Why Is Crypto Valuable?

Cryptocurrency is a digital currency that uses cryptography to secure its transaction history, control the creation of additional units, and verify the transfer of assets.

It is decentralized, meaning it’s not tied to any government or central bank, and no one has control over it but its users. Because there are so many different types of cryptocurrencies out there, each with its unique properties, the value of all of them combined cannot be put on a single number.

Now, why is crypto valuable? Logically, several factors determine the price you can expect to pay for a particular coin. Each of them is important in determining the value and popularity of a crypto asset and should be considered when making an investment decision. Let’s analyze them one at a time.

Sections

Factors Affecting the Success of a Cryptocurrency?

Bitcoin’s popularity makes exchanging bitcoins for conventional currencies like the USD or EUR simpler than ever. The world’s first cryptocurrency can be traded on almost any platform that deals in virtual currency.

The amount of Bitcoin transactions keeps increasing, thus reinforcing the asset’s position as the pioneering, market-dominating, financially fruitful, and the first decentralized cryptocurrency.

When considering the success of a cryptocurrency, what factors beyond its popularity are most important? Let’s find out.

Decentralization

There are multiple factors that contribute to the value of cryptocurrencies, but perhaps the most important one is their decentralized nature.

Just imagine if every individual on the planet could access the data on your hard drive. You would be in a lot of trouble. But, since crypto is decentralized, no central authority can regulate how much money you have or take it away from you.

This is one of the factors that contribute to the high value and popularity of cryptocurrencies.

Production Costs

The process of mining cryptocurrency was first thought of as a way to protect the distributed ledger, also known as the blockchain, and the transactions written in code.

Cryptocurrency mining refers to generating new digital currency tokens through the use of specialized software and hardware operated by miners.

The primary function of crypto miners is to validate completed transactions by completing a difficult mathematical algorithm. They do this with extremely powerful computers that consume a lot of power, raising the cost of electricity significantly. Miners enable decentralization and token generation by digitally signing each block of transaction data on the blockchain to ensure its authenticity.

Encouraging miners to invest in more expensive and more efficient machinery is a surefire way to drive up production costs. As a result, the worth of the cryptocurrency rises in proportion to the mining difficulty as miners try to recover their investments.

Supply and Demand

In the cryptocurrency market, the value of coins and tokens is determined in part by the supply and demand for those cryptocurrencies. The total supply of a given cryptocurrency is equal to the sum of all mined coins plus the amount of all coins that have been exchanged.

In general, each cryptocurrency makes its own unique methodology for the minting and burning of tokens public for potential miners and investors. As an example, we know that Bitcoin is hard-capped at 21,000,000 BTC, according to the mining strategy proposed in Bitcoin’s whitepaper.

On the other hand, some crypto assets lack a supply limit. Take Ether (ETH), for instance. Although there is no hard limit on the total number of ETH that can ever be created, a percentage of the total number of ETH in circulation could be removed from circulation through a fee-burning mechanism. Therefore, it’s hard to set the maximum supply of this cryptocurrency.

There is also a correlation between the number of people who want to mine and use cryptocurrencies and the total quantity of cryptocurrencies that have actually been mined and utilized. More specifically, the cryptocurrency price is based on how many people on the market want to buy them and how many can be bought. This is the demand and supply factor.

Grand Scale Profits

The success of Bitcoin demonstrated that cryptocurrencies could be a highly lucrative digital asset for investors. Because of this, numerous programmers have attempted to duplicate Satoshi Nakamoto’s success with Bitcoin by developing their digital currencies.

From its inception, Bitcoin didn’t have any intrinsic value. Many individuals either didn’t know about it or didn’t care enough to find out more and see whether ‘the new kid on the crypto block’ could be of any value to them.

Some BTC investors also managed to become billionaires ‘overnight’ after making their initial investment, which served as an additional stimulus for new crypto traders to get into the trading of digital assets.

Besides, people who invest in cryptos are investing in the future of technology rather than just buying into an investment product like stocks or bonds; this gives rise to a heightened interest among investors because they see cryptocurrency as something that will continue growing over time rather than just being a speculative investment boom like many bubbles before it was thought to be.

