Cryptocurrencies are the latest ‘big thing’ in the digital world and are now recognized as part of the monetary system. In fact, enthusiasts have labeled it a ‘money revolution’.
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Clearly, cryptocurrencies are decentralized digital assets that can be exchanged between users without the need for central authority, most of which are created by special computing 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, such as cryptocurrencies, do not depend on public confidence and trust in the issuer. As such, several factors determine its value.
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Factors determining 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 valuable, 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 bring down its price per month. This is because the supply of many cryptocurrencies 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, and some have focused on the applicability of their cryptocurrencies to urgent 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, becomes inflated, its price rises and its purchasing power declines. This will then cause an increase in the cryptocurrency (we use Bitcoin as an example) compared to that fiat. The result is that with every bitcoin you will be able to acquire more of that fiat. In fact, this situation was one of the main reasons for the increase in the price of Bitcoin.
Fraud and the history of cyber attacks
Fraud and hacks are also key factors affecting the value of cryptocurrencies, as they are known to cause wild changes in estimates. In some cases, a team that supports cryptocurrency may be fraudsters; they will pump up the price of cryptocurrency to attract unsuspecting individuals, and when their hard-earned money is invested, fraudsters cut the price, which then disappear without a trace.
It is therefore imperative that you watch out for cryptocurrency scams before investing your money.
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 loyalty of its members)
- Low related cryptocurrency risks as perceived by investors and users
- Sense of news
- Cryptocurrency market liquidity and volatility
- Country regulations (this includes banning cryptocurrency and ICO in China and accepting it as legal tender in Japan)