How Cryptocurrencies Get Their Value – A Guide on Cryptocurrency Valuation

In 2017, Bitcoin made headlines around the world as its price reached historic highs. Beginning the year at around USD 1000 per bitcoin, btc value rose to USD 20,000 by mid-December.  At the time of writing, Bitcoin price is a little shy of USD 10,000 per unit. What causes these fluctuations in btc price? In fact, considering that unlike fiat currencies they are not backed by any central banks or governments, what gives cryptocurrencies and altcoins their value at all? 

 

What makes something a currency?

Currencies such as the US Dollar, Euro, or the British Pound, are called fiat currencies, and are issued, authorized, and regulated by the central banks of their respective countries. Although these currencies were earlier based on physical reserves like gold, they no longer are, and hence their value is largely determined by the economy of the country they are based in. 

On the other hand are cryptocurrencies, which have no political or geographical boundaries. They are global and decentralized, and operate independently from central banks. Before we can get into the differences between cryptocurrencies and fiat currencies, and how they are traded, we must understand what makes something a currency in the first place. 

For a means of payment to be a widely acceptable currency, it must fulfil the following criteria: 

• It must be durable – The currency’s value should hold true for a long period of time.
• It must be transferable – The currency can be transferred to another person or entity without losing its value significantly. 
• It must be divisible – The currency should have the ability to be divided into smaller units. 
• It must be fungible – There should be no difference between two units of the same currency, and both units should be completely interchangeable with each other.
• It must be scarce – There must be a limited supply of the currency for it to be valuable. 

 

Let’s see how cryptocurrencies fit into the above criteria. 

Cryptocurrencies are in fact more durable, divisible, and scarce than fiat currencies. In fact, crypto is more durable than any other currency since it is completely decentralized and is impossible to destroy as long as the network survives. It is also much more divisible than fiat currencies. The lowest value of USD you can exchange is 1 cent, which is one hundredth of a dollar. Bitcoins, on the other hand, for instance, can be divisible to up to the eighth decimal level. While fiat currencies are only artificially scarce as their authorizing authorities control the supply, cryptocurrencies have a finite number of units that can be in existence which makes them inherently more valuable. Cryptocurrencies are also as fungible and transferable as fiat currencies, which means they meet all the criteria of a currency. 

 

Cryptocurrencies vs Fiat Currencies

While both are valid currencies and can be used as a means of payment, there are certain differences between cryptocurrencies and fiat currencies, which affect how they get their value.  

The biggest difference relates to the legality aspect. All fiat currencies are issued by governments and are, thus, considered legal tender authorized by their central bank. No governments have any control over cryptocurrencies although some countries have brought in some regulations, since they are decentralized. In fact, some countries have even banned cryptocurrencies as legal tender due to the fact that they cannot oversee such transactions. 

Another major difference relates to supply, as pointed out earlier. While most cryptocurrencies have a cap on the number of units that can ever be in supply, fiat currencies can theoretically have an unlimited supply since central banks have no limits on how much money they can produce. To control inflation, recession and other economic phenomena, governments usually regulate the supply artificially. These economic policies can in turn affect the value of the currency. Also, while it isn’t possible to count the amount of money in circulation for fiat currencies, it is so with cryptocurrencies. This makes them impossible to counterfeit or duplicate. 

 

Factors influencing Cryptocurrency value

So we see that while governments can influence the value of fiat currencies through their policies, the value of cryptocurrencies cannot be influenced by any central bank as they are decentralized. 

For cryptocurrencies, their value is determined by a variety of factors, with the most important of them being the role of supply and demand.

Supply and demand, in fact, are basic economic factors that determine the price of most things in the market. When there are more people who are willing to buy something than those who are looking to sell, the price of that item usually goes up. Considering that cryptocurrencies like bitcoins and other altcoins have a limited supply, any growth in their demand has a snowballing effect on the value at which they are traded. This is why cryptocurrencies that have a limited supply for trading usually trade at higher prices. Scarcer currencies like bitcoin, thus, are more coveted than cryptocurrencies that are less scarce.

Usability and adoption are also factors when it comes to determining the value of a cryptocurrency. The more sellers that accept a cryptocurrency as a means of payment, the more its value will rise. 

Cryptocurrency value is also closely associated with the competition the currency has from other cryptos, and the number of crypto exchange platforms it is featured on. Most big cryptocurrency platforms like CoinDCX feature all the leading cryptocurrencies in the world.

Another factor that determines crypto value is the cost of production associated with it. Most cryptocurrencies are generated through ‘mining’, where miners attempt to solve a cryptographic problem by using considerable computational power.

As demand for mining more bitcoins or altcoins increases, the cryptographic problem becomes ever more complicated, adding to the cost of producing a new bitcoin. 

 

CoinDCX – World’s Best Crypto Trading Platform

All the above factors make cryptocurrency prices much more volatile than fiat currencies. This is the reason why crypto trading remains a high risk-high reward proposition for traders. 

But while there may be many factors involved in determining the value of a particular cryptocurrency, the exchange it trades on has no role to play in it. Crypto exchanges like CoinDCX simply provide a convenient platform where traders can exchange fiat currencies for cryptocurrencies with high flexibility and liquidity. 

With tens of thousands of monthly active traders and over USD 10 million worth of daily trading, CoinDCX is the chosen platform for those looking to participate in the highly lucrative world of crypto trading. The platform offers impenetrable security to its users for trading in over 200 altcoins. Being linked to the other leading crypto exchanges of the world, such as Binanace, HitBTC and Huobi Global, it gives users increased flexibility for their trades. 

Are you ready to step into the world of crypto trading?

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