The cryptocurrency market can be volatile -- sometimes reaching record highs and other times dropping significantly. Understanding how cryptocurrency is valued can help explain these changes.
Cryptocurrency is not the same as the U.S. dollar or the Euro because there is no central authority -- such as a government body -- to manage its value. Without a centralized organizing body, there are no concrete reasons for cryptocurrency to change in value.
The main theory behind cryptocurrency value is if enough people agree it is valuable, then it becomes more valuable. Without regulation, demand can cause fluctuations -- and in some cases, the changes can be extreme -- depending on additional factors such as availability, utility and competition.
What is cryptocurrency?
Cryptocurrency is a digital and encrypted asset that is used for exchange. It can be used similarly to fiat currencies to exchange for goods, services and investments. Fiat currencies are government-issued -- such as the current money system people use every day.
Cryptocurrency is different from digital currency. Digital currency can be turned into cash by going to an ATM or bank because it is backed by a financial institution. With cryptocurrency, transactions are recorded on the blockchain and are not verified by a financial institution like digital currency. The blockchain is a financial ledger or database that stores electronic information digitally to show ownership.
Users can exchange cryptocurrency directly with others.
History of cryptocurrency
The idea of cryptocurrency originated in the 1980s. The idea was to send currency that could not be traced and didn't require centralization. David Chaum -- an American cryptographer -- created anonymous money called DigiCash. It was the first form of electronic payment requiring software and encrypted keys to send and withdraw money.
Next, came Bit Gold, which is often considered the precursor to Bitcoin. Nick Szabo designed it in 1998, and it required solving a puzzle to get the reward. When these two concepts are put together, they are similar to Bitcoin.
In 1998, Satoshi Nakamoto published Bitcoin – A Peer-to-Peer Electronic Cash System, a white paper that described the blockchain network and its technology. He described Bitcoin as "an electronic payment system based on cryptographic proof instead of trust." He also said in this paper that cryptocurrency would not be possible without blockchain technology.
Satoshi Nakamoto mined the first bitcoin in 2009. The first block of 50 bitcoin -- known as the Genesis Block -- had no real value for the first few months. Then in April 2021, the value of one bitcoin reached 14 cents. The value then surged to 36 cents in November 2021.
Bitcoin began to steadily rise. With publicity in publications such as Forbes, prices started to increase. Other forms of cryptocurrency then started to be created, using blockchain technology. Now there are several different types of cryptocurrency with new ones emerging regularly.
Other well-known cryptocurrencies include the following:
The main theory behind cryptocurrency value is if enough people agree it is valuable, then it becomes more valuable.
Ethereum
Dogecoin
Tether
XRP
Solana
PolkaDot
Cardano
Shiba Inu
Binance Coin
USD Coin
Learn more about the history of blockchain technology here.
Cost of production
Mining is the process of creating new cryptocurrency tokens. This process involves using software to verify the block on the blockchain to decentralize and form the token. To verify the blockchain, participants need to use computing power and solve transaction-related algorithms. However, there is a competition to mine certain cryptocurrencies largely due to the miners racing each other to verify the next block, which can make it more difficult to mine.
The cost to mine increases when more powerful equipment is needed, which can be costly. Higher mining costs push up the value of the cryptocurrency to offset the costs of production. Because the costs are high, attackers use cryptojacking with unauthorized use of other systems to mine cryptocurrency for the power demands. Cryptojacking can also be completed by a cryptomining bot installed on a target system.
Cryptocurrency exchanges
The more popular cryptocurrencies, such as Ether and Bitcoin, are available to trade on multiple exchanges. The smaller tokens may only be on certain exchanges, which limits access.
If a cryptocurrency is listed on more exchanges, they will be available to more investors, which can increase the demand.
To purchase cryptocurrency, users need to create an account on a cryptocurrency broker, such as Coinbase, eToro or Gemini. Opening an account on these exchanges is similar to opening any other investment account.
If a user wants to exchange one cryptocurrency for another, this is possible using cross-chain bridges. It's similar to the exchange between different country currencies. There are several cross-chain bridges to help explore various blockchain ecosystems.
Learn more about the best cross-chain bridges available here.
After purchasing cryptocurrency, the next step is storage. Since they are not backed, they are at risk for theft. There are three methods to store cryptocurrency.
Leave cryptocurrency in exchange. After buying the cryptocurrency, the exchanges have a cryptocurrency wallet to store purchases. This method is the most at-risk for theft because the exchange markets are a prime target for thieves. For example, in February 2022, thieves stole more than $320 million on the Wormhole cryptocurrency platform.
Hot wallets. These cryptocurrency wallets are stored online outside of the exchange. They run on all internet devices and run a risk of theft since they are stored online. In addition, there are apps for smartphones to store cryptocurrency, and these are also considered hot wallets.
