Why are Cryptocurrencies so valuable? Where does their value come from? And which factors can increase and decrease the value of Cryptocurrency? Many investors are asking themselves all of these questions, and we’re here to give you, and them, some answers!
Learning how Cryptocurrency gains value can significantly help you make wiser investing decisions, since you get to know not only the factors that add value to Cryptocurrencies, but also the factors that decrease the value of Cryptocurrencies. So, keep reading as we cover the top 5 reasons why Cryptocurrencies are valuable…
How Does Cryptocurrency Gain Value?
The value of Crypto are generated through different sources. Here are the top 5 reasons Cryptocurrencies are so valuable:
1. Supply and Demand
Supply and demand has a huge role in adding value to anything, including Cryptocurrency. When supply does not increase as fast as demand, the value increases. More and more investors convert cash to Cryptocurrency and discover how to buy these digital currencies, which further increases the demand. The supply of some Crypto like Bitcoin is limited, increasing the competition over gaining Crypto and hence increases its value. So, the increased demand with no supply is a top reason why Cryptocurrency has this much value.
The value of Cryptocurrencies like Bitcoin is determined by scarcity. Demand has skyrocketed while supply has decreased, and now everyone’s vying for this ever-expanding profit they get from investing in Crypto!
Blockchain, which is the technology of Bitcoin, may be used to pay for stuff in the future. Increased acceptance of Cryptocurrencies as investments limits the circulation supply and increases demand at the same time. El Salvador, for example, believes that the technology of Bitcoin will advance significantly to make it a viable payment method.
There are Cryptocurrencies such as DOGE that do not have unlimited supply like Bitcoin does, instead, it has almost limitless supply. So in order for the value of DOGE to increase, there should be a tremendous number of people willing and actually buying it, which will create a spike in demand.
2. Cost of Production
One school of thought holds that the cost of production of Cryptocurrency gives it an inherent value. Mining is the process by which new Crypto are created. This process is super expensive and consumes a lot of resources, which has a significant impact on the price and value of Crypto. This is logical since no miner would do its job if the money they get is insufficient to cover the costs.
So, because a miner is required to make the blockchain work, there will be naturally an increase in price provided that the demand is there.
3. Fear of Missing Out (FOMO)
People usually tend to be afraid of missing any good chances, which is a major factor in determining the value of Cryptocurrency. If the price of any coin skyrockets, more investors will be willing to buy this coin under the effect of FOMO.
While Cryptocurrency offers a variety of interesting technological applications, as a financial asset, it is still prone to speculation. The anticipation of the market about a certain price of a certain asset is called speculation. The price rises when many market participants expect an increase in price from the current price pattern and buy significant amounts of Crypto because they fear of missing out.
4. Government Restrictions
Cryptocurrencies have been fraught with controversy since they came to light and more people became seriously interested in buying and selling them. The security issues related to trading Crypto are one of the main concerns governments have. The more investors become interested in Cryptocurrency, the more restrictions the government can put on the process of converting cash to Crypto. The government tends to control and reduce digital money transactions due to the security issues related to Crypto trading.
Crypto might get banned in some countries, like the case in Algeria, Egypt, China, Bolivia, Iran, Indonesia, and India. While trading Crypto are legal in many other countries, governments still put restrictions on trading digital coins, but with different sanctions. Some banks even ban Bitcoin, preventing any of their clients from trading and exchanging it. All of these government restrictions and regulations can make Cryptocurrencies less decentralized, which can significantly affect the Cryptocurrency’s price.
There is some disagreement about the entity that is responsible for regulating cryptocurrency exchanges. For example, the Commodity Futures Trading Commission (CFTC) considers Crypto to be a commodity, similar to sugar and any other regular commodity. On the other hand, Crypto are considered to be a security (similar to bonds and stocks) by the Securities and Exchange Commission (SEC).
But none of these regulatory authorities have a clear regulating schema for Crypto traded in these exchanges. This could possibly limit trading Crypto and any financial assets related to it, as sound regulation is essential to facilitate Crypto trading. Future contracts and ETF on these exchanges can also increase the value of Crypto by enabling investors to access Crypto.
Speculations of future regulations can also have an impact on the value of Crypto. Events like legalizing Crypto trading in some countries, may cause prices of digital coins to rise. Price drops may also be caused by banning Crypto trading in some countries.
The economic news can also cause Crypto prices to either increase or decrease, particularly during periods of intense market volatility. For example, the conflicts between Ukraine and Russia caused the prices of digital coins to plummet at the beginning. However, the Crypto market made a significant rebound a few days later—there was a huge one-day increase in Bitcoin’s price that was the highest in over 12 months.
So as we mentioned, supply and demand, cost of production, FOMO, government restrictions, and news, can all add value to Cryptocurrency. But it’s important to understand that just like these factors make Crypto more valuable, they can definitely do the exact opposite. So keep that in mind if you invest in Crypto on a regular basis and seek to maximize your profit as a Cryptocurrency investor—use them to your advantage!