What affects the price of cryptocurrencies?
Like any other traditional currency, a cryptocurrency increases or decreases its value depending on the scale of the involvement of the cryptocurrency community (for example, demand from users, scarcity of a coin, its usefulness). Moreover, given that the majority of digital coins on the market are issued by private blockchain corporations, several factors in the value of cryptocurrencies also depend on the image and performance of these companies (for example, the viability of the project and its perceived value).
For a cryptocurrency to be valuable in the market, it must have its own uses. Any cryptocurrency is, first of all, a part of a decentralized digital ledger – blockchain technology. Therefore, in order to make a cryptocurrency valuable, it needs to be usable within a specific blockchain ecosystem.
For example, it is impossible to start using the Ethereum platform without ETH, a digital coin specially designed to carry out transactions within the Ethereum platform. Accordingly, the cost of Ethereum depends on the demand for the platform’s services.
A cryptocurrency can also provide for the payment of dividends, the right to vote (the right to decide the future development of the blockchain / project), be a way to exchange other cryptocurrencies within the blockchain ecosystem (most often on cryptocurrency exchanges), etc.
Deficit of cryptocurrency in the market
The number of circulating coins available on the market is an important factor in the formation of the value of a cryptocurrency. This number directly affects the law of supply and demand, as well as the value of cryptocurrencies.
The lack of digital coins in the market is the true goal of cryptocurrencies. In an ideal scenario, the demand should exceed the supply of the coins, which automatically makes them more valuable. For example, the maximum supply of BTC will never exceed 21 million coins, SNTVT – 4.2 billion, TON Crystal – 10 billion. Bitcoin, being the most popular cryptocurrency asset in the market with a fairly tight maximum supply, is in great demand among investors, which increases its value. Some cryptocurrencies use a “burning mechanism” that destroys some of the coins. The “combustion mechanism” heats up interest in cryptocurrency and gradually increases its value.
Influence of the media
The media has a great influence on everything that surrounds us. Especially when it comes to trends, it is the media that dictates them.
For example, when Bitcoin was the only digital coin available, no one doubted its value. However, as soon as other cryptocurrencies appeared, investors became interested in learning more about them.
For example, they heard about the Sentivate project or read an article about Free TON and realized that they have more investment options at their disposal, which may even be even better than Bitcoin. And if the media decides to actively promote one of the cryptocurrencies, then a huge number of investors will automatically pay attention to it, which can also positively affect the value.
Consequently, this affects the price of both Bitcoin and new cryptocurrencies – the price of the former can decrease in proportion to how the price of new cryptocurrencies increases.
The innovativeness of cryptocurrency
Whenever a new cryptocurrency is launched, it usually brings some changes to the cryptocurrency world. However, these changes can be very useful or minor.
Accordingly, if the cryptocurrency society can benefit from the innovations offered by the new digital coin, investors will do their best to popularize it, and thus raise its price.
Also, things can happen and vice versa. If the cryptocurrency does not bring any changes to the cryptocurrency world, this will be a good enough reason to reduce its value.
Popularization of cryptocurrency in the world
At the moment, a large number of online businesses accept some cryptocurrencies as a means of payment. They can be used to buy things online or pay for various services. Moreover, it is possible to exchange cryptocurrency for fiat currency.
Those cryptocurrencies that find use in the real world will be valued more than those that have not. If the popularization of cryptocurrencies continues, they will be very much appreciated as they will be used in real life. However, if a decision is suddenly made to completely abandon cryptocurrencies, they will cease to be of value, which will lead to a drop in their prices.
The value / benefit of the project and cryptocurrency
The price of any cryptocurrency depends on its viability and development. Projects and cryptocurrencies that constantly evolve following a roadmap, that enter into lucrative partnerships or launch user-friendly software, increase their value in the market. If no one is working on a project, it does not develop – this indicates that investors will turn their backs on it, and this will entail a drop in the value of the project’s cryptocurrency. It makes no sense for investors to invest in projects that will not achieve any goals, because in fact, such projects do not benefit either the cryptocurrency society or the world.
The use of cryptocurrency, the shortage of digital coins in the cryptocurrency market, the value / benefit of the project and cryptocurrency are indicators that largely contribute to positive sentiment around the project and affect the value of its cryptocurrency.
Why is the Market Cap value more important than the cryptocurrency price value?
Market cap is a direct indicator of the value of a digital coin in the market. The market capitalization index is determined by multiplying the total circulating supply of a coin by its price.
