How does cryptocurrency value increase?
The cryptocurrency ecosystem is as evident as the sun rising from the east. Each day we listen to people making millions from the crypto exchange’ but so do the people losing their everything. Additionally, since cryptocurrencies do not have a physical presence, nor are they governed by a centralized body, it is hard to judge how and where the crypto market is heading. You cannot design market trends. So the question arises – how does cryptocurrency value increase?
The guide below will discuss and understand how cryptocurrencies gain value. Furthermore, we will see which factors impact the valuation phenomenon. But first, let us polish our basics.
What is Cryptocurrency?
It is a digital asset. It is known as a cryptocurrency because it is used as a medium of exchange, just like any other fiat currency. The transaction is done in the digital world over the internet while the data is recoded on a blockchain.
One of the significant benefits of crypto coins is that they are resistant to inflation. These are more transparent and easy to port.
Crypto trading
Crypto trading is in the evolution phase and is different from the traditional monetary system. If you know how shares of a company bought and sold, the process is almost the same for cryptocurrency buying and selling.
You become the owner of the company when you buy its share. Similarly, you become the cryptocurrency owner when you purchase cryptocurrency.
Just as the demand determines the share price, the cryptocurrency’s directive regulates that cryptocurrency’s price. However, other factors like market demand, availability, and competition also affect the cost of crypto coins.
Valuation
The valuation depends on many factors. We will discuss each of these factors and see how does cryptocurrency value increase? lets discuss further more
- Demand and Supply
The supply part mainly depends on the number of miners and the mining of new coins. In addition, supply determines by the willingness of owners to sell their coins. Conversely, the demand part depends on many factors.
- what will happen if demand increases?
Firstly, the demand increases for the usefulness of the coin. When the transaction is fast, fees are low; there are smart contracts, and businesses start using this type of cryptocurrency, thus increasing the demand. It become the cause of the fastest growing cryptocurrency.
So, the value of cryptocurrency depends on the demand and supply phenomenon – just like any other free market. The value of cryptocurrency increases if:
The demand for that particular increases
The gap between demand and supply increases (demand is high, but supply is low)
- Competition
Every week, many new cryptocurrencies enter the crypto ecosystem. In addition, thousands of existing crypto coins are already available on the market. It shows that the entry barrier is none, but does every cryptocurrency survive? No!
So, building trust is the key to surviving such extensive competition. Blockchain must be helpful to have a large community. Hence, a new coin that attracts attention from investors can quickly draw value away from existing coins.
Therefore, the value of a coin increases if it offers value and is helpful.
- Internal Governance
Other than demand-supply and competition, internal governance also impacts the value of a coin. However, there isn’t any static set of cryptocurrency rules. The projects are developing on what the community wants and how they use these coins.
A few coins are called governance tokens, giving holders the power to vote for future projects. Stakeholders must come to a consensus about future use and mining processes.
Undoubtedly, investors always opt for coins that have stable governance. Since governments are currently staying away from crypto projects, the control solely depends on the project’s owner. On the flip side, better governance leads to stable prices.
So, good governance adds value to cryptocurrencies and vice versa.
- Utility
The higher the utility, the higher its value. To make cryptocurrency more utile, owners need to make it acceptable and utile within the specific blockchain ecosystem.
For instance, you cannot use Ethereum without an Ether – a coin tailored to “fuel” the transaction. Accordingly, the value of Ethereum depends on the platform’s services. Other factors which add to the utility of a specific coin are:
Mode of exchange
Dividend payments
Voting rights
- Project Developments
Stagnancy leads to a loss of trust. Since the cryptocurrency market is ever-evolving, owners must keep introducing new features to stay relevant. A project with zero development will eventually doom.
Hence, the projects which keep developing achieve higher values.
- Market Capitalization
Multiplying the total circulating supply with the individual price of the coin provides market capitalization. The higher the answer, the higher the value of that coin.
Frequently Asked Questions
How does cryptocurrency value increase?
The value of cryptocurrency depends on the demand-supply, market capitalization, project’s steady development, utility, competition, and governance of that particular coin.
How do demand and supply determine the value of a cryptocurrency?
The cryptocurrency ecosystem works just like any other economic system when determining a coin’s value. Higher demand leads to higher value and vice versa.
Are regular developments vital for gaining value for a cryptocurrency?
Yes, regular developments in a project keep investors interested in the coin. It helps a project to remain ahead of the competition, thus adding value to the utility, demand, and, subsequently, value of the cryptocurrency.
Why is Bitcoin volatile?
Bitcoin is volatile because its value depends on demand and supply. Many influencers, media, crypto fans, competition, and industry moguls influence the investors, which leads to value fluctuations.
Does the value of a cryptocurrency remain constant?
No, the value of cryptocurrency keeps on changing. Many factors determine the value of a coin at a given point in time.
Final Thoughts
Cryptocurrency is a highly volatile industry, and so is the value of coins traded here. We have covered all the factors to answer the query of how does cryptocurrency value increase? The deal is determined by market forces, utility, competition, and other similar factors.
Like other economic activities, the value of a coin is determined by the scale of community involvement. Cryptocurrency’s value increases when demand is high. The increase in demand depends on the usability of the crypto. So, people want more of it, but it is scarce in the market, which causes the value to increase.
We hope you enjoyed reading our article; keep revisiting for more on crypto-related topics.