Cryptocurrencies are the latest ‘big thing’ in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts have labeled it the “money revolution”.
Put plainly, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created through special computing techniques called “mining.”
The acceptance of currencies such as the US dollar, the British pound and the euro as legal tender is because they were issued by a central bank; however, digital currencies such as cryptocurrencies do not rely on the public’s trust and confidence in the issuer. As such, several factors determine its value.
Factors that determine the value of cryptocurrencies
Principles of a free market economy (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 increase and vice versa.
Mass adoption of any cryptocurrency can shoot its price to the moon. This is because the supply of many cryptocurrencies is 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.
Many cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrency to pressing personal life problems as well as crucial everyday cases, with the intention of making them indispensable in everyday life.
If a fiat currency, such as the USD or GBP, becomes inflated, its price rises and its purchasing power falls. This will then cause cryptocurrencies (let’s use Bitcoin as an example) to increase relative to that fiat. The result is that you will be able to acquire more of this fiat with each bitcoin. In fact, this situation is one of the main reasons for the increase in the price of Bitcoin.
History of fraud and cyber attacks
Scams and hacks are also major factors affecting the value of cryptocurrencies, as they are known to cause unusual fluctuations in valuations. In some cases, the team supporting a cryptocurrency may be the scammers; they will pump up the price of the cryptocurrency to attract unsuspecting individuals and when their hard-earned money is invested, the price is reduced by the scammers who then disappear without a trace.
That’s why it’s imperative to be wary of cryptocurrency scams before investing your money.
Some other factors to consider that affect the value of cryptocurrencies include:
The manner in which cryptocurrency is stored, as well as its utility, security, ease of acquisition and cross-border acceptability
The strength of the community supporting the cryptocurrency (this includes funding, innovation and loyalty of its members)
Low associated risks of cryptocurrency as perceived by investors and users
Cryptocurrency market liquidity and volatility
Government regulations (this includes the ban on cryptocurrency and ICOs in China and its acceptance as legal tender in Japan)