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 the ‘money revolution’.
In clear terms, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created through special computational techniques referred to as ‘mining’.
Accepting currencies, like the US dollar, the British pound and the euro, as legal remedies is because they are issued by a central bank; However, digital currencies, such as cryptocurrencies, do not depend on public trust and confidence in the issuer. As such, several factors determine its value.
Factors that determine the value of cryptocurrencies
Principles of free market economy (mainly supply and demand)
Supply and demand is a key 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 particular cryptocurrency will rise and vice versa.
Mass adoption
The massive approval of any cryptocurrency could lead to its price on the Moon. This is because many cryptocurrencies have their supply 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 that particular commodity.
Numerous cryptocurrencies have invested more resources in securing their mass adoption, with some focusing on the applicability of their cryptocurrency to urgent personal life issues as well as crucial day-to-day cases, with the aim of making them essential in daily life.
Fiat inflation
If a fiat currency, like the USD or GBP, inflates, its price rises and its purchasing power falls. This will then cause cryptocurrencies (let’s use Bitcoin as an example) to rise relative to that fiat. The result is that you will be able to buy more from that fiat with every bitcoin. In fact, this situation has been one of the main reasons for the increase in the price of Bitcoin.
History of fraud and cyber attacks
Frauds and hacks are also essential factors that affect the value of cryptocurrencies, as they are known to cause wild fluctuations in valuations. In some cases, the team supporting a cryptocurrency can be fraudulent; they will pump the price of cryptocurrency to attract unsuspecting individuals and when their hard-earned money is invested, the price is cut by fraudsters, who then disappear without a trace.
It is therefore imperative to be wary of cryptocurrency scams before investing your money.
Some other factors to consider that have an impact on the value of cryptocurrencies include:
-
The way in which cryptocurrencies are stored, as well as its usefulness, security, ease of purchase and cross-border acceptability
-
The power of the cryptocurrency community (this includes funding, innovation and loyalty of its members)
-
Low cryptocurrency-related risks as perceived by investors and users
-
Feeling the news
-
Market liquidity and cryptocurrency instability
-
Country regulations (this includes banning cryptocurrencies and ICOs in China and accepting it as a legal remedy in Japan)