What Determines The Value Of Cryptocurrencies?
What Determines The Value Of Cryptocurrencies?
This question originally appeared on Quora, the knowledge sharing network where compelling questions are answered by people with unique insights.
Answers are by Greg Matthews, Admir Tulic, Kayolan Roussev, Sev Jan, Isaac Arruebarrena, QuietGrowth, Kapil Kumar, Vahid Eyorokon, Dinko Jusupovic and Bit Woolly.
Greg Matthews, 5+ Yrs Cryptocurrency Researcher & Developer @ MicroGuy.com
Answered Jun. 16, 2017
Market price is driven by many factors but is mostly a scorecard for the attempted measurement of fundamentals. One thing to keep in mind is the market is always wrong but always seeking the truth.
In cryptocurrency, the closest thing we have to the truth is node count. Node count is a measurement of the active wallets on the network. This number can generally be retrieved from each currency’s corresponding block explorer.
For value investing, one could investigate node count and find currencies that are overvalued and undervalued. This is indicative of an overbought market if we compare it to others.
If Goldcoin has a node count of 238 and a marketcap of just $3 million, this is indicative of a highly undervalued currency and one that should see a correction to the upside in the near future.
So while market price can be influenced in the short term by things like herd mentality and news cycles, the price will eventually find its correct level and that is the point in time when the price accurately reflects the fundamentals.
You should work to understand where the market has it right, and where the market has it wrong. Understanding where the price should be, in comparison to where it is now, is the trick to finding opportunity in any market.
Admir Tulic, Crypto Educator and Senior Writer at Captainaltcoin.com
Answered Nov. 17, 2017
This is the same principle as any other traded instrument or currency. The value is determined by what people are willing to pay for it.
The value itself is embedded in the faith of the community that the supply and demand will have gradual upward price pressure over time.
That faith is founded on the structure of the market place as specified by the rules that are embedded in the cryptocurrency application code, the historical performance of the marketplace, and the anticipated and actual utility of cryptocurrency for payments through currently available goods and services, and through investments in new goods and services.
What kinds of things might compel a person to be willing to value cryptocurrency highly? A desire to hedge against inflation, its technological underpinnings, its decentralized nature, the privacy it offers, the security it offers, etc.
Kaloyan Roussev, read a lot of books and forums and done some trading
Answered Jul. 2, 2017
The last price a trade was made at for that cryptocurrency.
There is an order book of bids and asks that people filed for certain amounts and certain prices.
Whenever someone comes in and buys (or is being sold) at the market price, which is usually either the highest bid or the lowest ask, this is the last trade and the price it was performed at. This is the price of the cryptocurrency.
Price goes up and down thanks to supply and demand. If a particular crypto becomes popular for any reason, a swarm of willing investors come and they buy out the sell (ask) book starting from the lowest possible price and picking it up from there. If they buy out all the price positions up to a certain point in a quick amount of time, the price rises quickly, because the remaining sell orders are at a higher price. Some of those might even get cancelled and restated at even higher prices as a result of the obvious popularity of this crypto.
Now, on this particular exchange the price has risen and arbitrators (persons or bots) start buying/selling on another exchanges to pocket the difference in price. They act as a natural mechanism that is going to bring equilibrium to the prices among all the exchanges.
People rushing to buy or sell are being affected by news, expectations, deliberate market manipulations or technical analysis (studying behavioral patterns in the price charts and predicting possible movements in the future).
Sev Jan, Master’s degree from Masarykova Univerzita
Answered Jun. 20, 2018
On a long-term basis, the prices depend on the reliability of the currency, its investment and growth potential. Bitcoin, Ethereum and Litecoin are the frontrunners in this regard. Since Bitcoin remains the most popular and well-tested cryptocurrency, its price will continue to grow in the future. The same applies to Ethereum’s price. It’s potential for growth attracts more investment, which adds extra value to the price.
Also, there is no novelty in the fact that the amount of Bitcoin available for mining is slowly decreasing. This also results in the rise of Bitcoin’s price.
However, enthusiastic miners sometimes profit by betting not on the long-term perspectives, but by guessing the short-term fluctuations and volatility. What they need to do is to follow and predict the cryptocurrency valuations that slowly increase and decrease in each second. This is a tricky task, as Bitcoin and the other cryptocurrencies do not even have accepted volatility indexes yet. Nonetheless, it is possible to measure the volatility of the cryptocurrencies versus the changes in the U.S. dollar, but there are many factors involved that are hard to predict.
An example of such a factor is the rapid flow of information in the media. Sometimes, media sources disseminate targeted information that cause artificial price fluctuations in the market. Those fluctuations can either work for or against a given cryptocurrency price. For instance, the news on regulating Ethereum mining in China may result in an immediate fall of the global Ethereum price. Another cause of a cryptocurrency volatility fluctuation can be the concerns over its illegal use by drug criminals.
Many other factors such as the taxation perspectives for cryptocurrencies or the concerns over crypto transactions also impact the changes in cryptocurrency prices. Those factors are very diverse, so it is very difficult to provide unique computational formulas that can predict them. However, recent developments in artificial intelligence and data science are opening the perspective for making those predictions highly accurate.
