How Do Cryptocurrencies Gain Value & What Impacts Crypto Valuations

The crypto market is still a relatively new industry, and it can be difficult for novice investors to get their heads around effectively. Understanding what makes cryptocurrency gain value is tricky indeed. This digital currency exists in an extremely volatile market, with analysts trying to understand all of the pieces of the puzzle that make it both gain and lose value.

To understand these swings and what impacts crypto valuations, you must first have a basic understanding of the virtual currency itself.

What is Cryptocurrency?

In the same way traditional forms of currency act as a medium of exchange, cryptocurrency is simply a digital currency.The not-so-simple aspect of this virtual currency is the technology it is built on, which is known as the blockchain.

Blockchain is like a digital check-book ledger (on steroids). Every transaction is recorded in the blockchain, and those transactions cannot be erased. Blockchain technology also shows ownership of these digital “coins” or tokens. The cryptocurrency transactions are all internet-based, so they can be accessed anytime and anywhere.

Crypto is not bound by the same kinds of limits imposed in traditional banking structures (which may vary by country), and cryptocurrency trading is not subject to whether a market or exchange has opened for a regular business day.

Crypto is a 24-hour-a-day, never-on-vacation, moves-at-lightning-speed business with exciting prospects for its investors, but it is also a market filled with plenty of risks.

Because crypto is a relatively new technology, it attracts innovation but also scam artists. However, the technology itself has tremendous potential to change many aspects of our lives as we know it. There are many use cases for crypto beyond simply buying and selling it in hopes of making a profit. In fact, I’d venture out to say it is the least exciting part about it. Check out Top Crypto Use Cases Beyond the Hype

Crypto Types

It is nearly impossible to keep an accurate list of every type of crypto available today as the market is flooded with new ones. The list would be outdated as quickly as it was put together.

However, what we do know is that there are three main categories of crypto (Bitcoin, Altcoin, and tokens), and some examples of the best-known cryptocurrencies as of now are:

  • Cardano
  • Dogecoin
  • Ethereum
  • Polygon
  • Stellar

Bitcoin was the first crypto available (and is still the name people think of most often), and it will be capped after 21 million coins are mined. Altcoins, on the other hand, do not have a market cap. Tokens are separate from blockchain technology and exist on decentralized applications or dApps.

How Does Cryptocurrency Gain Value?

Like many things in the financial marketplace, crypto value is rooted in supply and demand. The supply piece relates to the coins being mined, whereas the demand piece is tied to owners and selling (as well as many external influencing factors).

The crypto market fluctuates, sometimes wildly, and the demand will likely increase as more businesses begin to accept cryptocurrency as a valid form of payment for goods and services, which means it will continue to gain value.

How much fluctuation exactly? Just look at the Bitcoin price graph over the last five years.

Bitcoin Price Graph

Value of crypto relative to the dollar

We must keep in mind that currency in a vacuum is useless. We keep comparing Bitcoin to a dollar because at the time of writing this dollar is more valuable when it comes to exchanging it for an actual product or service. Markets rejoice when Bitcoin goes up because it is a relatively liquid asset that can be turned into whatever currency you use. Real world currency with that much volatility would cause mayhem. So why do crypto currencies fluctuate so much, what is actually behind their ever-changing valuations?

Factors Affecting Crypto Valuation

Some factors appear consistently in crypto value, even in this relatively new market. Here, I will outline some of the common factors playing into the value of crypto.

  1. Competition. The crypto market is now overflowing with options. Many people think of “Bitcoin” when they think of cryptocurrency, but now there are myriad choices for these digital tokens. This kind of competition influences and affects value.
  2. Availability on Crypto Exchanges. The value of the currency may also be attached to how many exchanges have the coins. The more places it is available, the more people purchase that token and then use it in the market.
  3. Node Count. This could also be called “wallet count,” as it illustrates how many active wallets there are within the same network. A high count indicates strength in general, telling you a high number of people are using the currency, which can increase its value.
  4. Production Costs. Just as production costs for, say, a cereal company could ultimately affect the product’s pricing and value, the production cost of digital currencies also impacts value. Miners utilize certain types of hardware to create new tokens, and if the mining costs increase, the value of the crypto is likely to increase as well.
  5. The “Hype.” This is the best word to describe something impacting value in ways that cannot necessarily be measured – the hype from pop culture or social media or well-known personalities making a statement about a particular currency. This kind of publicity can affect crypto value for better or for worse.
  6. Governmental Regulations. The challenge with government regulations is that they can decrease the value of crypto. Some governments have banned certain coins or found ways to impose taxes on users cashing out crypto. This hurts the currency’s value.

How Users Can Increase the Value of Crypto

There are a few common methods for how crypto users and cryptocurrency investors increase their value.

Mining

Mining is a critical piece of the demand issue. It directly impacts the supply of crypto, meaning it also affects demand. So user mining can raise the value of a particular coin.

Buying Low and Selling High

Buying up crypto with a plan to hold it will ultimately increase the demand and get other buyers interested, which, in turn, can increase the crypto value.

Spreading the Word

In an age where word spreads like wildfire thanks to Twitter and other social media accounts, users can simply make a buzz online to be part of generating media coverage about particular crypto.

As the cryptocurrency market grows and attracts more users, new factors will influence value. What we do know is that crypto shows no signs of slowing down. Values may swing, but the market will only get bigger.

Happy Cryptoing!

Andy

Andy is the author behind most posts AlternaInvest.com, a web site analyzing and simplifying alternative and traditional investment vehicles.

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