Determinants Of Cryptocurrency’s Value
Cryptocurrency’s emergence has led to a barrage of intense scrutiny by experts, investors, and traders alike. This currency operates in a decentralized network, as an established administration does not govern it. Therefore, it is not perceived as a legal tender by governments majorly because it is not liable to censorship or supervision.
It is a modern and accessible market that works plainly due to public ledgers’ execution, which means any individual can easily access information without hassle.
As the market does not have a stabilized supply, its prices are unstable because they move quickly. Also, theoretical understanding of cryptocurrency is not widespread. Any forthcoming trader must be well equipped with proficiency in cryptocurrency.
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Since cryptocurrency is not prone to normal market processes like monetary policies, inflation rate, or economic growth, several additional factors influence their value. They are:
Law of demand and supply
The bitcoin protocol enables new bitcoins to be produced at a fixed rate. Fresh ones are put into the market when miners process blocks of a transaction and the rate at which new coins are introduced is projected to reduce as time goes on. From 2016–2018, there has been a steady decline in the introduction of new coins.
The law of demand and supply influences the price of the cryptocurrency in two ways. If a cryptocurrency has an elevated supply rate but an insufficient demand level from both traders and users, the value will diminish. Contrarily, if a cryptocurrency has a high demand level from traders and users but a low supply rate, the crypto coin’s value rises.
The system determines the number of bitcoins that can be in circulation. The maximum number of bitcoins that can exist is 21 million; once it is achieved, mining activities will cease to create new bitcoins. However, based on the current block rewards adjustment level, it will take 2140 for the last bitcoin to be mined.
In contemporary times, there has been a continued widespread advance in cryptocurrency. As a result, the market cap has also improved. Such an increase has brought about popularity in cryptocurrency as more corporations are trying their hands at it. All of these have led to the rise in the price of cryptocurrency.
Node Count
A Node is a computer program that is connected to other computers in the cryptocurrency blockchain. It is essential for the productive running of the cryptocurrency’s operations.
Node count is a gauge of the number of practical wallets existing on the network. It can be searched for on the internet or the homepage of a specific cryptocurrency.
You can always verify the correct rate for a crypto coin. You do this by scouring for the node count and the total market capitalization of that cryptocurrency and then comparing those details with other cryptocurrencies.
Competition
There are many different cryptocurrencies out in the market today. Bitcoin is the leading one, with the value of 1 bitcoin poised to reach up to $400k in 2021. However, it has other alternative coins hot on its heels as the most prominent crypto coin like Ethereum (ETH), Tether (USDT), Binance Coin (BNB), etc. Likewise, new initial coin offerings (ICOs) are continually on the verge of breaking into the market due to limited entry obstacles. Such a highly concentrated environment benefits investors because the extensive competition keeps prices down.
Public opinion
Word of mouth is significant in the cryptocurrency industry. Public opinion can influence traders and users and overall impact the direction of a crypto coin. If a crypto coin gets negative remarks from the public, the crypto price will dip in the market. Likewise, if a crypto coin gets positive reviews from the crowd, its price will improve.
If an unexpected event like a hack attack occurs and cryptocurrency owners get worried and instantly sell their crypto coins, the price reduces. People respond thoroughly to good happenings and negatively to unfriendly circumstances.
Large-scale Adoption
If a cryptocurrency achieves massive adoption, its price can rise exponentially. This will be promising for the future of cryptocurrency. An increase in the demand level by traders and users will cause a commensurate increase in crypto coins’ price.
Nevertheless, such large-scale adoption of cryptocurrency is conditional on its level of efficiency in practical situations. If cryptocurrency is reliably consistent for all forms of transactions, and if cryptocurrency gets accepted by most institutions as a form of payment, it will likely get massively taken by m a more significant number of people.
Inflation of the fiduciary currency
Inflation of the valid legal tender will lead to the increased price of products. People will still want to obtain the necessary goods, which will lead to the limited circulation of money.
If the purchasing power of the fiduciary currency reduces, then the price of the cryptocurrency will rise.
Cost of Production
Although cryptocurrency is a virtual commodity, it still attracts an actual cost of production. The materials and vitality that have been expended in mining crypto coins are a fundamental justification they have value — for instance, the cost borne for engineering designated hardware and cooling systems for the CPU or server.
Furthermore, there is a substantial cost for electricity needed for the mining of these crypto coins. Recent discoveries have shown that the electricity cost of Bitcoin mining is somewhere between $400 million and $6.2 billion per year. You can deduce how much other crypto coins will cost when their price is calculated.
For instance, the mining of Bitcoin needs a severe cryptographic math problem that miners tussle to interpret. Whoever decrypts it early is remunerated with a block of freshly minted Bitcoins and any transaction fees piled up since the last Bitcoin block was established.
Although the mining of cryptocurrency might seem like a complicated task due to the high level of proficiency and funds involved, it is the only way that security is guaranteed for the users, as mining is the reason why governments can not get rid of the cryptocurrency blockchain.
Regulations and Legal Issues
The widespread fame that cryptocurrency has accrued in recent years has motivated governments to find a way to regulate it. Regulation of such a digital asset can make it centralized, as it will now be under a central authority.
This will lead to more control in cryptocurrency transactions. This will eventually have considerable impacts on the value of the cryptocurrency. Firstly, it empowers crypto coin access to investors who cannot afford to buy them, which increases the demand for them. Secondly, it can minimize price volatility by letting institutional investors use their resources to make predictions and bets about crypto coins’ prices. For example, the billionaire businessman Elon Musk bought bitcoins worth $1.2 billion in January 2021, and that significantly increased the overall cost and value of Bitcoin.
In conclusion, the price of cryptocurrency is susceptible to altering very hastily. Nonetheless, in contemporary times the volume of crypto transactions has been high, while the volatility has been reducing. But, traders and investors still maintain a cautious eye over that trend.
If you acquire stock in a company, it grants you a special ownership rate in that company, whereas earning bitcoin gives you the right to the entire cryptocurrency. Cryptocurrency has been on an upward trajectory these past years, and it is projected to keep rising.
The long-term value of the cryptocurrency will be defined by numerous factors like open mass adoption, the law of demand and supply, public opinion, government regulations, and usability and safety. These characteristics make predicting the value of cryptocurrency somewhat complicated, but it also makes the future of trading and investing fascinating to look forward to.