Groundbreaking Technological Innovations

The decentralized nature of cryptocurrencies and their control mechanisms can be attributed to the underlying distributed ledger technology (DLT). This cutting-edge innovation, known as the blockchain, is used as a transparent ledger of all transactions in the crypto ecosystem.

As open-source software, blockchain allows any programmer to improve their project upon the existing solutions. Notably, the eventual goal of this technology is to allow two people to pay money to each other over a secure system without disclosing their identities to one another.

It is not necessary to involve a third party to verify this type of transaction as an intermediary. Originally designed to ensure the security and privacy of Bitcoin transactions, the system has fulfilled its intended purpose.

Blockchain Technology

While there is always some degree of risk involved with any crypto investment, being a victim of a scam isn’t one of them when it comes to blockchain technology. Transaction and user-specific data are both encrypted by blockchain technology, making for a secure online footprint. Bitcoin users’ ownership and identities are both protected by a digital signature that is generated when a user combines their public and private Bitcoin keys.

Namely, cryptography is used to safeguard the data stored on the blockchain. Each user on the network has a private key associated with their transactions and acts as a digital signature. If a record’s signature is tampered with, the record immediately becomes invalid, and the peer group is alerted to the problem. Since blockchains are distributed ledgers, they are immune to tampering from a single server and have no single point of failure.

Initial Coin Offering (ICO)

Token sales, often known as initial coin offerings (ICOs), are a popular form of crowdfunding for blockchain initiatives. A fintech project, for instance, can raise money for its project by selling tokens or coins for conventional currency or substantial crypto assets.

Token sales to individual investors are the most popular way ICO operators generate capital for their projects; these sales are analogous to an IPO. When an initial coin offering (ICO) is successful, the company behind the token often releases it on broader markets, including crypto exchanges.

The goal of a whitepaper published by a cryptocurrency startup is to educate potential investors about the company’s or project’s business model. After the project’s products and services have been formally unveiled, these official papers serve as technical descriptions of how the development team plans to implement the promised solutions.

Cryptocurrency Liquidity

Bitcoin’s growing importance in payment and investment depends on its easy conversion to and from other currencies through cryptocurrency exchanges. The increasing number of available exchanges makes it challenging for investors to settle on a single venue for their business. With the increased interest in cryptocurrency trading comes the difficulty of accurately estimating the size of these marketplaces.

In addition to the market cap, crypto traders and investors need to have a firm grasp of the coin’s liquidity. Simply said, liquidity stands for the ease with which an asset may be bought and sold without significantly impacting its value.

Undoubtedly, cash is the most liquid asset since it is both stable and easily convertible into other forms of money for immediate use in trade, loan repayments, and satisfying other pressing needs and demands. Therefore, cash is often used to stand in for an asset’s liquidity.

When discussing digital currencies, the term liquidity also refers to how easily one coin could be converted into fiat currency or another digital currency. All tradable assets need ample liquidity, and digital currency is no exception. In this regard, one of the most important factors that affect a coin’s liquidity is its trading volume.

Most Popular and Valuable Cryptocurrencies

Since Bitcoin first probed and ultimately dominated the market for virtual currencies, more than 21,000 new cryptocurrencies have been developed and made available for exchange. Some of these cryptocurrencies came close to Bitcoin’s prominence, while others had such a limited lifespan in the digital currency ecosystem that they are already defunct.

The following are some of the digital currencies that have the potential to generate the highest profit, according to CoinMarketCap:

Conclusion

Compared to government-backed fiat currencies, the flexibility offered by digital currencies and the public ledgers that log the transactions is substantial. However, because of the lack of security features, investing in digital currency can be a risky venture.

The exchange rates between fiat and cryptocurrency are turbulent, and we cannot expect them to stabilize over time because the cryptocurrency market operates on a different dynamic than the rest of the world’s financial system.

On the other side, the number of prospective innovations is practically limitless, and there are no limitations on what can be invented. Since the blockchain protocol is freely available, anyone with the technical know-how to implement it can create digital money.

Since many developers have different ideas about what an ideal crypto should be like and how it should operate, it’s easy to see a future with many other cryptocurrencies, each with its specific use case.