How does a cryptocurrency gain value?

Cryptocurrencies are the newest “big thing” in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts describe it as a “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 calculation techniques called ‘mining’.

The acceptance of currencies such as the US dollar, the UK and the euro as legal tender is because they are issued by a central bank; however, digital currencies, such as cryptocurrencies, do not rely 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 (main supply and demand)

Demand and supply is a major determinant of the value of something valuable, 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 increase and vice versa.

Mass adoption

The mass acceptance of any cryptocurrency can skyrocket its price. This is due to the fact that the supply of many cryptocurrencies is 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 a particular commodity.

Many cryptocurrencies have invested more resources to ensure their widespread adoption, with some focusing on the applicability of their cryptocurrency to pressing privacy issues as well as key everyday cases, with the intention of making them indispensable in everyday life.

Fiat inflation

If a currency, such as the USD or GBP, inflates, its price rises and its purchasing power falls. This will lead to an increase in cryptocurrencies (let’s use Bitcoin as an example) for this fiat. The result is that you will be able to acquire more of this fiat with each bitcoin. In fact, this situation is one of the main reasons for the increase in Bitcoin prices.

History of fraud and cyber attacks

Fraud and hacks are also major factors influencing the value of cryptocurrencies, as they are known to cause wild fluctuations in valuations. In some cases, the cryptocurrency support team may be fraudsters; they will pump up the price of the cryptocurrency to attract unsuspecting individuals, and when hard-earned money is won, the price is cut by fraudsters who then disappear without a trace.

That is why it is imperative to beware of cryptocurrency fraud before investing your money.

Some other factors to keep in mind that affect the value of cryptocurrencies include:

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

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

  • Low-risk cryptocurrency risks perceived by investors and consumers

  • News mood

  • Market liquidity and cryptocurrency instability

  • Government regulations (this includes the ban on cryptocurrency and ICO in China and its acceptance as legal tender in Japan)