Why is Cryptocurrency Valuable? A New Investor Guide
It’s hard to look at any financial website and not see some mention of cryptocurrency. However, with all the hype around cryptocurrency, it’s tough to filter through what’s true and what’s not.
One common question is, what are the factors that make cryptocurrency valuable?
We put together this investment guide for new investors to explain the factors that affect the value of cryptocurrency coins and markets.
Related: Crypto Terms You Need To Know For Investing
The Factors That Make Cryptocurrency Valuable
Several factors make cryptocurrency, individual coins, and the entire crypto market valuable.
The Utilization of Cryptocurrency
The utilization of cryptocurrency increases as investors and businesses begin to invest more in crypto and its acceptance as a form of payment or currency grows.
The more applications people and companies can use blockchain technologies for, the higher its utilization, which in turn increases the value of cryptocurrency in the long term. So, for example, you hear more about people talking about investing in crypto versus using crypto.
As the utilization of cryptocurrency grows, it will move from being an investment vehicle to a currency or a medium of exchange.
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Supply and Demand
The law of supply and demand is a crucial principle in microeconomics. The law of supply states that the price of an item increases as its availability decreases. The more that people want something, the more expensive it becomes.
For example, the maximum amount of Bitcoin’s supply is 21 million, and there won’t ever be more than that amount. This scarcity helps contribute to the price of Bitcoin.
When buyers use the classic strategy of buying low and selling high, they purchase and hold onto a cryptocurrency. This strategy can hike the price of the coin by reducing its supply of it while the demand for it grows.
Also, because it operates on the blockchain, you cannot make copies of Bitcoin, so you cannot counterfeit it.
The Market Cap
While many people think that the only determinant of the value of cryptocurrency is its price, this is only one aspect of its value.
Market cap helps to provide a better overall picture of the true worth of a cryptocurrency. In addition, the market cap helps show crypto’s growth and popularity over time and how it compares to other competing crypto assets.
Investors are often attracted to cryptos with larger market caps, which is why the market cap is used when ranking cryptocurrencies, not price.
The market cap of crypto is determined by its supply and its price. The scarcity of cryptocurrency coins can affect their market price. Likewise, widely available coins can have much lower prices. It’s the combination of scarcity and price that sets the market cap.
For example, if Crypto Y has 1,000,000 coins in circulation, and the coin’s value is $10, it has a market cap of $10,000,000.
Conversely, if Crypto Z has 100,000,000 coins in circulation and the coin’s value is $.005, it has a market cap of $500,000.
Related: Crypto Crash – How To Navigate a Downturn
Market sentiment is investors’ overall attitude, perceptions, and feelings towards a particular security or market. One of the drivers behind cryptocurrency volatility is how influential market sentiment can be.
A positive market sentiment typically indicates a bull market. In contrast, negative market sentiment is a hallmark of a bear market.
Market hype, crypto-related news, and social media outlets like Twitter and Reddit can all significantly affect market sentiment. For example, a simple Tweet by a certain billionaire can cause the price of a relatively unknown coin to spike dramatically.
There are plenty of tools to measure the market sentiment of a cryptocurrency. Some ways include using Google Trends to measure hype, tracking social media mentions, following industry blogs, and tracking large whale transactions.
Crypto miners validate cryptocurrency transactions, solve complex puzzles on a blockchain, and then add them to a distributed ledger.
The first computer to complete the solution to the problem receives the next block of the crypto, and the process repeats itself. Mining is how new crypto coins are entered into circulation.
Like with fiat currencies, the digital ledger must be updated by crediting one account and debiting the other when someone spends a cryptocurrency.
In addition, cryptocurrencies use proof-of-work and proof-of-stake miners to help validate the legitimacy of transactions on the blockchain. By verifying the transactions, miners are helping prevent double-spending.
The act of mining impacts the supply of new crypto coins and puts more of those coins into circulation. It can also affect the market perception of a crypto coin as more people get involved in mining new coins.
Regulatory uncertainty can also impact the value of cryptocurrency.
For example, in the US, the Securities and Exchange Commission (SEC) says that cryptocurrencies are securities and should be treated like stocks and bonds. However, the Commodity Futures Trading Commission (CFTC) says that cryptocurrencies are commodities like gold or grain.
This regulatory uncertainty makes it difficult for many investors to invest in cryptocurrencies because there are no regulations. When they do happen, these regulations can drastically affect their investment performance.
Suppose the governing body of a country changes its regulations to move away from or discourage investing in cryptocurrency. In that case, this can also send the prices down.
Regulations also make it easier for people to have more access to trading cryptocurrencies. And allow them to trade it more like a stock by taking short positions, options, or futures contracts.
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Many Factors Make Cryptocurrency Valuable
As a new investor, there are many factors that you should be aware of that impact the value of cryptocurrency.
Cryptocurrency and its underlying blockchain technology are new. As the acceptance of cryptos and their applications become more widespread, people will go from buying crypto to using it.
Supply and demand play a significant role in the value of cryptocurrency. Combined with market sentiment and cap, crypto valuations can be volatile.
Proof-of-work and proof-of-stake allow verified miners to verify transactions on the blockchain and help put new coins into circulation.
Regulatory uncertainty is one of the most significant factors affecting the crypto’s value. This uncertainty keeps interested investors from investing until they know how regulations will impact their investment.
The more access the general public can have to crypto, the more they will utilize it and help move crypto from an investment to a currency.
Related: How to Invest in Crypto (Without Buying Cryptocurrency)