It’s been only a decade since the appearance of the first cryptocurrency, and the market has experienced so many changes, that it seems like a lifetime. So many people choose to invest in this market, mostly because of the financial insecurity the pandemic brought last year.
At the same time when many economies started collapsing, certain coins experienced a huge rise in value, resulting in people investing like crazy. No doubt investing is a smart choice, but one has to understand a couple of things before making an investment. One such thing is the value and what influences it. But before we continue about it, here’s a short reminder of what cryptocurrencies are.
The simplest definition is that they are unique digital coins that are impossible to forge or produce yourself. They function as electronic records of certain values stored in electronic banknotes on websites that provide this type of service. They are produced by many people around the world using software that solves mathematical problems. Such production is called mining and was at first the most popular way to earn these currencies. Just as it is the case with any other product, the value is determined by supply and demand and is not tied to any physical thing. It is also prone to change and these changes sometimes take seconds. Cryptocurrencies are a completely new concept that changes not only the way we pay but also the way we experience money. As with any major innovation, for the value to grow, user awareness needs to change first. We are slowly but surely experiencing the rise in user awareness, which is why at the moment more than 200 million people in the world are trading. As a result, so many platforms for trading are created, to make this activity available to everyone. Go url to learn more about trading.
So, how is the value created then?
The primary factor that influenced the value or the price is the amount of money invested in a coin. This is why it is often compared to the shares market. It’s the same logic, the more you invest in it, i.e. the more people exchange their money to buy a certain coin, the higher is its value.
The theory teaches that in order to understand how the price of a coin is created, two things are needed to be understood:
- Market capital – the overall value of a coin. It is calculated by multiplying the number of units of a coin with a unit price. When you search for the overall value, you’ll notice it is mostly expressed in USD.
- Circulation supply (total current stock) – the total number of units currently available.
In the end, the price is calculated by dividing no.1 and no. 2.
It needs to be pointed out, is that the crypto market and currencies are (as previously mentioned) quite young, and there are still not enough studies conducted about what determines their price.
There are many other factors that affect the price, besides above mentioned, most of them can be referred to as external. These factors include the market itself (its attractiveness, trend, and speculations), macro-financial (exchange rate, interest rate, gold price, etc.), and political (legality, prohibitions, etc.).
Moreover, what also affects the price is energy in the form of electricity used for data protection and mining, the usefulness of the currency, public perception of its value, bitcoin price, media, etc.
What about Bitcoin?
The most famous coin that started the crypto fever is no doubt the Bitcoin. Its value is in its demand since it is the most wanted and popular coin of all. In addition to this, one fact that adds to its value (that applies to all coins as well), is that there is that its amount is limited. According to bitcoincodedenmark.com, it makes it immune to inflation. The psychological effect this has on people is huge.
It is quite obvious and logical why such growth in the price of bitcoin has occurred. It is the growing acceptance by a growing number of influential business people as well as mainstream business entities. Companies like Tesla which, according to news, bought a billion and a half dollars worth of bitcoin. More and more online payment services, like PayPal, have introduced it as a means of payment.
Can cryptocurrencies be compared to gold?
Although we have compared them to the shares, previously in the article, cryptocurrencies are not shares, because they have no technical analysis, no future or planned production, or market growth (although this can also be done within certain specific parameters). So, many are asking if they can be compared to gold?
Some of them, yes. For example, Bitcoin is slowly profiling itself as crypto gold. One of the special features of gold is that it does not enter into chemical reactions with other elements, especially not with oxygen (does not rust). Gold stays away from everything else and is largely independent of other elements.
Bitcoin is similar to gold in that sense – it does not depend on other factors (but determines the value of all other coins). It is cryptographically protected from any interference and influence. It is as it is, and there is no change.
To conclude, the value of a particular coin is not determined by anyone individually. It is determined by people’s expectations of it.
One of the most valuable features of these digital assets is that they are mostly decentralized. They can serve as money (they are intended for that, actually), but they are generally known as a means of investment.
The fact that they do not exist in the material dimension does not diminish their potential value. Moreover, unlike material objects (gold, for example), their transport is easy and fast. The advantages are obvious to them, and survival as a means of preserving values depends solely on the movement of human attention. However, do not forget that the value of everything else depends on it.