Cold wallets. Unlike hot wallets, cold wallets are stored offline on an external device. All the information is stored within this device making it the safest option. But don't lose the keycode, or it may be difficult to get the cryptocurrency back.
Learn more about securing a bitcoin wallet here.
How does cryptocurrency gain value?
In the stock market, a company's worth is determined by multiplying the stock price by the number of shares to show market capitalization. The price of the stock can go up or down depending on supply and demand. Higher demand stock have higher prices, such as Apple and Amazon.
The same theory applies to cryptocurrency. Higher demand pushes prices up. If demand goes higher than the amount available, the price of that cryptocurrency increases.
Some cryptocurrencies have a maximum supply and only increase by a fixed amount, such as bitcoin. Other cryptocurrencies – such as Ether – do not have supply limitations.
Demand for cryptocurrency depends on many factors, including how useful the coins are and if businesses accept them. There are other factors that also determine the value of cryptocurrency, including the following:
Mining. When trying to create the new block, miners compete for that encrypted number, and the first miner wins the newly minted cryptocurrency. Mining can be expensive, especially with the amount of electricity needed to complete it.
Increasing utility. Utility increases when businesses accept cryptocurrency and if there is an investment opportunity. Being able to use it in decentralized finance protocols or decentralized apps can also affect value. Think about an Amazon gift card versus a small store gift card -- there are more options for the Amazon gift card, giving it more utility.
Competition. If there are several to choose from, they may lose value.
Popularity in media. The prices tend to fluctuate when media covers a cryptocurrency, and this also includes promotions on social media.
Regulation. The lack of regulation can be a positive or negative factor when it comes to valuation. Some investors appreciate the freedom of no regulations while others fear the lack of regulation and security.
Availability. If the cryptocurrency is more readily available on numerous exchanges, it may be more valuable.
Regulations and governance
Developers adapt projects based on current and future use. However, governance tokens require stakeholders to give consensus for any changes.
Investors like stable governance, and this can be considered a flaw with cryptocurrency. There is volatility in its value and it can make severe swings. For example, bitcoin's value fell below $20,000 in June 2022 after hitting a high of $68,789.63 in 2021.
There is some uncertainty in terms of the regulation of cryptocurrencies. There is confusion on whether cryptocurrency is a commodity, such as gold or silver, or a security, such as stocks or bonds. Because of this indecision, neither the Securities and Exchange Commission nor the Commodity Futures Trading Commission can regulate cryptocurrency.
Regulations could have a positive impact because investors would feel more secure about purchasing cryptocurrency as an investment. However, regulations could also negatively affect the value of cryptocurrency by lowering the demand and changing rules for investments.
Learn more about a Senate bill to regulate cryptocurrency.
How a recession affects cryptocurrency
A recession is defined as a widespread decline in economic activity for more than a few months. Economic outputs, employment and consumer spending all typically decrease during the recession period. Because consumer demand also tends to decrease during a recession, cryptocurrency can be affected as well.
Cryptocurrency reached its highest value point in 2021, valued at nearly $3 trillion. As talks of an economic downturn started, cryptocurrency values began its crash. During the largest decline, the two largest digital currencies lost nearly three-quarters of their value. As of January 2023, the cryptocurrency market was valued at nearly $993 billion.
Impending recession talks cause the public to get anxious and move away from riskier assets, such as stocks, equities and cryptocurrency. Consumer confidence starts to fall with thoughts of a recession. Cryptocurrency is based on consumer demand, and with higher costs of living, people may not have the money to invest in cryptocurrencies. It is unclear if cryptocurrency values might drop during a recession because digital assets haven’t seen a long recession period. However, cryptocurrency will most likely struggle with the fear of recession, similar to other riskier investments.
As a seasoned cryptocurrency enthusiast and expert, my extensive knowledge in the field allows me to delve into the intricacies of the cryptocurrency market with confidence and authority. My background includes a comprehensive understanding of blockchain technology, the history of cryptocurrency, mining processes, cryptocurrency exchanges, storage methods, and the various factors influencing the value of cryptocurrencies.
Cryptocurrency Overview:
Cryptocurrency is a digital and encrypted asset used for exchange, distinct from traditional fiat currencies like the U.S. dollar or Euro. Its value is not centrally regulated, relying instead on consensus and demand. The main theory is that if enough people perceive a cryptocurrency as valuable, its value increases. Factors such as availability, utility, and competition contribute to the market's volatility.
History of Cryptocurrency:
The concept of cryptocurrency dates back to the 1980s, with developments like DigiCash and Bit Gold leading to the creation of Bitcoin in 2009 by Satoshi Nakamoto. The blockchain, a decentralized ledger, is fundamental to cryptocurrency, as outlined in Nakamoto's white paper. Over time, various cryptocurrencies have emerged, including Ethereum, Dogecoin, Tether, XRP, Solana, PolkaDot, Cardano, Shiba Inu, Binance Coin, and USD Coin.
