What drives value?
12 years ago, the world knew nothing about cryptocurrencies. When the first cryptocurrency, Bitcoin, came about in 2009, Mr. Warren Buffett dismissed it as absolutely without any value. But in so short a time, cryptocurrencies are gaining much headway in the financial landscape, sending big-named institutional investors such as PayPal and Microstrategy to march and scramble to gain big chunks of the crypto cake, particularly Bitcoin, with the latest being Elon Musk of Tesla.
So, What’s with Cryptocurrencies?
How did it become such a valuable asset even with its fickle-ish market attitude that is not that easy to deal with? Value pops up from nowhere. There must be factors that this digital, Internet-based currency has become what it is today — a very attractive and valuable investment instrument.
1. Utility of the Coin
One good thing about the disastrous ICO bubble was that it blasted into obscurity a lot of coins that did not have any utility at all. Those who remained strong were founded on legit projects and teams that continue to enjoy community backing and participation from users, developers, miners, and investors. A project makes use of its native coin to make transactions viable within an ecosystem. The utility coin is what the system recognizes as a payment medium or mode of exchange between transacting peers. Coin holders, depending on how many they hold, can enable them to have a voice within the community like voting rights or a certain amount of influence over designs or processes. The coin’s usability/utility makes it valuable. And the more transactions there are the coin’s demand increases. And so its value.
2. The Scarcity of the Coin
Digital coins are unlike fiat currencies, which can be printed with reckless abandon. Cryptocurrencies are finite in nature, meaning they have only a limited number of supply. What makes Bitcoin increasingly valuable and pricey is that there will only be 21 million bitcoins in its entire lifetime. By 2040, all the bitcoins will have been mined. Another key fundamental in cryptocurrencies is the “burn” mechanism where coins in excess are burned or destroyed to keep them scarce. Bitcoin Halving is another scarcity event of cutting Bitcoin’s price in half every other four years.
In other words, all cryptocurrencies have only a declared number in existence. Its total circulating supply indicates its market cap. When the supply is limited, the demand will eventually grow higher. High demand drives value. But if there is an overflowing supply and the demand is down, so, too, will the value decrease.
3. Perceived Value of the Coin
Bitcoin is perceived to be the leading alternative currency of the future, given its robust characteristics, make-up, and dominance in the market. Its milestones since day one have been well documented, and the once-dismissed as a “seashell or something” by the esteemed Mr. Buffett has become more and more valuable by the day. By virtue of their usability, other altcoins like Ethereum for smart contracts, PAID Network for business agreements, Xion Global for eCommerce, and a host of others for their legit and essential projects are valued by the market that is causing positive effects on their own cryptocurrency values. Another contributory factor to a coin’s value is what the media is saying about it. The media can do or undo cryptocurrencies to an extent. They can certainly affect FUD (fear, certainty, and doubt) or FOMO (fear of missing out) sentiments to the demand and supply. Some good headlines can influence investors to take hold of cryptocurrencies, or they can drive people away by publishing negative news. In a way, the media can help a lot in educating the dazed and confused by provisions of knowledge in their articles.
4. Economic Crisis
The economic and financial crises can greatly affect the value of cryptocurrencies. Fear of an impending economic collapse can trigger people to run to Hedgeable assets to protect their funds and the inflationary whiplash it can cause upon their fiat when retailers and individuals start purchasing cryptocurrencies, price, value and trust increases.
5. Regulating Cryptocurrencies
Cryptocurrencies are designed to combat the control of governments, central banks, and other regulating authorities. When these legal systems interfere, there is sure a negative market price movement as sentiments will see these interventions as repressive and detrimental to the decentralized nature of cryptocurrencies. But if the whole picture of such interference is to protect the population from crypto crimes such as fraud, theft, and terrorism, then market uptrends may be in the offing.
A number of whales present in leading cryptocurrencies are a potential threat to effect manipulations that can cause price movements. Mining is also an expensive extraction of coins that contribute to crypto value. Although a decade old, the cryptocurrency industry is still very young, and other factors may yet be discovered to deliver value. One thing for sure, cryptocurrencies are here to stay. Given that, stablecoins pegged to dollar reserves are hybrid invention examples to control or retain value. Combining the above-mentioned factors will give a potential investor glimpse of how cryptocurrencies work before he embarks on an exciting crypto journey.
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