Factors That Determine The Value Of Cryptocurrencies

Cryptocurrencies are the new ‘big thing’ in the online realm and have now been accepted as part of the monetary system. Proponents of cryptocurrencies have even branded it as ‘the revolution of money.’

In simple terms, cryptocurrencies are decentralized digital or virtual currencies that can be traded between users without a central authority. The majority of cryptocurrencies are created via special computational techniques referred to as ‘mining.’

As of Feb 26, 2021, the value of 1 Bitcoin is over $45,000! This begs the question, "How does cryptocurrency gain value?"

The recognition of currencies such as the US Dollar (USD) and the Great British Pound (GBP) as legal tenders is only because they have been issued by a central (reserve) bank. Cryptocurrencies such as Bitcoin and Ethereum, on the other hand, do not rely on the public’s confidence and trust in the issuer. As such, there are a number of factors that can determine its value.

If you are planning to enter the world of Crypto OTC trading, you should be familiar with the following factors that determine the value of cryptocurrencies:

1. Principles of the free market economy (mainly Supply and Demand)

The economic model of "supply and demand" is the central determinant of the value of anything on the market. Cryptocurrencies are no exception to this model. If more people are willing to purchase a cryptocurrency and others are willing to sell it (or vice versa), the price of that particular cryptocurrency will rise.

2. Mass adoption

The widespread adoption of any cryptocurrency can shoot its price to unprecedented heights. This is attributable to the fact that many cryptocurrencies have their circulating supply capped. As per economic principles, a rise in demand without a corresponding rise in supply will translate to an increase in that particular commodity’s value.

3. Fiat inflation

If a fiat currency, such as USD or GBP, becomes inflated, its price increases, and its purchasing power decreases. This causes the value of cryptocurrencies to increase with respect to that fiat currency. As a result, you can acquire more of that fiat currency with each cryptocurrency. This situation has been one of the key drivers for the unfathomable rise in the value of cryptocurrency.

In addition to the principles of the free market economy, mass adoption, and fiat inflation, there are other factors that can influence the value of cryptocurrencies:

• Utility, security, ease of acquisition, and cross-border acceptability of the cryptocurrency
• The strength of the community backing the cryptocurrency
• Associated risks of the cryptocurrency as perceived by investors and users
• News sentiment
• Market liquidity and volatility of the cryptocurrency
• Country regulations

Well, there you have it: some of the primary factors that can determine the value of cryptocurrencies. Armed with this knowledge, you should be able to enter a crypto trading business with minimal fuss.

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