What determines the value of a cryptocurrency?
Cryptocurrencies are not printed like fiat currencies but are discovered or mined using a powerful network of computers worldwide. Cryptocurrency value is volatile compared to that of regular currencies. The term value should not be confused with price. While value is in regard to its benefits and usefulness (as a medium of exchange and as a store of value), price is the monetary cost of a cryptocurrency. Now that cryptocurrencies are not regulated by any central bank or government, what determines their value? What influences cryptocurrency exchange rates?
Supply and demand
All currencies and commodities, including the digital currencies in the market, have an exchange value agreed upon by the seller and buyer. Supply and demand are major factors that influence the price of anything that can be traded. The value of any cryptocurrency is driven by the speculative interest of the traders and the powers of supply and demand in the community. The amount of a particular coin available to be mined versus the demand for the said coin will affect the value of the said coin. For example, if more people are willing to buy bitcoin, its value will go up. Likewise, if more people want to sell, its value will decline. The increase of popularity of many cryptocurrencies has been driving their value up, given that most of their supply is limited.
News and Rumours
If a coin encounters scandals, such as hacking or it is declared as scam, its demand will decline and hence the value will go down very fast. Events concerning one coin may spread to more than one cryptocurrency. For instance, event concerning bitcoin have severally affected the whole cryptocurrency market. When large markets such as China, Japan, USA and EU announce any move to regulate cryptocurrencies, either favourable or unfavourable for the growth of the digital currencies, the price may rise or fall respectively.
If the masses adopt the usage of cryptocurrencies, then their value will shoot up. One way of adopting the digital currencies is the increase of their applicability in real life situations. More places can accept them as a means of payment hence increase their demand, which in turn will affect their prices upwards. There is an assumption that this will be the situation in the near future.
The value of a cryptocurrency may be affected through a miners’ conference or a meeting to impose some changes to the protocol of a particular coin. If an agreement is not arrived at on a matter concerning a digital currency, the price may fall drastically.
Inflation of fiat currencies
When the value of a regular currency drops, then the value of cryptocurrencies will increase with respect to that currency. This is because one can buy more digital coins using that currency.
The cost involved in producing a particular coin, that is mining, is also a major factor that influences its value. This includes both direct costs and opportunity costs. For instance, the cost of resources used in mining one bitcoin is higher compared to other digital currencies. Maybe this is one of the reasons why its value is much higher than others. The costs involved in mining include manufacturing costs for the hardware, costs of the cooling systems and energy costs. As of January 2018, the average cost of mining one bitcoin was in the range usd5000.
Value is the importance that we attach on anything. We have already seen many alt coins loose value and practically die off because investors do not see any real value in their adoption. A cryptocurrency derives its value both from its use as a medium of exchange and as a store of value and if cryptocurrency does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won’t be appealing as a store of value.