The crypto market is highly volatile – it can soar to record highs, and drop significantly causing huge losses. However, in general, the market continues to gain value, with new cryptos and coins cropping up every now and then. But since there’s no government body that regulates a cryptocurrency, what gives it its value?
Today, we will take you through the major laws that govern the crypto market and determine the value of a particular cryptocurrency.
The Crypto’s Supply and demand
Supply and demand play the biggest role in the valuation of a cryptocurrency, just like with any other asset. The number of coins in circulation and their maximum supply directly influence valuation, with limited supply driving up prices and vice versa.
Different cryptocurrencies employ different techniques to regulate this aspect. For example, Bitcoin has built-in scarcity through a maximum supply cap. This cap boosts scarcity and increases the price of Bitcoin and its value over time, in combination with other factors. It’s important to note that the supply and demand of a cryptocurrency is also volatile as it can be affected by factors such as social buzz and media attention.
Utility
The utility of a cryptocurrency is key in determining its adoption and value as it influences its attractiveness to users, investors, and businesses. Cryptocurrencies with higher utility are generally more likely to gain traction, maintain their relevance, and appreciate over time. Some aspects of utility in cryptocurrencies include payment systems, smart contracts, privacy and security, and tokenization.
Cost of production
The cost of production is a huge contributor to cryptocurrency valuation, especially when it comes to cryptocurrencies that use Proof of Work (PoW), such as Bitcoin. In such cryptocurrencies, miners are required to solve complex mathematical problems to validate transactions and add them to the blockchain. This process requires the use of specialized hardware and software, which means high upfront and maintenance costs. It also burns through a lot of electricity.
Note that an increase in the number of miners also increases the complexity of the mathematical problems required to verify a block, which again results in increased production costs and, consequently, coin prices.
Market sentiment and perception
Market sentiment is investors’ general prevailing attitude and feelings towards a specific cryptocurrency. On the other hand, perception is how market participants view or interpret the news and developments of a cryptocurrency. These two significantly affect the value and price movement of cryptocurrencies, even when it comes to well-established assets like Bitcoin and emerging altcoins. Together, they often drive the demand, trading volume, and price fluctuations, contributing to the inherently volatile nature of the crypto market.
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Internal Governance
The internal governance of a cryptocurrency is responsible for making decisions that guide the development, management, and operation of that particular cryptocurrency. These decisions can impact the long-term success and stability of a coin, impacting value. For example, Ethereum has transitioned from PoW to PoS, a decision that significantly increased the scalability of the coin, enhanced energy efficiency, and increased security. If a decision of such magnitude is poorly executed, it can often lead to huge instability of the crypto.
Competition
Competition plays a crucial role in determining the value of cryptocurrency as the market is very competitive. When a new cryptocurrency enters the market, it poses a challenge to existing cryptocurrencies, especially those that operate under similar structures. The tough competition in the market means a cryptocurrency needs to have unique features that set it apart from competitors. Having a strong edge over the competition often leads to increased adoption, while strong competition from other cryptocurrencies can decrease value.
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