How Your Investment in Cryptocurrency Determines Its Value?

Cryptocurrencies have been available to the public for nearly a decade now, but their popularity is a relatively new phenomenon. A lot of people have now started investing in one of the many digital coins available today. The process of creating these coins — called Mining — is limited to the geeks, who work on powerful computers to solve complex mathematical equations to create virtual currencies like Bitcoin, the oldest and most popular of them all. Based on the idea of decentralisation, the blockchain technology behind these coins plays an important role in sustaining them and making them secure.

How does cryptocurrency work and how is its value determined?

To understand that, we need to first know how a cryptocurrency is different from a fiat currency (Indian Rupee, US Dollar, etc.). The biggest difference is that a fiat currency is backed by governments and declared as legal tender. It derives its value from the fact that two parties in a transaction put their trust in that value. Most countries operate in a fiat currency system, where central banks and monetary reserves control the supply of money, and, as such, indirectly control inflation.

Cryptocurrencies are not regulated by governments; they are decentralised. Most countries are yet to accept them as legal tender. Cryptocurrencies will also generally have a fixed supply, therefore their devaluation through inflation is unlikely.

Other than that, both have similar characteristics. Both can be a medium of exchange to buy products and services and both have a relative store of value.

Cryptocurrency public ledger

Every cryptocurrency trade automatically gets entered into a decentralised ledger that is not regulated or manipulated by a single entity. All transactions are secured by cryptography and it is available to everyone to view from any place at any time.

Cryptocurrency node count

Node count measures how many active wallets exist on the network. It is a good indicator of the value of a cryptocurrency. To see whether a currency has a fair price or whether it is overbought, one can search for the node count and the total m-cap (market cap) of the cryptocurrency and then compare the two indicators with other cryptocurrencies. Node count also shows how strong a cryptocurrency community is — more nodes mean stronger communities.

Cryptocurrency exchanges

To know about cryptocurrency, a person can visit an online exchange, such as WazirX or Binance in India. All the details related to any cryptocurrency — like its market capitalisation, its performance over the past weeks and months, total currency in circulation, current and past value — are available there. These cryptocurrency coins, such as Bitcoin, Ethereum, or Dogecoin, can also be traded on these exchanges for a fee.

Determining price of cryptocurrency

The most effective way the price of a cryptocurrency coin is determined is by its demand. Heavy demand from buyers will push the value of a digital coin upwards. Conversely, if a coin has a high token supply with little demand, then its value will drop. Other factors that influence the price of a crypto coin include the level of token utility — i.e., how useful the token is. A difficult mining process would mean it is more difficult to increase the supply of the coin and cause upward pressure on the price when demand is high.

Mass adoption

If more people invest in a crypto coin, its value can shoot through the roof. Still, these virtual currencies are far away from being adopted by the masses. Why? Because there are real-world problems associated with them. One: they cannot be exchanged for goods and services as widely as a fiat currency. For these digital coins to gain mass adoption, their utility has to increase and the deal should appear lucrative to the buyer.

Price volatility

The cryptocurrency market is still new and a lot of people are not yet familiar with the industry. New markets have qualities that make them inherently volatile. Then, there are some whale accounts that hold a large number of cryptocurrency coins and tend to influence markets to book profits.