One of the first things every trader will run up against is crypto volatility. As you might already know, it’s not uncommon for the cryptocurrency market to experience extreme highs and lows.
Many people who have never invested before find it hard to understand how to make money with a decentralized currency because the crypto market is so volatile.
Many factors influence how cryptocurrencies gain value. Let’s break them down and examine them independently.
What Is Cryptocurrency?
By definition, cryptocurrencies are digital assets that protect both the privacy of their users’ financial transactions and their personal data.
The lack of support from a governing body is what gives digital currencies their decentralized label. As crypto transactions take place without a middleman, cryptocurrency users no longer have to place their faith in financial institutions when it comes to the safety of their money or confidential information.
The blockchain, which operates as a decentralized database, is where all Bitcoin transactions are recorded and carried out. Blockchain technology is the foundation for the most important forms of cryptocurrencies, including Bitcoin, altcoins, and tokens.
The main goal of cryptocurrencies is to solve the problems that come with traditional currencies by giving those who own cash more power and responsibility.
What Makes Bitcoin Different From Other Cryptocurrencies?
Bitcoin (BTC) was initially introduced to the market and remained the most valuable cryptocurrency to date. As a peer-to-peer system, all Bitcoin transactions are conducted directly between users via Bitcoin’s blockchain.
Bitcoin has the highest market value of all crypto assets and provides greater stability than other digital assets. Moreover, since Bitcoin has gained widespread popularity, exchanging it for conventional currencies like the US dollar or the Euro is simpler than ever.
You can buy Bitcoin on almost every online cryptocurrency trading platform.
Let’s see what Bitcoin has taught developers on how to create a valuable crypto asset.
How Does a Certain Coin Gain Popularity on the Crypto Market?
Bitcoin’s performance has proved that cryptocurrencies can become very successful digital assets.
As a result, a number of programmers have attempted to develop their own digital currency comparable to Bitcoin, based on innovative blockchain technology, with enough liquidity, decent market capitalization, ease of trading, and successful Initial Coin Offering (ICO).
The decentralized character of cryptocurrency governance mechanisms may be traced back to the Distributed Ledger Technology (DLT), which serves as the underlying protocol for all cryptocurrencies. Blockchain is a new kind of distributed ledger that can be employed to record the details of a financial transaction and then be shared with the public.
As blockchain code is freely available, any developer may use it to create secure and reliable applications or services based on a peer-to-peer payment system.
Confirmation from a third-party mediator is not strictly required in this transaction. The original intent of this technology was to provide a secure and private means of authorizing and recording Bitcoin transactions, and it has fulfilled that goal.
Ultimately, investors are drawn to more private and secure transactions, which raises the value of cryptos because more crypto fans are willing to invest in the market.
In finance, the phrase market capitalization refers to a metric that indicates how much money the market is now willing to put into a company. Market capitalization in the cryptocurrency industry is calculated by multiplying the present value of the coin by the actual number of circulating coins.
The total worth of a cryptocurrency, calculated using the maximum possible supply, represents the market capitalization value of that coin. Thus, the larger a cryptocurrency’s market cap, the larger its market share. Cryptocurrency dominance and popularity may be gauged by looking at their market capitalization.
The market capitalization (or cap) of a cryptocurrency (such as Bitcoin) is the sum of all the value of all the coins ever created in digital form. Multiply the token supply by the token cost to get the answer.
A project’s market cap is often cited as the most critical indicator of its importance. However, the logic behind this assertion is regularly challenged. The market capitalization of a cryptocurrency is a helpful indicator of its value, but it’s not the only one.
The size of a cryptocurrency’s market cap is a good proxy for how valuable the coin has been to investors over the long term. According to this logic, the longer a coin has been on the top, the higher the chances for it tol stay there.
The Difference Between Max, Total, and Circulating Supply of a Cryptocurrency
The total supply of a crypto asset is the sum of the coins already in circulation and the coins that have yet to be mined and hit the market.
The circulating supply refers to the number of coins issued on the market, even though not all of the coins that have ever been made are now in use – some lay dormant in crypto wallets or have been lost.
The maximum supply is the maximum number of a particular coin or token that will ever be created. When the maximum supply of a currency has been reached, you can no longer generate new coins.
Liquidity is another important aspect that you should be familiar with.
When discussing cryptocurrencies, the term liquidity refers to the ease with which one cryptocurrency can be converted into fiat currency or into another cryptocurrency. In short, liquidity is a prerequisite for trading any marketable asset, including crypto assets.
The successful trading of cryptocurrencies for other currencies on cryptocurrency exchanges is essential for the further growth of currency’s applications in the finance industries. Namely, the value of digital coins goes up on the market when more people agree that they have value. This happens when more people trade them through a platform, thus raising their liquidity.
Even while trading cryptocurrencies have gained in popularity, gauging the liquidity of these marketplaces remains challenging.
Aspects That Influence How Cryptocurrencies Gain Value
What aspects of a cryptocurrency, besides its popularity index, should be given the most weight when figuring out how likely it is for it to do well on the market? Here are the details.
Decentralized Nature of Cryptocurrencies
As was previously said, the degree to which a cryptocurrency network is decentralized is one of the most important variables determining that digital currency’s value.
