When it comes to cryptocurrency, you might be wondering what actually makes it as valuable as it is.
The idea behind why sometimes it is worth more than other times really is very simple.
It is all to do with supply and demand. If there is an increase in people wanting cryptocurrency at a faster rate then it can be supplied, then the price of it shoots up.
It is the same with other items too. If there is a shortage of rice in a grocery store, and a lot of people want to buy it, then the price will go up due to supply and demand reasons.
It isn’t seen as an uncommon thing to find that cryptocurrency can either decrease or increase by around 5 to 10 percent within the space of 24 hours or more.
You might find that the lower price cryptocurrencies can change during the day, too.
In this article we shall take a look at cryptocurrency and its value in more detail. Hopefully you will be able to understand the price workings of cryptocurrency by the end of it.
So, let’s get to it!
How Does Cryptocurrency Get Its Value?
To really understand cryptocurrency, you will want to know how it gets its value. It isn’t the norm to find cryptocurrency being backed by a particular organization as you might find with other currencies.
For example, the government will likely not back cryptocurrency as it does with other financial exchanges. Doing so can add value to a currency, but cryptocurrency isn’t one of them.
Instead, other means have to add and decrease value to cryptocurrency. These are:
- Supply and demand
- Other competition
- Cost of the production
- Different regulations and legality
With these in mind, let’s take a look at them in more detail so you can get a much better understanding of each one.
Supply And Demand
Just like we have stated before, the increase and decrease of the price of cryptocurrency can change due to supply and demand.
If there are more people who want it, yet the supply is low, then the price will most certainly increase.
Fortunately, every single crypto will publish their supply, so you will always know if there is a demand. This means that they let their token minting and their burning plans are always available to see.
However, depending on what cryptocurrency you are after, you will find their monetary policies are very different from one another. Bitcoin will only ever have a maximum of 21 million available.
Their supply of Bitcoin will only increase at a fixed amount with every brand new block that is mined on its blockchain.
Ethereum on the other hand, tries to avoid having such a fixed increase of their supply.
They do this by offering a reward per each block mined which is fixed, however they also pay out when including what is known as ‘uncle blocks’ in this new block. This drives the efficiency of a blockchain.
Overall, this means that they do not need to keep their supply as fixed as Bitcoin.
It isn’t surprising that there are new launches of cryptocurrency all the time, meaning that it gives people a lot of choice. This means new tokens are being launched every week, if not every day.
Whilst starting a cryptocurrency business is relatively safe for newcomers, to create a company which is trusted and viable, the company would need to begin building a trusted network of people who will use the cryptocurrency.
If a competitor, especially a new one, starts to have a large amount of users and momentum, then it will take away value from existing companies.
This will bring their own price down due to the fact that the new competitor will see their tokens having a higher price.
Cost Of The Production
To produce tokens, you need to mine for them. It doesn’t mean that you literally have to go out and mine for the tokens, it is just what the process is called.
It involves having a computer verify a block on a blockchain. Having a decentralized network full of miners allows the cryptocurrency to move along as it should do.
The reward for this takes the form of cryptocurrency tokens. There may also be fees that are paid to the miners by any exchange parties.
To do all this, it needs computers to work on it. Expensive and top of the range equipment is usually used, as well as a whole lot of electricity.
This is because there is competition to mine for cryptocurrency, and this can be done best with powerful computers.
This means the cost to actually mine becomes more expensive to do so. Once this cost increases, so does the cryptocurrency value. If there is a demand for the blockchain, then the price will increase.
Different Regulations And Legality
Whilst you might not think that the different regulations and legalities of cryptocurrency can increase or decrease the price, you will be surprised to find out that it actually can.
This is because regulation is needed in order for people to trade cryptocurrency. Because investors can gain access easier, this actually increases the value of it.
However, having regulations involved can also impact the overall demand of a cryptocurrency. This is because a governing body can actually change rules to go against investment of cryptocurrency.
This will send the cryptocurrency price low.
Final Thoughts On What Drives The Prices Of Cryptocurrency
If you are looking to invest in cryptocurrency, then you will need to understand how the value and price of it works. This will mean that you make more informed and better decisions in the long run.
For example, if you have a feeling that the demand may increase pretty soon because you know a reason for it to, and know supply will struggle, then you will want to invest in that cryptocurrency.
Hopefully this article has helped you in your future cryptocurrency investment.