In this world where everything that we use is being controlled by one or a group of organizations. Everything that is happening is happening under a central authority and we have the more or less same control over the things that are happening around us. Even the money we earn after putting in a lot of effort is not in our personal control. Our government controls our currency and has the authority to alter it in response to world events. Amidst these controlled circumstances, cryptocurrency emerged as a hope for those who were looking out for escaping this loop of centralized power and gaining control back over their money.
Cryptocurrency could be the answer to the world’s biggest finance-related problems but before we implement this technology to the masses we have to make sure that they understand how cryptocurrency gains its value. We must comprehend how this asset functions at its core and how to harness the power of this decentralized money.
In the article ahead, we will discuss how cryptocurrency gains value and what are some of the factors that affect its currency market prices.
What is Cryptocurrency?
If you are reading this article then there are higher chances of you knowing what cryptocurrency is and how does it function with blockchain. But if you are completely new to cryptocurrency then these terms might have been intimidating to you for a long time. For explaining, cryptocurrency is a token of exchange of value that has a recorded ledger. This recorded ledger is immutable and distributed over a large number of computers and any of these computers can verify the transaction on the basis of having the authority of verification as it has all the data required to check.
Cryptocurrency is decentralized in nature which means that there is no headquarters of the verification authority for transactions and a transaction can only proceed when all the presets required are met and checked. The immutable ledger ensures that all transactions are irrevocable and transparent.
Blockchain technology along with cryptocurrency is disrupting finance around the globe by replacing the central authority with more reliable and efficient smart contracts. Smart contracts help individuals trust the organization since everything is transparent.
How does Cryptocurrency gain value?
We all know how volatile cryptocurrencies are. With the recent crash of Terra Luna, the market has shaken even the most faithful investors and has continuously fallen ever since. Changing cryptocurrency values makes some investors money and hurts others. This game of changing values in the market depends upon the intrinsic value of the cryptocurrency. But how does a completely digital token gain its value?
✔ Supply and Demand
Since there is no single entity in charge of cryptocurrencies, they must find other means to increase in value. Limited supply in the ecosystem and rising demand are major factors in cryptocurrencies’ rising value. As investors continue to exhibit faith in the concept and hold on to their coins, the supply and demand gap develops, increasing their value.
✔ Cost of Production
Since cryptos are produced by mining, another factor influencing their value is their production cost. Mining is the process through which computers on the blockchain networks add a new block to the entire chain by verifying all the previous transactions. This needs high-end computational power and electricity, so the mining computer is rewarded for adding a block. When determining a token’s price, this value is also taken into account.
✔ Value to the Customer
Cryptocurrencies also gain much of their value from the value they provide to the end-users of these tokens. Most cryptocurrencies in the market serve as a project and make it easier for people to interact in that environment. However, if new projects come into the market that tackles the same challenges as the older token and provides additional value, they will be able to take a share of the older blockchain network’s users and gain value. As the value for the end-users increases the value of the project cryptocurrencies increases as well.
How a cryptocurrency’s creators handle it affects its value. A cryptocurrency project must go through numerous levels of rules and contracts to reach the people. Any regulatory problems or controversy might cause the token’s value to fluctuate.
As trust in a token decline, its market value drops; as trust improves, its value rises. That is why having exemplary leadership with new black spots is critical to the value of the entire project.
In the recent past, we have seen a clear impact of internet trends on the value of crypto coins. Elon Musk’s next trend or fad can affect a coin’s direction and attract investors. As they acquire more from the market, those owning the assets sell their tokens at a greater price than their inherent value, increasing the token’s value.
However, these gains can be short-term as in the case of Dogecoin but it is also true that the entire Doge rollercoaster made penny investors millionaires overnight.
Different Types of Cryptocurrency Technology
Stable coins are cryptocurrencies backed by real-world assets and not market movements. These coins’ valuations are predicated on their underlying assets, and a smart contract promises to exchange them for something substantial.
Their value is safeguarded by the US dollar and kept in vaults, like the majority of Stablecoins. These Stablecoins are pegged 1:1 with dollar most of the time but it is not a rule. When it comes to investing in the blockchain industry, stablecoins are regarded as the safest kind of investment.
Proof of Work
Cryptocurrencies are validated in a blockchain network using different technologies and Proof-of-Work or POW is one such technology. Bitcoin and Ethereum are two of the biggest cryptocurrencies present in the market and run on the POW technology. In proof-of-work, miners compete to validate transactions and add new blocks to the blockchain.
In this scenario, miners employ their computational power to answer complex arithmetic problems, and the fastest one wins. This not only consumes an immense amount of energy but also takes a lot of time.
Proof of Stake
Proof-of-Stake or POS is different from the POW mechanism fundamentally as miners do not compete with each other to win the transaction in the proof-of-stake mechanism. A random node on the blockchain that is willing to validate the transaction is selected and awarded with the transaction. This random selection of the node makes this process much more energy-efficient and time-saving when compared with the proof-of-work mechanism.
POS needs nodes to stake some of their cryptos so they can be penalized for wrongly validating transactions. The higher the number of staked tokens, the higher your chances of winning a random transaction.
Final Words On How Do Cryptocurrencies Rise In Worth?
Reading about how cryptocurrency acquires value shows that it’s not a mirage. They are backed by solid foundations in real-world services which makes them unique in their true sense. They remove the central authority and limit government interference in currency decisions.
There are plenty of exchanges that are present in the market, dealing with the exchange of cryptocurrencies for users around the world. These exchanges transform a financial system that hasn’t fully matured and is open to new technology. The security, reliability, and transparency that blockchain comes with, can change the entire course of action for international financial organizations.
We as a generation are becoming a part of this revolution and we hope that this article will give you all the information that you need to participate in the system.