Cryptocurrencies are the latest “big thing” in the digital world and are already recognized as part of the monetary system. In fact, enthusiasts described it as a “money revolution.”
Clearly, cryptocurrencies are decentralized digital assets that can be exchanged between consumers without the need for a central authority, most of which are created using special computational techniques called digging.
The acceptance of currencies such as the US dollar, the British pound and the euro as legal tender is because they are issued by a central bank; however, digital currencies, such as cryptocurrencies, do not rely on public 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 (main supply and demand)
Supply and demand are a major determinant of the value of everything valuable, including cryptocurrencies. This is because if more people are willing to buy cryptocurrency and others are willing to sell, the price of that particular cryptocurrency will increase and vice versa.
Mass adoption
The mass acceptance of any cryptocurrency can drive its price to the moon. This is due to the fact that 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 this particular commodity.
Many cryptocurrencies have invested more resources to ensure their widespread adoption, with some focusing on the applicability of their cryptocurrencies to urgent personal issues as well as important everyday cases, with the intention of making them indispensable in everyday life.
Fiat Inflation
If the fiat currency, such as USD or GBP, inflates, its price rises and its purchasing power decreases. This will then lead to an increase in cryptocurrencies (let’s use bitcoin as an example) compared to this 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 rise in the price of bitcoin.
History of fraud and cyber attacks
Fraud and hacks are also major factors affecting the value of cryptocurrencies, as they are known to cause unusual changes in valuations. In some cases, the team that supports cryptocurrency may be fraudsters; they will pump up the price of cryptocurrency to attract unsuspecting people, and when their hard-earned money is invested, the price is cut short by fraudsters who then disappear without a trace.
That is why it is imperative to watch out for cryptocurrency fraud before investing your money.
Some other factors to keep in mind that affect the value of cryptocurrencies include:
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The way cryptocurrency is stored, as well as its usefulness, security, ease of acquisition and cross-border acceptability
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The strength of the community supporting cryptocurrency (this includes funding, innovation and loyalty of its members)
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Low associated risks of cryptocurrency, as perceived by investors and consumers
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News mood
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Market liquidity and volatility of cryptocurrency
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Government regulations (this includes banning cryptocurrencies and ICOs in China and accepting them as legal tender in Japan)