How Does Cryptocurrency Value Increase?
Have you wondered how does cryptocurrency value increase? How does a cryptocurrency gain value, and what is affecting them to go up and down? Since cryptocurrencies are notoriously volatile, it is not surprising why people wonder what determines their daily value.
People who’ve just stepped into the crypto universe and ask themselves how cryptocurrency value increases should be aware of their immense volatility and price swings. There is news regarding recent crypto highs and lows popping up quite often, so people must check the prices of their preferred cryptocurrencies every day.
However, despite their unpredictability, cryptocurrencies are still considered a great investment opportunity if you know what forms their value and the other fundamentals.
How does a cryptocurrency’s value increase is a matter of many exciting factors that we’ll discuss once you get a clear picture of what crypto is and how cryptocurrencies gain value. Let-s start with the core basics, shall we?
What are cryptocurrencies?
Cryptocurrencies represent a digital currency created to work as a medium of exchange on Blockchain technology without any central authority to uphold or maintain it. To conduct a financial transaction, control the creation of new units, and verify all transfers of assets, Blockchain technology uses cryptography.
Best visualized as virtual tokens, represented as ledger entries to an internal system, cryptos can be programmed to record every financial transaction and virtually any other digital assets of value. Users are able to send cryptos between two parties, without any need for a third party, using public keys and private keys.
They certainly are a global phenomenon that more and more crypto individuals use in their daily lives. One of the main reasons for such great popularity is that they are advantageous to users because there are no processing fees. It usurps all the standardized norms held by numerous banks charging much bigger tariffs once sending and receiving money, in most cases.
The monetary system is the most lucrative crypto feature.
The most lucrative feature of cryptocurrency is its monetary system that’s not controlled by any central authority. There are no government regulations or control, so users find it beneficial because it’s much better than traditional monetary regulations.
Generally, they’ve been praised for their divisibility, portability, transparency, inflation resistance, and, perhaps most crucially, their impact on the law and finance sectors that could be detrimental.
How does a cryptocurrency gain value exactly?
The fluctuation is based on the market’s perception of its value at any given time. In some supply/demand factors, these fluctuations could happen for numerous factors. Demand is expected to increase based on how valuable and beneficial it is to own the coins. Also, there’s an increased crypto demand as a store value investment.
Users can increase the crypto value significantly.
It’s no secret that users can also influence a cryptocurrency value. Here are some proven methods for doing so:
- Mining – It’s the act of mining crypto coins that can be profitable. Mining has a considerable impact on the supply of cryptocurrencies.
- Buy low, sell high – Users are able to increase the value of crypto by purchasing and holding coins. What increases the demand and crypto value here is the increased buying.
- Media coverage – The more extensive the media coverage of particular crypto is, the more expensive it will cost. Thus, users could impact this through their social media accounts. Keep in mind that a single tweet of a VIP could increase a particular crypto value to enormous heights.
- Increasing utility – The utility of a crypto increase as more institutions invest in it and accept it as a form of legal payment. Every user can contribute to this process, which will have a massive impact on increasing crypto’s value over a longer time.
The value of cryptocurrency explained in detail
Any central authority like fiat currencies do not back cryptocurrencies are or numerous other mediums of exchange that governments sanction.
Government backing is able to improve faith in the value of a currency among consumers. Thus it provides a colossal collector and spender of the currency. However, if we take into account the decentralized nature of cryptocurrencies, it’s apparent that they derive their value from numerous other sources such as:
- Supply and demand
- Regulations
- Competition
- Governance
- Cost of production
- Availability on exchanges
All of these factors above have a significant impact on cryptocurrency value. We will explain each of these facts to understand how cryptocurrency value increases or decreases.
Supply and demand
The most crucial factor that influences the value of a cryptocurrency is the law of supply-demand. It’s almost the same with anything else in life – if people want something in huge quantities, it will be more valuable, and vice versa.
