Cryptocurrency is a decentralized digital (or virtual) currency that utilizes cryptography to guarantee secure transactions and to control the creation of new coins. It acts as a medium of exchange or monetary value and it is used to convert transactions. It operates without the governing of a trusted third party, such as a bank, or any other central authority, and for that reason, it is just about impossible to be shut down, double-spent or even counterfeit. Also, it is not backed by a commodity like gold or anything else that has an underlying value.
Due to its growing popularity and commercial acceptance it has become important to understand how it works, what are the benefits for the users, and the factors that define its value – although it is subject to change. Its total value has been estimated to be somewhere from $250 to $300 billion, with Bitcoin alone accounting for two-thirds of that amount.
In this case, since there isn’t a governing authority that can control it, another system has been introduced – blockchain. It is a distributed public record of the encrypted transactions performed with a particular cryptocurrency. Practically, it is an ever-growing list of files, so called blocks, which are linked together through encryption. Transactions with the cryptocurrency are stored in the blockchain and are publicly available, thus securing the transparency of the system. The miners task is to verify these transactions, and this process of creating new cryptocurrencies is called mining. Within the network of a particular digital currency, each node in that network has a copy of the online record called a blockchain. The user that adds a block to the blockchain by solving a mathematical problem, gets a reward in cryptocurrency. However, such calculations require a great deal of computing power that consumes enormous amounts of electrical energy.
All the above means that cryptocurrency itself it is a massive market with countless opportunities. Recent research has shown that the global blockchain market will continue its upward trend with high growth rates until 2025. Of course, cryptocurrency does present itself with certain challenges as well. Visit the epodcastnetwork.com if you want to find out more about them.
So, let us go through our list and clarify what are the top things that make the cryptocurrencies valuable.
A factor that adds to the value are the expenses of making this digital asset – huge amounts of resources and energy must be invested in the process of mining which itself is very demanding. Cryptocurrency miners use special computers – hardware and software – that are able to quickly perform countless calculations. Running these computers uses a significant amount of energy, especially for the cooling systems.
Security is crucial since vulnerabilities in the software, so called “bugs in the code” can potentially be exploited by hackers who intend to steal the cryptocurrency. In those cases, some change in the blockchain can be considered. If the code is changed, but the old version remains, so called a “hard fork”, can have an impact on the price if there isn’t an agreement between the miners and the other participants in the network. It is up to the investors to ultimately decide if the new currency is as valuable or not. Changes to the rules that are used by the current software are called “soft forks” and they do not result in creating a new coin.
A search of the node count is another solid indicator of the value of the cryptocurrency. A node is the number of active wallets on the network. The crypto wallets are apps that allow cryptocurrency users to store and retrieve their digital assets, and active addresses (or wallets) are those that have engaged in transactions at any point during the last 24 hours. This can indicate if a cryptocurrency is overbought. This node count also gives a picture of the strength of the community of a specific cryptocurrency. More nodes translate to a stronger community with more chances to overcome crises along the way.
Demand and supply dictate the value of everything on the market, and cryptocurrencies are no exception to the rule. As the supply of the digital currencies is limited, naturally, a larger demand will raise the prices. If a coin is involved in scandals, especially hacking, or it turns out to be a scam, its demand can quickly drop. New tokens are introduced with the mining, when the miners process blocks of transactions. This process has a fixed rate, so even if the demand increases, the supply will not, and therefore, the prices will jump. Also, the number of tokens in a system is limited, so in the future, the transaction fees will support the mining activities. The supply of tokens is capped as dictated in the protocol, which is unlikely to change.
Mass adoption by the general population can drastically increase the prices of a particular cryptocurrency, but so can scarcity. As mentioned before, their supply is capped, and it is because of this that the devaluation of cryptocurrencies through inflation is mostly nonexistent. The more accepted they are as a valid method of payment and can be used in transaction in everyday life, the more their prices might shoot up.
Appearances are important, and therefore, the perceived value drives the relative value of a digital currency on the market, and it can be achieved by various means. Blockchain tokens reflect the perceived value of the community to its members.
The competing cryptocurrencies also influence the pricing. Bitcoin, Coinbase, Ripple and Ethereum are one of the most recognized cryptocurrencies, even though there are hundreds of them. Their popularity has an impact on the prices; however, it is difficult to understand how the mutual competition will affect the value.
Another determinant of the value of a cryptocurrency is the availability of currency exchanges, and the more widely used the exchange is used, the easier it is to find new participants, thus creating a network effect. This impacts how other digital cryptocurrencies are being introduced.