What Determines the Value of a Cryptocurrency – 2020 Guide
Since the dawn of cryptocurrencies and over the years it has gained more traction and fame, there have been dozens of different ones to choose from. While Bitcoin is the absolute king when it comes to all parameters, there are many other viable options. But what makes them differ so much in value? In this account, we attempt to answer that interesting but complicated question. If you wish to learn more and maybe invest in a cryptocurrency or two, make sure to visit de.immediate-bitcoins.com.
1. Node Count
The first important factor that influences the value of a cryptocurrency is its node count. In the digital currency world, a node is a computer that connects to a cryptocurrency network. This computer supports the whole network through validation and relaying of transactions, so the more nodes, the stronger the currency. It is a measurement of how many active wallets exist on the network, and how many can be looked on the internet or on the currency homepage. To determine if a currency has a fair price, you can simply search for its node count and the market capitalization of the digital currency in question, after which you can compare them with the rest of virtual currencies.
By performing this action, you can learn if the coin is overbought. Furthermore, the node count shows the strength of the cryptocurrency community, which is always important as the strongest ones have the widest and most diverse fan bases. It is simple, the stronger the community, the more stable the currency. As you can see, the node count is important for a potential user as it can calculate the chances of the currency to overcome a potential crisis down the line.
2. Supply and Demand
Like in every other business, the balance between supply and demand has a lot to do with the value of a certain cryptocurrency. In the world of cryptocurrencies, there are many popular online exchanges where users do their cryptocurrency business, like purchasing, selling, and trading. Over the years, the usability of cryptocurrencies and the ease of access has greatly changed, which is why there have been numerous changes in value. As their popularity rose, so did the adoption by many companies and governments, resulting in great demand and widespread implementation of digital currencies in multiple areas of traditional business. All of these things acted as a crucial driving force for the constant increase in the price of cryptocurrencies.
Anything that can be traded is susceptible to the rules of supply and demand. As such an important factor, it directly influences the value of a digital currency on the available market. It is simple really. When more people are trying to buy bitcoins while others are selling them, the price goes up. The opposite goes for the price drops. Now, since the total supply of most cryptocurrencies is limited, the increased popularity resulted in competition to buy as much as possible, further resulting in price increases.
Another thing is worth mentioning here. When or if a certain digital coin faces a serious scandal, like a hacker attack, or if a new coin turns out to be a scam, the demand plummets lightning fast. Other cryptocurrencies may also suffer slightly as a result of a general scare, as traders and holders may become too wary and decide to hold onto their current assets instead of trading it further. This could cause somewhat of a hold in the business and things could stagnate for a period. The most obvious example of this is when Bitcoin prices fell down, which led to the correction of the whole market as some currencies rose while others also fell.
3. Mass Adoption
This goes hand in hand with the popularity of a certain digital currency. When or if a digital currency gains a large following and mass adoption, the value can skyrocket incredibly quickly. As mentioned, the total amount of every cryptocurrency is limited, meaning that an increase in demand directly leads to an increase in price. This is one of the reasons why Bitcoin continues to dominate the market. It is simply the most popular and the most sought after cryptocurrency in the world and has been for over a decade.
However, different factors determine how popular cryptocurrencies can become. These include practical uses like the applicability in real-world situations, meaning the number of places where you can actually use the currency to pay for something. In addition, the presence and recognition of the exchanges is a huge factor. Basically, if a cryptocurrency has a clear use in everyday life, similar to traditional (fiat) currencies, it is in a very good position to be one of the dominant cryptocurrencies of the future.
4. Inflation of Traditional Currencies
In an inflation scenario, fiat currencies can greatly influence cryptocurrencies just like they influence each other. If a certain fiat currency falls in value, the price of Bitcoin, for example, would go up in relation to that currency. A domino effect ensues, reflecting the change in most other currencies, both fiat, and crypto. This happens because one is able to get more of the suffering currency by trading it for cryptocurrency, ending up with more money when the fiat gets back on its feet. This is slowly happening right now, as the USD is experiencing variations in value, so all cryptocurrencies are also shifting and spiking daily.
5. Production Cost
Direct costs and opportunity costs of actually making a coin are of huge importance in the overall determining of its value. Again taking Bitcoin as an example, it has a very high production cost, something that further contributes to its price. From its early days, tons of resources and energy have been put into mining Bitcoin. Specialized mining hardware like top-tier gaming-grade CPUs and GPUs were used, and hefty electricity bills were constantly coming to the addresses of miners. Today, mining farms do it on larger scales, but they still have to use top of the line hardware and pay a lot for the needed power. Research shows that the power needed for one year’s worth of Bitcoin mining is anywhere between $400 million and $6.2 billion.