In other words, if demand for something increases faster than supply, the result will be the price going up. Cryptocurrency gains value once demand rises higher than the supply in the crypto world. The supply mechanism of a cryptocurrency is widely known. Every crypto is responsible for publishing its token minting and burning plans.
Some of these cryptocurrencies, such as the well-known Bitcoin, have a limited supply. It’s no secret that there will be 21 million Bitcoins maximum. Some other cryptocurrency tokens, such as Ether, have no market capitalization on supply. The current price of Bitcoin is 43,530.30USD as of April 2022.
Crypto mechanisms that burn existing tokens
Some cryptos include mechanisms that “burn” existing tokens to prevent the circulating supply from slowing inflation or growing too large. Burning a token refers to sending these tokens to an unrecoverable address on the Blockchain. Demand is able to increase as a project gains awareness or as utility increases.
Bitcoin and Ethereum supply and demand examples
When institutional investors started purchasing and holding Bitcoin in 2021, the price of one Bitcoin increased significantly, as demand exceeded the tempo at which new coins were created. It decreased the total Bitcoin’s available supply effectively.
Same with more decentralized finance projects launched on the Ethereum blockchain, the demand for Ether increased considerably. Regardless of what cryptocurrency individuals use for transactions, Ether is required to perform a transaction on Blockchain technology.
If a DeFi (decentralized finance) project withdraws itself, its token will become more effective, thus increasing demand for it.
Regulations and legal requirements
Regarding regulations and legal requirements, regulations should allow more straightforward ways to trade cryptocurrency. Futures contracts or ETFs provide more access to cryptocurrencies for investors. That is increasing their value in the first place, which is extremely important for those wondering how cryptocurrency value increases exactly.
However, what could produce better price discovery and reduce the volatility of crypto pricing? The simple answer is that with options of futures contracts, regulation enables investors to either:
- Take short positions
- Bet against the price
Competition
Because there are currently more than 8,000 cryptocurrencies in existence, with new tokens and projects launching each day, it’s evident that there’s a lot of competition between them in the crypto markets. The barrier to entry is somewhat low for new competitors.
However, creating applicable cryptos relies on building a quality network of users of that particular crypto.
Governance
In general, cryptocurrency networks rarely rely on static or standard rules. When developers adapt projects, they’re doing it based on the community using them. Some tokens called the “governance tokens,” give their holders permission to impact the future of a project, including how that token will be used or mined.
For impacting governance tokens and changing them, there has to be a consensus among stakeholders. Typically, all investors fancy stable governance.
Cost of production
You’re probably aware that new cryptocurrency tokens are produced by mining. It refers to a process involving using a computer to verify the next block on blockchain technology. What allows cryptocurrency to work smoothly, as it does, it’s the decentralized network of miners. In exchange for that, the protocol creates crypto tokens as rewards.
As mining process costs increase, it requires an increased value of the cryptocurrency. If the value of the mining currency is not high enough to offset their costs, miners won’t mine it. Keep in mind that miners are essential for making Blockchain technology function. Therefore, as long as there’s demand for Blockchain, the price must go up.
Availability for exchanges
Bitcoin and Ethereum, considered mainstream cryptocurrencies, are traded on multiple exchanges platforms. However, some smaller tokens are only available on certain exchanges, limiting access for some investors.
Some wallet providers will aggregate quotes for swapping any collection of cryptos across multiple exchanges. Still, they’ll charge a fee for that, which also increases the cost of cryptocurrency investing.
Remember, if particular crypto becomes listed on various exchanges, it could attract more investors and demand. As demand increases, the price goes up!
Summary
How does a cryptocurrency value increase is one of these questions that have bothered many future investors and crypto enthusiasts? We’ve concluded that some of the most significant factors that affect crypto value growth are the law of supply and demand before anything.
If a particular cryptocurrency is valuable, it’s logical that people would like to own more of it, which will drive up the demand significantly. Since people are keen on using it, it’s apparent that they’re not willing to sell it. The result is more demand than supply, and the value increases!