How does cryptocurrency gain value?

Cryptocurrencies are the latest “big thing” in the digital world, and they have now been recognized as part of the monetary system. In fact, enthusiasts described it as a “money revolution”.

Of course, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for a central authority, most of which are created using special computational methods called “mining”.

The adoption of currencies such as the US dollar, the British pound and the euro as legal tender is due to the fact that they were issued by the central bank; digital currencies, however, such as cryptocurrencies, are not dependent on public confidence and trust in the issuer. Thus, several factors determine its value.

Factors determining the value of cryptocurrencies

Principles of a free market economy (mainly supply and demand)

Demand and supply are the main factors that determine the value of something valuable, including cryptocurrency. This is because if more people want to buy a cryptocurrency and others want to sell, the value of that particular cryptocurrency will rise, and vice versa.

Mass adoption

Mass adoption of any cryptocurrency can raise its price to the moon. This is due to the fact that the supply of many cryptocurrencies is limited by a certain limit, and, according to economic principles, an increase in demand without a corresponding increase in supply will lead to higher prices for this particular product.

Many cryptocurrencies have invested more resources to ensure their mass adoption, with some focusing on applying their cryptocurrencies to pressing personal issues as well as to important day-to-day affairs, with the intention of making them indispensable in daily life.

Fiat inflation

When the fiat currency, like the US dollar or GBP, becomes overvalued, its value rises and purchasing power falls. This will then lead to an increase in cryptocurrency (let’s take bitcoin as an example) relative to this fiat. As a result, you will be able to purchase more of this fiat with each bitcoin. In fact, this situation has become one of the main reasons for the rise in Bitcoin prices.

History of fraud and cyberattacks

Fraud and hacking are also major factors affecting the value of cryptocurrencies as they are known to cause wild fluctuations in valuations. In some cases, a team that supports cryptocurrency may be fraudsters; they will raise the price of cryptocurrency to attract unsuspecting people, and if their hard-earned money is invested, the price is reduced by fraudsters who then disappear without a trace.

So you need to be careful with cryptocurrency scams before investing your money.

Some other factors that affect the value of a cryptocurrency include:

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

  • Strength of the community that supports cryptocurrency (includes funding, innovation and loyalty of its members)

  • Low associated cryptocurrency risks as perceived by investors and users

  • The mood of the news

  • Market liquidity and cryptocurrency volatility

  • Country rules (includes banning cryptocurrencies and ICOs in China and accepting them as legal tender in Japan)