Last Updated on 2 months by Shubham Attri
Cryptocurrency is being used as a medium of exchange and has been in demand for the past few years. Have you ever wondered how cryptocurrency gains value? Well, stop wondering now because here we are with a post on ‘How does cryptocurrency gain value’ that will clarify all your doubts regarding this.
Cryptocurrency is a global phenomenon used by various users from all over the world. Any central authority does not head the monetary system of cryptocurrency. This benefits the users as cryptocurrency is known for transparency, divisibility, and portability. It is surely going to stay for a long time because of its benefits to people.
We may not be wrong in saying that it may turn out to be the future of all currencies. We usually hear people saying that something has taken place. This will increase the value of cryptos or decrease their value.
So, here we will discuss how it happens and how cryptocurrency gains value? There are many factors responsible for the value of cryptocurrency. We will discuss all of them here. So, let’s dive into the post and look at the type of cryptocurrencies.
Cryptocurrency: What Are The Types?
Various cryptocurrencies keep on emerging with every passing week. Here are the three broad categories of cryptocurrencies.
When people talk about cryptocurrency or digital currency, they usually refer to Bitcoin only. Bitcoin uses a proof-of-work system. This currency was created in the year 2009.
Altcoin is the alternative coin for Bitcoin. They can be used for creating smart contracts. Some Altcoins use a proof-of-stake mechanism, while a few use a proof-of-work mechanism. They were introduced in 2011.
Tokens are used on Apps or Decentralized applications and do not have any blockchain. They are used to represent any physical thing. They are created for using smart contracts.
Cryptocurrency: How Does It Gain Value?
As we have discussed the categories of cryptocurrency, let’s see how cryptocurrency gains value. Various factors affect the value of cryptocurrency. Users can increase the value of cryptocurrency by purchasing cryptos. This will increase the demand, and ultimately, the value of cryptocurrency will also rise. Users can also increase the value of cryptocurrency by increasing its utility. If more and more people and institutions accept cryptocurrency as a form of payment, this will increase utility and value.
Factors Affecting the Value Of Cryptocurrency
Here are the factors that have an impact on the value of cryptocurrency. Let us discuss them one by one.
1. Demand And Supply
The value of anything depends upon the demand and supply. If the demand for a particular product is higher than the supply, the prices will rise. Likewise, demand and supply play a major role in deciding the value of cryptocurrencies. The laws of demand and supply apply here. If there is a scarcity of something or lesser supply, it will result in higher value. However, if the demand is high, the value will be lower.
2. Lesser Competition
Another major factor is competition. Many cryptocurrencies are launching every week, leading to fewer barriers to entering the cryptocurrency market. When a new competitor enters the market and gains momentum, the value is taken from the present competitor. Thus, the price of the new competitor goes up, leading to lower prices of the current holder.
There are cryptocurrencies like Ether and Bitcoin that trade on various exchanges. They can be easily available to anyone. However, many smaller tokens are not easily available. They are present in limited exchanges. If the cryptocurrency is easily available on multiple exchanges, the number of investors increases, and the demand leads to higher prices.
4. Stable Administration
Investors usually prefer going for those cryptocurrencies that have stable governance. If administration or governance is stable, it provides high value by providing firm prices. Cryptocurrency hardly abides by consistent rules. So, even if there is some flaw in the operation of the cryptocurrency, but it has stable governance, the investors will prefer it.
5. Production Cost
The process of mining is used for producing new cryptocurrency tokens. Computers are used for verifying blocks on the blockchain resulting in high investment in electricity and expensive equipment. The higher the competition for mining a cryptocurrency, the tougher the race to solve complex block problems. This will lead to higher mining costs and increase the value of cryptocurrency.
There is a requirement for proper regulation for the smooth trading of cryptocurrency. But if the legal authorities change the rules or laws and don’t favor the investors, it would lower the value of cryptocurrency.
Technological advancements have mostly resulted in a positive change in the value of a cryptocurrency. There is mostly an increase in the value of cryptocurrency whenever a new feature or development is introduced.
8. Famous Names
The value of cryptocurrency is also sometimes affected by stardom. One such example is Elon Musk. He tweeted once about Dogecoin in 2020, and the coin’s value increased by 20%. Next year it rose by 40% after Elon Musk’s tweet. Though this may not be true in all cases, celebrities can usually help in positive change in the value of the cryptocurrency.
These are the factors that have a major influence on the value of cryptocurrency.
This post was all about ‘How does cryptocurrency gain value.’ You can also invest in cryptocurrencies. However, you should not forget to do complete research before investing in cryptocurrencies, as they are highly volatile.
If you liked the post, share it with your friends. Drop your queries in the comment section if you have any. You can also tell us in the comment section if we have missed any other factor that affects the value of cryptocurrency.
Frequently Asked Questions
Q. Why Do Bitcoins Hold Value?
A. Bitcoins hold value mostly because of scarcity. The value of any cryptocurrency depends on factors like demand, supply, technology, etc.
Q. What Is Cryptocurrency?
A. It is a digital currency that doesn’t depend on banks for verifying a transaction.