No doubt, it is very common to see frequent news about how people make a lot of money from cryptocurrencies, especially during an upswing, but we have also seen people lose almost everything, especially during a downswing.
It is quite hard to accurately predict the price movement of cryptocurrencies since they are not tangible and there is no single authority controlling them. So, what then gives cryptocurrencies value?
Moving ahead, I will be taking you on a walk of what drives the price of digital assets and how they gain value.
What exactly is Cryptocurrency?
Just like our fiat or any other currency, cryptocurrency is used as a medium of exchange. In layman’s terms, cryptocurrency is simply a digital asset.
All cryptocurrency transactions are made online, and the histories of all the transactions are recorded on a public ledger known as “blockchain.” This ledger can be used to prove ownership of any cryptocurrency, and it is not only limited to crypto usage; it can also be used to record other valuable possessions.
Cryptocurrency is its most monetary feature, and we have seen a lot of adoption in recent years. On the blockchain, people can send cryptocurrencies to others for goods purchased or services rendered. Cryptocurrencies have enormous advantages, one of which is the fact that they can’t be controlled by anyone, and usually, fees for processing transactions are very affordable. As a result of this, cryptocurrencies are accessible to all, resistant to inflation (which is very common with fiats), and all their transactions are made public.
Cryptocurrency trading is rapidly growing in the space, but it is important to note that the use of cryptos as a monetary system is different from trading. Just like people buy and sell companies’ shares, crypto users trade cryptocurrencies too. Holders of any stock are believed to have shares in the company. Buying a cryptocurrency token, on the other hand, gives you ownership of that cryptocurrency in particular.
A company’s stock price is influenced by the demand for its products, and similarly, the monetary system of crypto influences the price of trading crypto. Supply, demand, availability, and competition from other cryptocurrencies all play a role in determining the value of a cryptocurrency.
Types of Cryptocurrency
Cryptocurrencies can be divided into three major categories:
Bitcoin: Bitcoin is the first cryptocurrency to ever be in existence, with a total supply of 21 million.
The fact that Bitcoin has a limited supply means it can be said to be a store of value to protect your funds from the harmful effect of inflation. Like gold, investment in a store of value currency is similar.
The Proof-of-Work system of mining is being used by Bitcoin. This means the Bitcoin blockchain is kept running by a network of miners who do difficult calculations. As a reward for their efforts, miners are rewarded with newly generated Bitcoins. Proof-of-Work enables Bitcoin’s transactional mechanism to have a real value attached to it. There is a fixed amount of computational power associated with each Bitcoin.
Altcoins: In many ways, altcoins differ from bitcoins, but they have few similarities. Forking of bitcoin often leads to altcoins, and they come in numerous varieties.
In terms of the blockchain, bitcoin and altcoins are very different. An unlimited supply of some altcoins has a significant impact on their utility. As a result of the faster blockchain created by some altcoins, mining and transaction times have improved.
The mechanism of verifying the authenticity of transactions may also vary between different altcoins. Some altcoins use proof-of-work, while others use proof-of-stake, with validators replacing miners. Unlike Proof-of-Work, Proof-of-Stake demands a lot more “work” from the miners, and it consumes less energy and equipment than Proof-of-Work.
Smart contracts can also be established using altcoins. It can be executed automatically if certain predetermined circumstances are met. They can be finished immediately because there is no requirement for an intermediary. Smart contracts may be used in a wide range of businesses, making them an attractive investment.
Tokens: Tokens have been developed to employ smart contracts or tokens as a type of cash. There is no blockchain, and they are employed on decentralized applications that don’t require one (dApps).
As a means of keeping track of the value of a cryptocurrency, miners create a public ledger called a blockchain. It’s reminiscent of how reserve banks used to keep gold reserves that underpinned their fiat currency.
On the other hand, tokens do not represent anything physical. They may be used to buy things from dApps and to earn lower transaction and voting costs, which has increased their popularity, just like the way fiat currencies are no longer linked to gold.
How Do Cryptocurrencies Increase in Value?
On-exchange platforms, cryptocurrencies can acquire value. Supply and demand also affect it.
The supply of a cryptocurrency is determined by the number of new coins created and the number of existing owners looking to sell.
Numerous factors influence the demand for a coin. The demand for the coins will increase in proportion to their use. This means that if the monetary system of a particular cryptocurrency functions properly (i.e. transactions are fast and costs are minimal) if smart contracts become more prevalent, and if more businesses begin to embrace crypto, demand for crypto will increase. Additionally, the demand for cryptocurrencies will keep increasing because it serves as a means of preserving wealth.
How Can Users Increase the Value of Cryptocurrencies?
Below are a few ways for consumers to boost the value of their cryptocurrencies:
Purchase low and sell high: By purchasing and storing coins, consumers can enhance the value of cryptocurrency. The purchase boosts demand, and thus the value of the cryptocurrency.
Mining: Mining Bitcoins or other cryptocurrencies can be very profitable because it reduces the supply of cryptocurrencies, which in turn increases the price.
Improving the Utility of Cryptocurrencies: When more institutions invest in and accept cryptocurrency as a payment method, its utility increases. You, as a user, can participate in this process. This will improve the long-term value of cryptocurrencies.
Coverage of Cryptocurrencies in the Media: Cryptocurrency values change in response to media coverage, and users can influence this through their social media profiles.
Additionally, cryptocurrencies gain value as a function of the extent to which they are adopted by the community. When demand exceeds supply, the value of cryptocurrency climbs. When a cryptocurrency is advantageous, it increases demand. People are resistant to selling it because they use it. This signifies that demand exceeds supply, resulting in a value gain.
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