Decentralized cryptocurrencies are not subject to the supervision of anybody other than the trader. Because of the way they are designed, as soon as you purchase your coins, you will be able to store them in your own digital wallet or on the digital device of your choice.
As a result, you are the only one accountable for their handling and security in most cases, making them highly appealing assets for every market participant.
Also, with a decentralized blockchain, the participants don’t need to know or trust anybody else since each network member has their own copy of the transaction data stored in the distributed ledger.
This system eliminates the need for the participants to exchange personal information and, in turn, improves the reliability and security of cryptocurrency transactions that drive up their demand and price.
The process of generating new cryptocurrency tokens or coins is called crypto mining. To decentralize and create new tokens, you need to use special mining hardware to validate each blockchain block.
The blockchain network members, i.e., the crypto miners, must apply computational resources and resolve complex algorithms to validate the data blocks on the distributed ledger.
At first, cryptocurrency mining was thought of as a process through which miners verified transactions before adding them to the blockchain in exchange for a reward. But as blockchain technology evolved, there was an increasing demand for processing power upgrades in crypto mining.
Consequently, the mining difficulty for some cryptocurrencies is exacerbated by the fact that miners actively compete with one another in order to validate the next block.
So, the price of mining cryptocurrency became very dependent on the type of mining hardware. Due to the higher mining costs, the value of the cryptocurrencies in circulation goes up.
Supply and Demand
One of the most important aspects determining cryptocurrencies’ market value is the balance between supply and demand. As shown before, you can calculate the current supply of a cryptocurrency by adding up the coins that have already been generated and the ones that have been traded.
Usually, the whitepaper of the cryptocurrency will include the recommended mining strategy for that coin. The intended total supply of the coin is also laid out in this plan, although some digital assets don’t have a finite supply.
If there aren’t a lot of units of a given currency or token, it means they’re quite valuable because of their scarcity. So, if there is a high demand for cryptocurrency, its price is likely to rise.
Yet, if there is a large supply of a given cryptocurrency but not enough people interested in buying it, its price may fall.
Basically, if a lot of people believe something is valuable, then its price is bound to rise. This is the core idea of the supply and demand factor.
Supply, usefulness, and competitiveness are only a few of the other elements that can amplify the effects of demand and create price volatility in the absence of regulations.
The practice of trading cryptocurrencies through an exchange regulated by some of the highest financial authorities is generally regarded as a positive development. This is due to the fact that it protects investors from trading on fraudulent platforms and prevents their information from being misused.
Despite this, not every cryptocurrency exchange is subject to regulation since regulators do not treat cryptocurrencies the same way everywhere.
Some rules can have a negative impact on the value of certain cryptocurrencies, despite the fact that these restrictions typically aim to protect investors when making cryptocurrency investments.
The Chinese crypto market is one of the most notable examples of how regulations can influence the value of cryptocurrencies. Namely, just as cryptocurrencies started to gain traction, the Chinese government decided to ban crypto transactions to avoid any financial risks.
The cryptocurrency market took a significant hit due to this development because China is such a large country with millions of people who could potentially invest in cryptocurrencies but were suddenly discouraged and prevented from doing so.
The information on the steps China took to protect the country’s economy from these unregulated financial assets significantly influenced the value of cryptocurrencies by causing fear, uncertainty, and doubts (FUD) among crypto investors.
In practice, the value of an asset is as high as its practical usefulness. Currently, most of the cryptocurrencies that flood the marketplaces are considered to be merely investment tools.
Bitcoin (BTC) and a few other coins do not fit into this scenario since they already have numerous applications in the real world, such as paying for day-to-day costs, and a lot of online retailers are willing to do business with those who use BTC for instance as a form of payment.
The Impact of the Economic Downturn on Cryptocurrency Value
A recession is a period of widespread economic contraction lasting longer than a few months. During a recession, the economy’s production, employment rates, and consumer spending all tend to fall. During a recession, consumer demand goes down, which could also negatively impact Bitcoin and other cryptos.
When all they hear and read about are predictions about an upcoming recession, investors become fearful of risky assets like stocks, shares, and cryptocurrencies. Fear of a recession dampens consumer confidence. Higher living expenses may discourage potential users from investing in cryptocurrencies, which heavily rely on consumer demand.
Since digital assets haven’t been through a long recession, it’s hard to say if their prices will go down or not. Yet, just like other risky investments, cryptocurrencies will undoubtedly struggle with recession anxiety.
Many variables affect how much you’ll need to invest in a given cryptocurrency. In reality, an asset is only worth as much as people are willing to pay for the benefits it provides. The vast majority of the cryptos now available are seen solely as financial vehicles.
Moreover, although financial regulations are generally intended to safeguard investors, they might have a detrimental effect on the value of some cryptocurrencies by imposing investment restrictions.
Last but not least, the balance between supply and demand is a key factor in establishing the market value of cryptocurrencies. A scarce crypto coin or token will fetch a high price due to the high demand it will generate. The opposite is also true: a drop in price may occur if there is a significant supply of a cryptocurrency but not enough individuals are interested in purchasing it.
Therefore, make sure that you educate yourself well on the market conditions, the roadmap of the cryptocurrency of your interest, and the financial instruments and trading conditions of the exchange you’ve picked before making any financial investment.
Ultimately, don’t let your emotions direct your moves on the market. Leave that thing to reason, sound logic, and – relevant information.