands of cryptocurrencies and new ones get launched every week. This shows that the entry barrier is relatively low for new entrants, but the real challenge is to create a reliable cryptocurrency and a community that believes in the coin.
If the blockchain is useful, it can quickly build a community, especially if it overcomes the limitations of competing coins. If a new coin gains traction in the market, it draws value away from the existing coin. Therefore, if a coin provides value and is really useful, its prices can move higher.
How to Increase Crypto Value?
Even though the value of cryptocurrencies is based on supply and demand, there are ways you can increase the value of cryptocurrencies.
- Buy low, sell high: It is an old yet effective investment strategy. Users can buy the coins, which increases their value, and hold them. After the value has increased, you can sell the coins, making a profit.
- Mining: Mining a cryptocurrency sends a message that it is high in demand and it also impacts the supply. Thus, mining Bitcoin and other altcoins can be profitable.
- Increasing utility: As large organizations are adopting crypto and using it as a form of payment, its utility is increasing. You can also contribute to this process and increase the value of a coin.
In this guide, we answered the question of how do cryptocurrencies gain value, and to quickly reiterate, supply and demand, internal governance, and competition against other coins are some of the key factors that affect the value of a cryptocurrency.