- Market Cap = Total Working Stock * Price of each coin
An example of calculating market capitalization.
- The number of BTC coins on the cryptocurrency market is 18 630 187. Each coin is worth $ 49,000, so the market capitalization of BTC is 18 630 187 * 49,000 = $ 912 879 163 000.
- The number of TON Crystal coins on the cryptocurrency market is 500,000,000 coins. Each coin is worth $ 0.5667, so the market cap of TON Crystal is 5 021 572 921*0,5667=$2 791 994 544,076
- The number of SNTVT coins in the cryptocurrency market is 3 508 583 663 coins. Each coin is worth $ 0.01, so SNTVT’s market cap is 3 508 583 663 * 0.01 = $ 35 085 836.
Despite the fact that the price of BTC cryptocurrency is higher than the price of TON Crystal, the total value of the TON Crystal cryptocurrency (Market Cap) is higher than the total value of BTC. Despite the fact that the number of SNTVT coins in the cryptocurrency market is larger than the number of BTC, the price per coin is too low to provide a higher market capitalization than BTC. Thus, the market capitalization of a cryptocurrency is the best way to find out the true value of a cryptocurrency.
What determines the price of 1 BTC?
BTC came a long way before it hit $ 49,000. It owes a lot to popular cryptocurrency exchanges. The more popular a crypto exchange is, the more investors and traders it attracts. Accordingly, it can benefit from its market power. There are many factors that influence the bitcoin price, the main ones are below.
BTC supply and demand
Two things affect the supply of Bitcoin. The first thing is the bitcoin protocol, which allows new bitcoins to be created exclusively at a fixed rate. It is constantly decreasing, so the rate of new coins emergence has slowed down from 7.0% (2015) to 3.5% (2020). The slowdown in the growth of the number of coins in circulation is associated with a halving of the amount of mining reward. This can be seen as artificial inflation for the cryptocurrency ecosystem.
The second thing that affects the supply of bitcoin in the market is the maximum number of coins. The maximum number of BTC coins is 21 million. After reaching 21 million coins, it will no longer be possible to mine this cryptocurrency. For example, the number of BTC coins reached 18 517 925 in April 2020, which is 87.22% of the maximum number of coins. As soon as 21 million bitcoins start circulating in the cryptocurrency market, the value of coins will depend on practicality (whether it is easy to use in transactions), legality and relevance. The artificial mechanism of inflation, which consists in halving the amount of miners’ remuneration, will no longer affect the price of the cryptocurrency. However, at the current rate of decline in rewards, the last bitcoin will be mined sometime in 2130.
Bitcoin may be the most famous cryptocurrency, but there are hundreds of other tokens vying for investor attention. While Bitcoin dominates as the most popular cryptocurrency in the market, altcoins such as Ethereum (ETH), Ripple (XRP), Free TON (TON Crystal), Bitcoin Cash (BCH), Litecoin (LTC), Sentivate (SNTVT) and EOS ( EOS) are actively competing for a place in the top 10 cryptocurrencies. Due to the virtually absent barrier to entry into the world of cryptocurrencies, there are now a huge number of ICOs. At the moment, there are more than 6,500 different cryptocurrencies and their number is only increasing every year. However, the high popularity of Bitcoin among investors provides it with a significant advantage over its competitors.
Cost of mining BTC
Despite the fact that Bitcoins are virtual digital coins, their production requires real “materials”, in particular, electricity and video cards. Bitcoin mining is based on complex mathematical calculations, for which all miners compete – the first to do the correct mathematical calculation is rewarded with a block of new bitcoins. The uniqueness of bitcoin mining is that the algorithm only finds one block of bitcoins. On average, every ten minutes. The more miners join the competition for solving a math problem, the more difficult – and therefore more expensive – it is to solve this problem in order to maintain a ten-minute interval.
Research has shown that the market price of Bitcoin is closely related to the cost of producing coins.
Forks and management
Since Bitcoin is not run by a central government, it relies on developers and miners to process transactions and keep the blockchain secure. Decentralization is the foundation of democracy in blockchain development. However, when disagreements arise, digital coins are negatively affected. The software changes are driven by consensus, leading to frustration in the bitcoin community and the emergence of forks.
The scalability issue has always been very important for Bitcoin. The number of processed transactions per second depends on the block size. At the moment, Bitcoin software is only capable of processing about seven transactions per second. When the demand for cryptocurrency was low, everything was fine, but now many experts fear that the slow speed of transactions will force investors to pay attention to other digital coins.
