Cryptocurrencies are the latest ‘big thing’ in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts called it the ‘money revolution’.
Clearly, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central body, most of which are created using special computer techniques called ‘mining’.
The acceptance of currencies, such as the US dollar, the British pound and the euro, as legal tender is because they were issued by the central bank; Digital currencies, however, like cryptocurrencies, do not rely on public confidence and trust 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 are the main determinants of the value of anything of value, 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 rise, and vice versa.
Mass adoption of any cryptocurrency can drop its price per month. This is due to many cryptocurrencies whose supply 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 that particular commodity.
More cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on the applicability of their cryptocurrencies to burning personal issues as well as key everyday cases, with the intention of making them indispensable in everyday life.
If a fiat currency, such as the USD or GBP, inflates, its price rises and purchasing power declines. This will then cause cryptocurrencies to rise (let’s use Bitcoin as an example) relative to that fiat. The result is that with every bitcoin you will be able to get more of that fiat. In fact, this situation is one of the main reasons for the rise in Bitcoin prices.
History of fraud and cyber attacks
Fraud and hacks are also key factors affecting the value of cryptocurrencies, as they are known to cause wild changes in valuations. In some cases, a team that supports cryptocurrency can be fraudsters; they will pump up the price of cryptocurrency to attract unsuspecting individuals, and when their hard-earned money is invested, fraudsters will shorten them and then disappear without a trace.
Therefore, before investing money, it is necessary to be careful when cheating with cryptocurrencies.
Some other factors to consider that affect the value of cryptocurrencies include:
The way cryptocurrency is stored, as well as its usefulness, security, ease of acquisition and cross-border acceptability
The strength of a community that supports cryptocurrency (this includes funding, innovation, and member loyalty)
Low related cryptocurrency risks perceived by investors and users
Market liquidity and cryptocurrency volatility
Government regulations (this includes banning cryptocurrencies and ICOs in China and accepting them as legal tender in Japan)