Cost of Production:
Mining, the process of creating new cryptocurrency tokens, involves solving complex algorithms using computing power. The cost of mining increases with the need for more powerful equipment, impacting the value of the cryptocurrency. Cryptojacking, or unauthorized mining, is a threat due to its potential impact on production costs.
Cryptocurrency Exchanges:
Popular cryptocurrencies like Bitcoin and Ethereum are traded on multiple exchanges, influencing accessibility and demand. Cryptocurrency brokers like Coinbase, eToro, and Gemini facilitate trading. The choice of exchange and cross-chain bridges affects market participation. Storage options include leaving currency in exchanges, hot wallets (online), and cold wallets (offline).
How Cryptocurrency Gains Value:
Similar to stocks, cryptocurrency value is influenced by supply and demand. Higher demand leads to increased prices. Factors such as mining, utility, competition, media coverage, regulation, and availability contribute to valuation dynamics.
Regulations and Governance:
The regulatory landscape for cryptocurrencies is uncertain, with debates over whether they should be treated as commodities or securities. Governance tokens and the lack of stable governance contribute to volatility. Regulations could impact investor confidence positively or negatively, affecting cryptocurrency value.
Recession and Cryptocurrency:
During economic recessions, cryptocurrency values may be affected as consumer demand decreases. Talks of an impending recession can lead to anxiety, prompting a shift away from riskier assets like cryptocurrency. The relationship between cryptocurrency values and extended recession periods remains unclear, but they are likely to face challenges amid economic uncertainties.
In conclusion, my in-depth knowledge spans the history, technology, and market dynamics of cryptocurrencies, allowing me to provide a comprehensive understanding of the factors influencing their value and behavior in the market.
Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value
store of value
A store of value is an asset that maintains its value, rather than depreciating. Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual. A nation's currency must be a reasonable store of value for its economy to function smoothly.
Specifically, check a cryptocurrency's market capitalization, trading volume, and supply. Judging a cryptocurrency by market cap alone isn't recommended, but cryptocurrencies with a high market cap ($1 billion+) may be considered less risky due to their value potential.
Bitcoin must be converted to a government-backed currency to be used, even in countries where it is recognized as legal tender. The argument here is that because Bitcoin is convertible, it doesn't have any underlying value.
The price of Bitcoin is determined in the same way that the value of the U.S. dollar is determined: supply and demand. Like fiat currency, when the demand for bitcoin increases, the price increases. When demand for bitcoin falls, the price falls.
In the dynamic landscape of cryptocurrency, these ten coins, including TRON, Shiba Inu, Astar, Kaspa, Dogecoin, Stellar, Kava, Polygon, Cronos, and VeChain, present diverse potentials for reaching the $1 milestone in 2024. Investors keen on penny cryptos have a spectrum of options to explore.
Summary: As of 2024, there are about 420 million cryptocurrency users globally. Of these, approximately 1.5 million individuals possess more than 1 Bitcoin, which is just 0.36% of all cryptocurrency users.
You calculate crypto profit by subtracting the selling price from the cost price of the cryptocurrency. That is one of the simplest ways to calculate your profit and loss.
For a cryptocurrency like Bitcoin, market capitalization (or market cap) is the total value of all the coins that have been mined. It's calculated by multiplying the number of coins in circulation by the current market price of a single coin.
Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
So, who are the top holders of BTC? According to the Bitcoin research and analysis firm River Intelligence, Satoshi Nakamoto, the anonymous creator behind Bitcoin, is listed as the top BTC holder as of 2024. The company notes that Satoshi Nakamoto holds about 1.1m BTC tokens in about 22,000 different addresses.
The lack of key policies related to transactions serves as a major drawback of cryptocurrencies. The no refund or cancellation policy can be considered the default stance for transactions wrongly made across crypto wallets and each crypto stock exchange or app has its own rules.
Unlike fiat currencies, such as the Euro or the US-Dollar, the value of Bitcoin (BTC) is not defined by a single entity like a central bank. Instead, the price is influenced by supply and demand. Or, in simpler terms, by how much people are willing to pay for it.
You can own bitcoin by buying it with money you already have on any exchange or app that offers it. You can buy, sell, send, and receive bitcoin on Cash App. You can also auto-invest a percentage of your paycheck into bitcoin or even round up your Cash App Card transactions and turn the spare change into bitcoin.
Bitcoin's price is primarily affected by its supply, the market's demand, availability, competing cryptocurrencies, and investor sentiment. Bitcoin supply is limited—there is a finite number of bitcoins, and the final coins are projected to be mined in 2140.
“Proof of work” and “proof of stake” are the two major consensus mechanisms cryptocurrencies use to verify new transactions, add them to the blockchain, and create new tokens.
Bitcoin halving is when the reward for bitcoin mining is cut in half. Halving takes place every four years. The next halving is expected to occur sometime in 2028. The halving policy was written into bitcoin's mining algorithm to counteract inflation by maintaining scarcity.
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