Why is Cryptocurrency Valuable?
Cryptocurrencies have generated much interest lately, primarily since their value has had an astronomical increase in recent years. Despite all the turmoils in the global economy, the cryptocurrency market has continued booming. But, what has driven this increase, and why is Cryptocurrency valuable?
Also known as virtual currencies, cryptocurrencies are controlled by a decentralized network. They present a more convenient alternative to bank-controlled fiat currency by working to a clear set of protocols, removing intermediaries and offering transparency.
Below you can learn why Cryptocurrency is essential and valuable, gaining insight into the factors that help digital currencies gain value.
What makes Cryptocurrency Valuable?
Like any currency, the digital currency gets its value based on community involvement factors. These include scarcity, user demand, utility, divisibility, and transportability.
However, as private blockchain corporations issue digital coins, certain factors of cryptocurrency value also stem from the efficiency and reputation of these companies.
What affects the value of virtual currencies?
Since cryptocurrency is an emerging asset, the market is still volatile. The factors listed below can cause the price of digital currency can rise and fall rapidly, making it a risky investment:
- Limited supply and demand
- Using the blockchain system
- Coin usefulness – the ease of its use and storage
- Mass media opinion & Public perception of its value
- Investors contributions
- Impossibility of fraud
Factors influencing the value of Cryptocurrency
Cryptocurrencies have been seeing a recent boom in value that comes from several factors. Here, we explore some of the more typical factors that influence the value of cryptocurrencies:
- Scarcity – The maintenance of a currency depends solely on its supply. In the perfect scenario, a currency is valuable if the demand exceeds the supply.
The finite nature of digital currency makes it scarce, thus enjoying great demand and an increasing value. Some currencies even apply a ‘burning’ mechanism that destroys some supply to fuel the value rise.
- Utility – A currency should be utile to be effective and valuable, making it easy to trade the currency for goods and services. To make a digital coins utile, it must be usable within a specific blockchain ecosystem.
Consider the example of Ethereum. You need the coin to start using the platform for transactions. The value of Ethereum thus depends on the demand for the services offered by the platform. The utility of cryptocurrencies also includes other aspects like dividend payments, exchange methods within the ecosystem, etc.
- Market Cap – Market capitalization is a direct indicator of the crypto coin’s value. The market cap index can be obtained as a product of the price of a currency and the total circulating supply.
For example, suppose a coin is priced at $3, and a total of 200,000 coins circulate in the market. In that case, the cryptocurrency has a market cap of $600,000. Another coin priced at $4 with 100,000 coins in circulation has a market cap of $400,000.
So, even when the price of the second coin is high, the total value is lesser than the first coin. Thus, the market cap index is an excellent way to indicate a cryptocurrency’s value.
- Perceived Value of the Project – Cryptocurrency value directly depends on the overall progress and viability of the project. A project that keeps developing, achieving its milestones, and establishing collaborations become more valuable in the market. These are the factors that create a positive sentiment around the project and increase the currency’s value.
- Node Count – A reliable indicator of cryptocurrency value. Node count is a measure of the total existing active wallets searchable on the web.
To determine whether the currency is priced reasonably, one can quickly look at the cryptocurrency’s node count and market cap and compare the indicators with other cryptos. This indicator also depicts the strength of the community of the currency. The more nodes a currency has, the stronger is the community.
Why is Cryptocurrency Value on the Rise?
The cryptocurrency market has also continued to witness a rise despite the global pandemic creating havoc on economies. Several crypto projects have emerged during this period to cater to the ever-rising demand for cryptocurrencies.
Here are a few reasons why cryptocurrency value is rising.
Cryptocurrency is today considered to be the safest asset against inflation and market volatility. There is a rising trend among public companies to convert their holdings into Cryptocurrency.
Recently, an American company Square purchased bitcoins worth $50 million. A public listed company named Microstrategy converted its cash reserves worth $425 million into Bitcoin as a better store of value.
PayPal and Cryptocurrency
In October last year, PayPal declared that it would launch buying and selling features for Cryptocurrency on its platform. This launch covered Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.
The global digital payment leader also announced its plans of allowing the use of cryptocurrencies for transactions. Consequently, the demand for crypto has been increasing, thus contributing to its price rise.
Easy Public Accessibility
Cryptocurrency can be used not only for exchange but also as a store of value. Though it has recently acquired attention as a payment method, it has remained an established asset class for more than a decade.
Even when people are not willing to use this transaction method, they might favor converting their cash into digital currency. They believe it to be a more secure store of value and a wiser investment.
Direct and opportunity costs also determine the value of cryptocurrency. For example, Bitcoin has a high production cost from the energy and resources that mine the coins, so Bitcoin has so much value. Such costs also include specialized hardware like servers, GPUs, and CPUs.
Inflation of Fiat Currency
With the falling price of fiat currency, the price of a cryptocurrency increases in relation to that currency as you get more of the currency with your digital coins.
This phenomenon is prevalent today as central banks print more and more currency and keep interest rates low.
The major online currency exchanges have led to a dramatic increase in cryptocurrency usability, so we see a rise in the market cap over the past years.
As the adoption and popularity increase, more and more countries are trying to implement them. All these reasons have driven price increase in cryptocurrency.
The value of cryptocurrency can change quickly, but the volatility has been decreasing with time. The volume of transactions has gone up, which means the trend is here to stay. Several factors determine the long-term value of crypto.
This guide should help you understand how and why Cryptocurrency is valuable and how its value is likely to change in the future.