Cryptocurrencies are the latest ‘big thing’ in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts have labeled it a ‘money revolution’.
To put it plainly, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created by special computing techniques called “mining”.
The acceptance of currencies, such as the US dollar, the British pound and the euro, as legal tender is because they are issued by a central bank; digital currencies, however, such as cryptocurrencies, do not depend on public trust and confidence in the issuer. As such, several factors determine its value.
Factors that determine the value of cryptocurrencies
Principles of free market economy (mainly supply and demand)
Supply and demand are the main determinants of the value of anything of value, including cryptocurrencies. This is because if more people are willing to buy a cryptocurrency and others are willing to sell, the price of that particular cryptocurrency will rise, and vice versa.
Mass adoption of any cryptocurrency can send the price skyrocketing for a month. 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 will lead to an increase in the price of that particular commodity.
More cryptocurrencies have invested more resources to ensure their mass adoption, and some have focused on the applicability of their cryptocurrency to pressing life problems as well as key everyday cases, with the intention of making them indispensable in everyday life.
If a fiat currency, such as the USD or GBP, becomes inflated, its price rises and its purchasing power falls. This will then cause cryptocurrencies (let’s use Bitcoin as an example) to increase against that fiat. The result is that with each bitcoin you will be able to acquire more of that fiat. In fact, this situation was one of the main reasons for the increase in the price of Bitcoin.
Scams and history of cyber attacks
Scams and hacks are also key factors affecting the value of cryptocurrencies, as they are known to cause wild swings in valuations. In some cases, the team supporting the cryptocurrency can be scammers; they will pump up the price of the cryptocurrency to attract unsuspecting individuals, and once their hard-earned money is invested, the scammers short the price, who then disappear without a trace.
Therefore, it is imperative that you watch out for cryptocurrency scams before investing your money.
Some other factors to consider that affect the value of cryptocurrencies include:
How cryptocurrency is stored, as well as its utility, security, ease of acquisition, and cross-border acceptability
The strength of the community supporting the cryptocurrency (this includes funding, innovation and loyalty of its members)
Low risks associated with cryptocurrency according to investors and users
The feeling of news
Cryptocurrency market liquidity and volatility
Country regulations (this includes banning cryptocurrency and ICOs in China and accepting it as legal tender in Japan)