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Digital currencies have been available to the public for more than a decade now, but their fame is relatively new. There are a lot of people who have started to invest in one of the many cryptos that are available in the market. It is a lucrative investment option as it offers great prices. But at the same time, it also offers great losses. What are the reasons that determine the sudden rise and fall of crypto prices? In this article, let us see the factors influencing crypto value.
How Does Cryptocurrency Operate?
To evaluate the factors influencing crypto value we first need to know how a digital currency is varied from a fiat currency. The largest difference is that a fiat currency is pegged by the government and is stated as a legal tender. It obtains its value from the idea that two parties in any transaction put their trust in the value. Most nations function in a fiat currency structure where the monetary reserve and central banks control the money supply and as such indirectly control inflation.
On the other hand, digital currencies are not regulated by the governing authority in any nation, they are completely decentralized. Most of the nations are yet to accept cryptos as their legal tender. Digital currencies also have a fixed supply. So their devaluation via inflation is unlikely.
Other than that both share similar features. Both can be used as a medium of exchange to purchase services and products and both offer a relative store of value.
Factors Influencing Crypto Value in General
What influences the value of a digital currency? The first thing that arises in our mind is demand. The more the demand, the higher the value and vice versa. For digital currencies, there are various factors influencing crypto value, its price fluctuations, and many more. In this section, we will discuss those in detail. Also if you think which of these factors can influence the price of a cryptocurrency the most, then all will do. All the factors are crucial.
Node Count
The node count portrays the number of active wallets that exist in the same network. One can easily find this data by simply doing a Google search or checking the homepage of the currency. But how is node count crucial? First, it portrays how strong the community is. A high node count is the result of a strong community, and a strong community raises the chances for that currency to conquer a potential crisis. Second, a large number of nodes can also suggest the decentralization and strength of a network, both crucial factors when it comes to digital currency.
There is one thing that needs to be noted. You can check if a digital currency is valued fairly using the node count. Take a look at the node count of the currency and the total market cap and compare them with a more famous currency. Using this procedure is not completely accurate as network infrastructure varies, but it at least offers you a notion of how cryptos function and how node count can affect the price.
Cost Of Production
The cost of production is another dimension that influences the value of crypto. Every day, miners avail specialized servers or hardware to produce new coins and verify the latest network transactions. Miners are rewarded with digital tokens and also a network fee for their efforts.
The network activity of the miner enables the decentralized digital currency to keep working. So, if mining costs rise, the value of cryptocurrency may also rise. There is no point for the miners to mine new digital currencies using heavy resources if they do not receive a good amount of reward. However, this is not always the case and is also not uniform throughout all cryptos, so ensure to research before committing.
Crypto Exchanges
If a coin is available on a huge number of digital currency exchanges, it increases the number of people purchasing and using that coin. If you require two or more exchanges to swap any digital currency token, you will have to pay a fee for each swap, increasing the cost of investment.
Competition
The amount of existing digital currencies just keeps increasing, with the latest tokens being released every day. There are soccer team coins, meme coins like Dogecoin, celebrity coins, and many more. There are also feasible digital currency projects among these latest coins that could overcome a present limitation and construct a strong network of users. Other than that there is also a steady competition between the top cryptos of the market like Bitcoin and Ethereum. Now if you are wondering what is Bitcoin. It is the first and most successful digital currency in the crypto space. The Bitcoin price history along with other cryptos has been too volatile.
Scarcity
Theoretically, if there is a limited supply of a cryptocurrency, the price will increase as fewer coins are available to purchase. However, if 40 percent of the coins are being circulated and the rest of 60% is remote, the value may decline when more tokens become available for purchasers.
Some digital currency projects “burn” prevailing coins by sending them to an unrecoverable address within the blockchain. This way, they manage the available supply.
The Bottom Line
There are a lot of factors influencing crypto value, and there is zero error-free way to foresee it, which is why the financial experts advise the users to only to invest money in digital currency that they can afford to lose and always finish as much research as you can before creating your wallet and putting money in it. So if you are wondering how does cryptocurrency value increases, then this is the perfect article for you.
Frequently Asked Questions On Factors Influencing Crypto Value
1. What makes Crypto increase in value?
If a coin is available on a huge number of digital currency exchanges, it increases the number of people purchasing and using that coin. If you require two or more exchanges to swap any digital currency token, you will have to pay a fee for each swap, increasing the cost of investment.
2. What decides the price of a crypto?
There are various factors that determine the value of crypto like node count, cost of production, crypto exchanges, competition, and scarcity.
