Where Do Cryptocurrencies Get Their Value?
Fri 13, Dec 2019
Cryptocurrencies are volatile, and we all are well aware of it. The news about recent crypto highs and lows pops up every day in our feeds, making for the general impression that crypto is a tricky thing to deal with.
Nevertheless, investing in crypto can still be a lucrative investment opportunity, if you know how its value is formed. The following piece sums up common factors affecting the value of digital currencies and indicators, reflective of their truthful value.
So what is behind the crypto value?
Like any currency, cryptocurrencies gain their value based on the scale of community involvement (like the user demand, scarcity or coin’s utility). Still, having in mind, most of the digital coins on the market are issued by private blockchain-related corporations, some factors of crypto value will stem from the image and efficiency of these companies (like project’s viability and perceived value). Let us make a general overview of what makes cryptocurrencies valuable.
To make a cryptocurrency valuable one needs to make it utile. Any cryptocurrency is primarily a manifestation of using a decentralized digital ledger — blockchain technology. So to make your crypto coin utile, you need to make it usable within a certain blockchain ecosystem.
Let us take Ethereum as a use case. You cannot start using the Ethereum platform without an Ether — a coin, specially tailored to “fuel” the transactions within the Etereum platform. Accordingly, the value of Ethereum depends on the demand for the platform's services.
Cryptocoins’ utility can also include dividend payments, mode of exchange within a blockchain ecosystem, voting rights etc.
Scarcity of the Crypto
Scarcity stands for the finite nature of the digital coins. In the perfect scenario, the demand should excel the supply of the coins, to make it more valuable. For example, the finite supply of Bitcoinnever goes beyond 21 million coins. As the most popular crypto in the market, Bitcoin thus enjoys great demand and a rise in value. In a bid to fuel the rise in value, some currencies apply a so-called “burning” mechanism, destroying a part of the coin supply.
Perceived Value of the Project
Any cryptocurrency value depends on the overall viability and progress of the project development. Projects that keep developing, achieving one milestone after another, establishing lucrative partnerships or launching user-friendly software becomes more valuable in the eyes of the market. All of these are indicators, largely contributing to the positive sentiment around the project and affecting the value of its cryptocurrency.
Market capitalization is a straightforward indicator of the coin’s value on the market. The Market cap index is determined by multiplying the total circulating supply by the individual price of the coin.
Market cap = Total Circulating Supply * Price of each coin.
Let us examine a use case. If Coin A has 200,000 coins circulating on the market with each one worth 3$, the market cap of the crypto would be 200, 000*3=$600,000.
In the same way, if Coin B has 100,000 in circulation with each worth $4, the market cap would be 100,000*4= $400,000.
Even though the price of Coin B is individually higher, the total value of Coin A appears much more than Coin B. Thus, the index of the coin market cap is a better way to indicate the true price of a cryptocurrency.
Why use Satoshi pricing in determining the crypto value?
Let’s start from the beginning. Satoshi is the creator(s) of Bitcoin (the pseudonym anyway). As a tribute to him/her/them the crypto community named the smallest unit of Bitcoin after him.
So a Satoshi is equivalent to 0.00000001 BTC and Satoshi pricing is using this unit as a yardstick - the only ‘point of reference’ to trade most of the 1500 cryptocurrencies out there.
The perfect analogy for this is USD. You know how the USD is the point of reference to trade not only fiat but all oil and all other commodities? It’s the same exact thing. In order to acquire most cryptocurrencies out there is through buying Bitcoin first.
To conclude, Bitcoin and cryptocurrencies are considered volatile with high fluctuations all around. But with an increasing number of tech giants and influencing people showing an interest in blockchain and digital ledgers, and with many governments around the world scratching their heads to find ways to regulate it, cryptocurrency is surely a term that is here to stay and, dare we say, is the future of all currencies.