The cryptocurrency market is rapidly evolving and staying ahead requires a cutting-edge exchange platform. Not all exchanges provide the same level of quality service because some prioritise security over convenience. Still, others are more flexible. This article outlines which factors promote the success of a cryptocurrency.
The Value Of A Cryptocurrency
Similar to other currencies, the value of cryptocurrencies is based on the level of community involvement, such as demand, scarcity and coin utility. It’s important to note that as most digital coins are issued by private blockchain companies, part of their value also comes from the company’s reputation for efficiency and perceived value of the project.
The Usefulness Of The Coins
Enhancing a cryptocurrency’s utility is crucial for its value. Cryptocurrencies are a representation of decentralised digital ledger technology, known as blockchain. To increase the utility of a cryptocurrency, it must be usable within a blockchain environment.
For instance, let’s take Ethereum as an example. You can’t use Ethereum platforms without Ether, which is a coin specifically created to run transactions on the Ethereum blockchain. Therefore, the value of Ethereum is based on the demand for Ethereum platform services.
Other factors that contribute to cryptocurrency value from a utility perspective include dividends, exchange modes within the blockchain and voting rights.
Demand And Supply
Like other tradeable assets like stocks, commodities and securities, cryptocurrencies are affected by the fundamental principle of demand and supply. As some cryptocurrencies have a limited supply (for example, Bitcoin is capped at 21 million tokens), scarcity plays a significant role in price volatility. In essence, as demand for a cryptocurrency grows, its price will also rise.
Cost Of Production
As cryptocurrency guides will explain, new tokens are generated through a process known as mining. This involves using a computer to verify blocks on the decentralised blockchain network. Miners are rewarded with cryptocurrency tokens, in addition to transaction fees, for their efforts.
Verifying the blockchain requires computing power. This means that participants invest in expensive equipment and electricity to mine. In proof-of-work systems like those used by Bitcoin and Ethereum, the more competition there is for mining, the more challenging it becomes. Miners compete in order to solve complex mathematical problems to verify blocks. As competition increases, so does the need for more powerful equipment which drives up mining costs.
As mining costs rise, the value of the cryptocurrency must also increase. Miners will only continue to mine if the value of the currency covers their expenses. As long as there is demand for using the blockchain, the price will have to go up since miners are crucial to the blockchain’s functioning.
The acceptance and use of a cryptocurrency can greatly affect its value, just as the principles of demand and supply do. Major companies that are accepting cryptocurrency as payment, such as Walmart and PayPal who accept Bitcoin, or countries recognising it as legal tender, like El Salvador that accepts Bitcoin, can greatly impact a cryptocurrency’s value.
Like all markets, the sentiment of the cryptocurrency market goes through cycles. During a bull market, investors benefit while a bear market reduces value. To gauge the sentiment of the market, one can use the Fear and Greed Index. This index gauges investor attitudes and indicates whether the market is bullish (positive) or bearish (negative).