Value determination of a cryptocurrency
As more people continue to venture into cryptocurrency, the major problem remains how to determine the value of a cryptocurrency accurately. Cryptocurrencies are very volatile compared to other forms of assets. The constant and unexpected rises and dives in the price make the valuing process quite challenging. Nonetheless, investing in crypto is still a lucrative investment opportunity that many people have immensely benefited from. However, going into the crypto business blindly can be your worst investment decision.
For instance, when the Bitcoin price exploded in 2017, many people made their investments and benefited significantly. But when the prices came crashing down, those who invested towards the end saw the value of their holdings fall by half. In the crypto world, the ability to value and predict the price of an asset is what makes all the difference. Investors who are able to value cryptocurrencies correctly stand a greater chance of making better and informed decisions.
So, what factors influence the value of cryptocurrency?
- Demand and supply
Like other investments, the price of cryptocurrency results from the interplay between demand and supply in the market. Therefore, if more people are willing to purchase any holding, and others are also willing to sell it, the price of that asset will go up and vice versa. Due to the limited supply of cryptocurrencies, the increase in popularity of any asset drives the prices up.
- Utility
The utility of a coin is the different ways in which it is or can be used in a specific blockchain network to which it is related. The value of a cryptocurrency is directly related to its utility. Therefore the stronger the function of a coin, the more people are interested in acquiring it. A good example is with Ether, the currency of the Ethereum blockchain. Ether derives its high value from the smart contract technologies that require everyone to acquire Ether coins to execute any commands and develop applications within the Ethereum ecosystem. Thus, as more people execute transactions and develop apps, Ether’s demand rises, consecutively raising its value.
- Scarcity
Like in traditional assets, the rarity of an item like gold and diamonds drives their prices up. For instance, the supply of bitcoins is limited to 21 million coins. As a result, Bitcoin has grown to become the most popular and valuable crypto due to the persistently high demand.
- Perceived value
The perceived value of an asset is its viability and progress within the community. For example, a cryptocurrency can become more valuable if it consistently achieves set goals. A cryptocurrency that keeps developing and growing becomes more valuable and generates more public interest.
All these factors combined make the process of determining the accurate value of a cryptocurrency quite complex. But as the popularity grows, the volume of transactions has also increased tremendously, lowering the volatility. Therefore, it is up to an investor to weigh the interrelatedness between these factors when determining the value of a cryptocurrency.
Andriienko, O., 2018. Identification of the factors influencing the price of Bitcoin (Doctoral dissertation, Mykolo Romerio universitetas).
Hayes, A.S., 2017. Cryptocurrency value formation: An empirical study leading to a cost of production model for valuing bitcoin. Telematics and Informatics, 34(7), pp.1308-1321.
Sovbetov, Y., 2018. Factors influencing cryptocurrency prices: Evidence from bitcoin, ethereum, dash, litcoin, and monero. Journal of Economics and Financial Analysis, 2(2), pp.1-27.