The blockchain community was divided when it was necessary to increase the number of transactions (solve the scalability problem). Changes to cryptocurrencies are called “forks”. Soft forks are rule changes that do not lead to the creation of a new cryptocurrency, while software changes lead to new cryptocurrencies and are called “hard forks”. Notable examples of previous bitcoin forks are Bitcoin Cash (BCH) and Bitcoin Gold (BTG).
Сould Bitcoin replace the US dollar as a reserve currency?
Could Bitcoin replace the US dollar as the world’s reserve currency? Some experts and directors of large blockchain organizations say yes with confidence. BTC has every opportunity to oust the US dollar from its status as the world’s reserve currency. Nevertheless, in order to supplant the dollar, bitcoin needs to overcome several difficult stages of its existence.
Bitcoin as an exchange
The US dollar loses a small portion of its purchasing power every year due to inflation. However, this is happening so slowly that market participants do not notice the difference.
For something to function as traditional currency, something must be an effective medium of exchange. In other words, legal entities, companies and other organizations must be able to exchange something (or bitcoins) for goods and services. The US dollar has certainly established itself as an ideal medium of exchange because it is one of the most widely traded fiat currencies in the world. Bitcoin, which has been around since 2009, has yet to be as successful as the US dollar.
One of the main issues that is undermining Bitcoin’s use as the primary medium of exchange is its intense volatility. An example of this is December 2020, when the price of a digital currency almost doubled, increasing from $ 16,000 to almost $ 26,000. Moreover, the price continued to grow and already in February 2021 the cost of 1 BTC coin exceeded $ 49,000. Such price jumps great for investors, but at the same time they diminish the attractiveness of using BTC as a medium of exchange. The lack of volatility is one of the most important elements required for the effective functioning of bitcoin as a traditional currency.
Frequency of sharp price fluctuations is a key problem of any cryptocurrency, which plans to become a widely used method of payment for services and goods. Scalability, usability and throttling are other concerns.
In addition, some blockchains are not designed to handle a large number of transactions. This issue is called scalability. Only those cryptocurrencies whose blockchains are capable of processing hundreds of thousands of transactions per second can become widely used. Moreover, the regulation of cryptocurrencies also causes some difficulties, as many countries have separate sets of rules. If there were the same rules for regulating cryptocurrencies everywhere, their popularization would occur faster.
Another key requirement for cryptocurrency is that it must function as a store of value. In order for Bitcoin to meet this requirement, it must hold its value for a long time.
The digital currency BTC can be an ideal stock of value in those parts of the world that are suffering from significant geopolitical turmoil, as their native currency can experience significant value changes during geopolitical changes.
Currency unit of account
The third requirement that Bitcoin must fulfill in order to function as a standard currency is to function as a unit of account.
The BTC cryptocurrency functions as a store of value as it is used to quantify the value of other goods and services. The proof is that absolutely all altcoins can be bought with Bitcoin, not fiat currency.
Bitcoin is too volatile to be an efficient unit of account in the real world. However, this could change for the currencies of high volatility countries if they link their fiat currencies to Bitcoin rather than the US dollar.
Cryptocurrencies have become very popular over the past few years. When Bitcoin, the first cryptocurrency, hit the market and attracted huge public attention, it was a real discovery in the financial world. No one could have imagined that its price will reach $ 49,000. Over time, bitcoin became the main object of desires of investors around the world.
There were not very many cryptocurrencies at the time, which allowed BTC to remain one of the most popular. Over time, more cryptocurrencies have appeared, which has significantly affected the stability of Bitcoin. Ultimately, this also led to frequent fluctuations in the prices of all cryptocurrencies.
There are many factors that determine which cryptocurrencies will be worth over $ 45,000 and which will not surpass the $ 1 mark. The change in the value of cryptocurrencies is a whole complex of different factors that depend not only on investors and traders, but also on developers. It should be borne in mind that in addition to the factors listed above, there are many others that affect the price of cryptocurrencies. Therefore, it is sometimes difficult to determine why the price is going up or down, as well as how to predict how a particular factor will affect the price of a digital coin in the future.
Bitcoin has the potential to replace the US dollar as the world’s reserve currency, but this requires a solution to some of the challenges of volatility and scalability. Traditional currencies are a medium of exchange, a store of value, and a unit of account. Despite the fact that the US dollar has performed well on the international market, Bitcoin has huge hidden potential.