Cryptocurrencies are the latest “big thing” in the digital world and are now recognized as part of the monetary system. In fact, fans have labeled it as a ‘money revolution’.
In plain 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 computing techniques known as “mining”.
Currencies Acceptance of currencies such as the US dollar, British pound, and euro as legal tender is because they are issued by a central bank; digital currencies, however, such as cryptocurrencies, do not rely on the public’s 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. That is, 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 of any cryptocurrency can shoot its price to the moon. This is because many cryptocurrencies have a limited supply and, according to economic principles, an increase in demand without an increase in supply will lead to an increase in the price of that particular commodity.
Multiple cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrencies to pressing personal life issues, as well as everyday crucial cases, hoping to make them indispensable in everyday life.
If a fiat currency, like the USD or GBP, becomes inflated, its price rises and its purchasing power falls. This will then cause cryptocurrencies (let’s use Bitcoin as an example) to increase relative to that fiat. As a result, with each bitcoin you will be able to acquire more of that fiat. In fact, this situation has been one of the main reasons for the rise in the price of Bitcoin.
History of Scams and Cyberattacks
Scams and hacks are also major factors affecting the value of cryptocurrencies, causing wild swings in valuations. In some cases, the group behind the cryptocurrency may be fraudsters; they will pump up the price of the cryptocurrency to attract unsuspecting people and when the hard-earned money is invested, the fraudsters short the price, and then disappear without a trace.
Therefore, it is essential to be wary of cryptocurrency scams before investing money.
Other factors to consider, which affect the value of cryptocurrencies, are:
The way cryptocurrency is stored, as well as its availability, security, ease of access and cross-border acceptability
The strength of the community backing the cryptocurrency (including funding, innovation and member loyalty)
Low cryptocurrency risks as perceived by investors and users
Market liquidity and cryptocurrency volatility
Country regulations (this includes banning cryptocurrencies and ICOs in China and accepting them as legal income in Japan)