Cryptocurrencies are decentralized which means they are not governed by the government which in return makes them volatile and risky assets. So as they do not have central authority support, they obtain their value from the following factors:
- Supply and demand
- Cost of manufacture
- Accessibility on exchanges
- Competition
- Governance
- Regulations
Cryptocurrency supply and demand
The price of anything is constructed by its supply and demand. According to the law of demand, prices go up when demand increases and vice versa. The same principle relates to cryptocurrencies. Cryptocurrency`s supply is always known. Bitcoin, for instance, has a static maximum supply. While other currency like Ether does not have a limit on supply. Some virtual currencies have processes that “consume” on hand tokens to avoid the flowing supply from expanding too enormous and reducing inflation. In the consumption of a token, tokens are sent to an unrecoverable address on the blockchain.
Each cryptocurrency has a different monetary policy. The supply of Bitcoin increased with every single new block extracted on the blockchain by a predetermined amount. Ethereum proposes a fixed incentive per block mined, but it also gives out for incorporating “uncle blocks” in the latest block, which aids facilitate the efficacy of the blockchain. Consequently, the supply rise is not as rigid. Other cryptocurrency supplies are entirely controlled by the group in charge of a project, which can choose to issue more of a token to the community or burn tokens to manage the money supply.
In cases when a project gains awareness or utility increases, demand can increase. Cryptocurrency`s broader adoption as an investment also boosts demand while makes the circulation of supply effectively limited.
Similarly, as more decentralized finance (DeFi) projects launch on the Ethereum blockchain, the demand for Ether increases. Regardless of which virtual currency one is transacting with, Ether is expected to execute transactions on the blockchain. Or, in a scenario where DeFi project takes off itself, its specific token will turn out to be more valuable, thereby growing demand.
Cost of production
new cryptocurrency vouchers are created through a procedure called mining which involves utilizing a computer to authenticate the next block on the blockchain. The decentralized system of miners permits cryptocurrency to act as it does. In exchange, the procedure produces a remuneration in the structure of cryptocurrency coins, in supplement to any costs paid by the swapping parties to the miners.
As mining outlays increase, it requires a boosted value of the cryptocurrency. Miners won’t min if they do not reach break-even. And, since miners are vital for making the blockchain function, if there’s call for employing the blockchain, the price will have to rise.
Cryptocurrency exchanges
Majority of cryptocurrencies such as Bitcoin and Ether trade on several exchanges. But some minor tokens may only be offered on chosen exchanges, hence, limiting accessibility for some investors. Some wallet suppliers will accumulate prices for trading any set of cryptocurrencies throughout numerous exchanges, but they’ll charge a fee for performing so, raising the amount of investing. Additionally, if a cryptocurrency is lightly traded on a modest exchange, the increase the exchange gets may be overly huge for some investors.
If a cryptocurrency turns out to be listed on more exchanges, it can improve the number of investors wanting and capable to purchase it, thus increasing need. And another thing constant, as demand increases, the value turns up.
Competition
There are thousands of several crypto coins in presence, with every day new vouchers and projects are launching. The entry barrier is relatively low for new rivals to enter in the market. However, designing a sustainable cryptocurrency also depends on constructing a setup of clients of that cryptocurrency.
A network can be quickly build using a useful application on the blockchain, notably if it enhances upon a constraint of a competing application. New competitors can take value from its rivals after securing momentum in the market, thus sending the fee of the incumbent low as the new player’s token finds its price to go higher.
Internal governance
Cryptocurrency networks hardly bore by a fixed set of rules. Designers adjust projects based on the society that utilizes them. Governance tokens provide their owners a right in the future of a project, incorporating how a token is dug or used. A consensus between stakeholders is needed to make any change to the governance of vouchers.
Investors like secure governance. As, stable governance where matters are comparatively challenging to change can be of benefit by offering more stable pricing.
On the contrary, software upgradation slow process to enhance practices can reduce the advantage of cryptocurrency values. If an update would reveal value for cryptocurrency holders but needs months to implement, it hurts the existing stakeholders.
Regulations and legal requirements
Confusion exist related to who should control the exchange of cryptocurrencies. In the Securities and Exchange Commission (SEC) opinion, cryptocurrencies are securities similar to stocks and bonds. On the other side of the coin, the Commodity Futures Trading Commission (CFTC) believes that they’re goods like beans or gold.
However, only determining verdict could offer greater transparency and enhance cryptocurrency prices while opening the door for more extensively traded crypto-associated financial commodities Because both authorities could not rule over virtual market.
Regulation is expected to make available easier approaches to trade cryptocurrency. Some commodities provide more access to cryptocurrency for stockholders, raising its value. Furthermore, regulation could empower investors to bet compared to the cost of cryptocurrencies with futures contracts or options. Thus, would generate better price finding and decrease the unpredictability of cryptocurrency valuing.
If a ruling body modifies the rules to disdain cryptocurrency investment or usage, it could direct the price of cryptocurrencies lower. Therefore, regulation plays a negative role to impact the demand of currency.