Updated Feb. 24, 2018
Economic equilibrium, where supply and demand are balanced.
Currently cryptocurrency markets are quite illiquid. This makes the price of bitcoin and other cryptos fluctuate a lot. The uncertainty around them does not help either. Regulation, technical challenges, reputational issues and other factors make the supply and demand unpredictable.
Based on what does the price go up or down? I would say it is based on people’s expectations. If they expect the price of bitcoin to increase due to a utility increase over time (more merchants accept it, transaction volume grows, there is a larger ecosystem of developers building on top of it) there will be a rise on demand, and assuming that the supply does not increase in the same proportion, the price will go up.
On the contrary, if the utility decreases (mobile platforms block crypto apps, technical issues arise, governments ban them, exchange markets get shut down) the demand will decrease, the supply will increase (more people willing to sell) and the price will go down.
In the long term their value will be determined by their utility (adoption by merchants and other users, significant advantages with respect to other forms of payment), liquidity (exchange markets, interchangeability with other forms of value) and trust (reputation, regulation, adoption by trusted institutions).
Answered Feb. 17, 2018
We believe that the value of every cryptocurrency is the price, irrespective of the volatility of that price. The price that is decided by the market for that asset gives it value. It is not appropriate to assert that the inherent value of all cryptocurrencies is zero, and to draw a conclusion that they are not assets with a value. The inherent value of any cryptocurrency, though each of them is not backed by any tangible asset or a promise by a credible institution, is the trust and belief placed in it by its distributed investors.
Even assets that do not generate income, at present or in future, on their own, can be perceived to be valuable. After all, the market-determined pricing, at any point of time, is a function of demand and supply. Whether the current pricing of various cryptocurrencies is speculative or not, can be just a subjective opinion of someone. That said, it is believed that the prices of certain cryptocurrencies have been manipulated or have been subject to intense speculation.
Kapil Kumar, lives in Delhi
Answered Feb. 8, 2018
The price of any cryptocurrency is determined by a few factors so I’ll try to do my best to give as many as I can.
What a cryptocoin can do is very important. You need your coin to do a lot of stuff in order to attract a lot of usage. If Bitcoin didn’t help You transfer your money in a couple of minutes/hours and instead took days, people wouldn’t use it so much.
You need your coin to be used by people. The more it gets used the higher the price will go because of its adoption.
Your coin has a higher chance to be adopted if it is cheap. A good example would be Stratis. A really good coin that is similar to Ethereum, but is a lot cheaper and has a really solid team. So knowing that this is a new Ethereum and is cheaper will make you more likely to buy it.
Rumor always has an effect on price.
If the team that develops the coin is well known in the cryptoverse, that could pump the price up a bit.
If your crypto has 90 million coins, the price will be higher than in a case when there are over 40 billion coins.
Vahid Eyorokon, M.S. Artificial Intelligence & Machine Learning, Wright State University
Answered Dec. 23, 2017
It also depends on the particular Cryptocurrency’s implementation. Many traditional cryptos are driven by speculation. But there are some asset-backed cryptocurrencies like AlloyCoin, which actually have two values.
In addition to a market value determined by speculation, AlloyCoin also seeks to maintain a price floor which is determined by the performance of the network’s collectively held assets.
Dinko Jusupovic, Self Employed
Answered Jan. 12, 2018
Before moving onto answering this question, I’d like you to ask yourself what determines the value of anything.
In theory, value equals what you need minus what you are willing to sacrifice – how much is it going to cost (active value + time + effort).
Now let’s try to understand values that are solid in the system we live in, their flaws and alternatives.
Take gold as an example. It’s limited in supply, it’s use is impractical, its value is abstract but capped. When you have limited supplies of anything, the distribution process is prone to be manipulated by big holders. There are only a few things we can do with gold – sell it, make cables, necklaces, emotional value – bond with memories, historical importance etc. Therefore its value is capped by the possibilities we can create out of its existence. Gold is old.
Crypto is an ideology. Deep in that ideology is a hope that one day we will create value, share it with anyone who wants to enlarge it and in the end, fairly distribute it. It starts with a creative thought of changing the systems in which few people are holding the vast majority of generally accepted values, process and distribute that value using middlemen such as governments, large funds and extremely wealthy individuals.
Value of cryptocurrency, before anything, is the idea of a world in which people create value, enlarge it, distributed it and use it freely.
Bit Woolly, Business Development Manager at Relinns Technologies
Answered Feb. 19, 2018
The technology behind the cryptocurrency plays a very important role.
The value of cryptocurrency is determined by the security that the technology provides.
Another is Node count, which is a good indicator of the value of a cryptocurrency. Node count is a measurement of how many active wallets on the network exist, which can be searched on the internet or the homepage of a particular currency.
Rising Demand: Supply and demand is another most important factor to determine the value of anything required for trading.
Inflation of fiat currency: If the price of a fiat currency falls, then the price of Bitcoin would go up with respect to that currency. This is why you will be able to get more of that currency with your Bitcoins.
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