Cryptocurrencies are the latest “big thing” in the digital world and have now been recognized as part of the monetary system. In fact, enthusiasts have labeled it “the money revolution”.
In plain terms, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created using special calculation techniques called “mining”.
The acceptance of currencies, such as the US dollar, the British pound and the euro, as legal tender is because they have been issued by a central bank; Digital currencies, however, like cryptocurrencies, do not rely 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 economics (mainly supply and demand)
Supply and demand is a major determinant 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
Mass adoption of any cryptocurrency can shoot its price to the moon. This is because many cryptocurrencies have their supply 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.
Multiple cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrency to pressing personal life issues as well as crucial day-to-day cases, with the intention of making them indispensable in everyday life.
Fiat Inflation
If a fiat currency, such as the USD or GBP, becomes inflated, its price rises and its purchasing power falls. This will cause cryptocurrencies (let’s use Bitcoin as an example) to rise against this fiat. The result is that you will be able to acquire more of this fiat with each bitcoin. In fact, this situation has been one of the main reasons for the rise in the price of Bitcoin.
History of scams and cyber attacks
Scams and hacks are also fundamental factors affecting the value of cryptocurrencies, as they are known to cause wild swings in valuations. In some cases, the team backing a cryptocurrency may be scammers; they will pump up the price of the cryptocurrency to attract unsuspecting individuals and when their hard-earned money is invested, the scammers lower the price, then disappear without a trace.
Therefore, it is imperative to be wary of cryptocurrency scams before investing your money.
Some other factors to consider, which have an impact on the value of cryptocurrencies, include:
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How the cryptocurrency is stored, as well as its utility, security, ease of acquisition and cross-border acceptability
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Strength of the community that supports the cryptocurrency (this includes funding, innovation and loyalty of its members)
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Low risks associated with cryptocurrency as perceived by investors and users
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Feeling of the news
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Market Liquidity and Cryptocurrency Volatility
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Country regulations (this includes the ban on cryptocurrencies and ICOs in China and their acceptance as legal tender in Japan)