How does cryptocurrency gain value?

Cryptocurrencies are the latest ‘big thing’ in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts have labeled it a “money revolution”.

Simply put, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created using a special computing technique called “mining.”

The acceptance of currencies such as the US dollar, the British pound and the euro as legal tender is due to the fact that they are issued by a central bank; Digital currencies, however, such as cryptocurrencies, are not based 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 (mainly supply and demand)

Supply and demand is the main determinant of the value of anything of value, including cryptocurrencies. This is because if more people are willing to buy a cryptocurrency and others are willing to sell, the price of that cryptocurrency will rise and vice versa.

Mass adoption

Mass adoption of any cryptocurrency can send its price to the moon. This is due to the fact that many cryptocurrencies have a certain limit on their supply, and according to economic principles, an increase in demand without a corresponding increase in supply will lead to an increase in the price of the given commodity.

Many cryptocurrencies have invested more resources to ensure their mass adoption, some have focused on the applicability of their cryptocurrencies to pressing personal life issues as well as everyday essentials, aiming to make them indispensable in everyday life.

Fiat inflation

If a fiat currency, such as the US dollar or the pound sterling, becomes inflated, its price rises and purchasing power falls. This will then cause cryptocurrencies (let’s use Bitcoin as an example) to rise against that fiat. The result is that you will be able to acquire more of that fiat with each Bitcoin. In fact, this situation has been one of the main reasons for the increase in the price of Bitcoin.

Fraud and cyber attack history

Scams and hacks are also major factors affecting the value of cryptocurrencies, as they are known to cause drastic fluctuations in valuations. In some cases, the cryptocurrency support team may be scammers; they will inflate the price of the cryptocurrency to attract unsuspecting individuals, and when their hard-earned money is invested, the price is slashed by the scammers, who then disappear without a trace.

Therefore, it is necessary to be careful of cryptocurrency scams before investing your money.

Some other factors to consider that affect the value of cryptocurrencies include:

  • How cryptocurrency is stored, as well as its utility, security, ease of acquisition and cross-border acceptability

  • The strength of the community supporting the cryptocurrency (this includes funding, innovation and loyalty of its members)

  • Low risks of cryptocurrency as perceived by investors and users

  • News mood

  • Cryptocurrency market liquidity and volatility

  • Country regulations (this includes the ban on cryptocurrencies and ICOs in China and its acceptance as legal tender in Japan)