Cryptocurrency can gain value on exchange platforms. It increases in value based on supply and demand.
The supply of a cryptocurrency depends on how many new coins are being mined and how many current owners want to sell their coins.
The demand for a cryptocurrency depends on many factors. Demand will be increased based on how useful it is to own the coins. This means if the crypto monetary system works well (i.e. fast transactions and low fees), if smart contracts become more commonplace, and if more businesses start to accept crypto, the demand for crypto will increase. Additionally, there is an increased demand for cryptocurrencies as a store of value investment.
How does cryptocurrency gain value? Like any market, the value of cryptocurrencies fluctuates based on the market’s perception of its value at any given time. These fluctuations may be rooted in some of the supply and demand factors mentioned above or can happen as a result of hidden market factors.
- 6. Inflation of Fiat Currencies
- How Can You Survive a Crypto Crash?
- 1. Do Not Panic
- 2. Do Your Research
- 3. Consider Diversifying Your Portfolio
- Production Costs and Bitcoin Price
- Step 5: Create two calculated fields for ROI and ROI%
- What are the Main Differences Between Fiat Currency and Cryptocurrency?
- 1. Divisibility
- 2. Counterfeitability
- 3. Utility
- 4. Durability
- 5. Transportability
- 6. Scarcity
- 7. Inflation of Fiat Currency
- Approaches to cryptocurrency valuations
- 4. Inflation of Traditional Currencies
- How are cryptocurrencies valued?
- Regulations and Bitcoin’s Price
- Key aspects of valuing cryptocurrencies
6. Inflation of Fiat Currencies
This is when the government of a country prints more money or increases how much they’re devaluing their currency.
Bitcoins are not affected by this because people know that bitcoins will always have value and can be traded for other things, so their worth doesn’t change even if the economy, in general, is unstable.
So what does this mean for bitcoin and other cryptos?
Well, what this means is that not only do people see how cryptos like bitcoin and other altcoins are not inflating, but how they can have a stable value in fiat currencies.
This means that when people want to invest their money in one thing for the future instead of investing it into something whose value could go anywhere-they might choose cryptocurrency as an alternative option.
Inflation is just one factor that affects currency values; by contrast, cryptocurrencies such as Bitcoin actually increase over time with each person who invests and uses them.
The number of investors grows over time, eventually leading to mass adoption by the community.
Which will cause increased interest thus making crypto values rise when someone wants one but cannot buy it due to high demand or low supply.
In this way, Cryptos are not affected by inflation and the value of one Bitcoin will always be worth more than how much it is valued in fiat currencies.
How Can You Survive a Crypto Crash?
There is a truly endless list of factors that can cause a crypto price drop or even a total crash, and such risks are always looming over the market, even when things are going seemingly well. So, how can you survive a crypto crash if you’ve already invested?
1. Do Not Panic
As mentioned previously here, the panic surrounding drops in crypto value can make everything a lot worse. Though it seems tempting to quickly sell off your funds as soon as there’s a price drop, this can contribute to an eventual crash.
Most price drops are often temporary, and big coins like Bitcoin and Ethereum have suffered crashes in the past, only to bounce back shortly after. So, it pays to take a moment and consider whether acting fast is the right decision for you in light of this.
2. Do Your Research
If a crypto token you’ve invested in is starting to fall in value, you must read up on why exactly that specific token, or the market in general, is suffering. The reasons why a coin has crashed often indicate whether the crash will be long-term or short-term. If the price drop is caused by a big name making a cynical statement or selling their funds, this will most likely be a temporary issue, and you shouldn’t panic.
Related: Common Crypto Fees Explained & How They Cost You Money
However, more long-term problems, like new laws or global crises, could result in a more severe hit to the market. There’s still no real way of knowing exactly how any factor will affect the crypto market, but it pays to educate yourself and understand the situation.
3. Consider Diversifying Your Portfolio
If one particular coin you own has crashed or keeps experiencing significant drops in value over time, you may want to consider investing in other tokens so that you’re not putting all your eggs in one basket.
This doesn’t mean pouring huge amounts of money into multiple other cryptos. Just getting your foot in the door and investing in two or three coins instead of just one can be beneficial. You could also consider investing in other digital assets, like NFTs, but remember that the price of such assets also depends on the value of the coins you can buy them with.
Production Costs and Bitcoin Price
Like other commodities, production costs play an essential role in determining bitcoin’s price. According to some research, bitcoin’s price in crypto markets is closely related to its marginal cost of production.
For Bitcoin, the production cost is roughly a sum of the direct fixed costs for infrastructure and electricity required to mine the cryptocurrency and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of a network of miners competing to solve for an encrypted number—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees accumulated since the last block was found.
An indirect cost of bitcoin mining is the difficulty level of its algorithm. The varying difficulty levels of bitcoin’s algorithms can hasten or slow down the bitcoin production rate and affect its overall supply, thereby affecting its price.
Solving the hash to open a block and earn a reward requires brute force in the form of considerable processing power. In monetary terms, the miner will have to buy many expensive mining machines. The bitcoin-mining process also requires costly electricity bills. According to estimates, electricity consumption for the bitcoin-mining network equals more than that of some small countries.
Step 5: Create two calculated fields for ROI and ROI%
The next step is to create two calculated fields. One will display ROI (Return on Investment) and the other will display ROI as a percentage.
In the top right hand corner of the data source view click to ‘Add a Field’.
For ROI the formula is:SUM(Current Value CAD)-SUM(Paid)
For ROI % the formula is(SUM(Current Value CAD)-SUM(Paid))/SUM(Paid)
Below is an example of how ROI% should look.
Once you’ve added in these extra metrics your data source should look like this.
Once this is complete we can add in the charts in our data studio dashboard.
What are the Main Differences Between Fiat Currency and Cryptocurrency?
Truthfully, fiat currency and cryptocurrency differ in their definitions.
They also have a myriad of other differences, which we list below.
Divisibility is an essential aspect of any currency, whether fiat, commodity or cryptocurrency.
Look – if you want to exchange goods across varying values, you must use a currency that can be broken into multiple small units.
Similar to the way fiat currency can be divided into smaller units such as cents, cryptocurrencies can also be broken down to make it feasible for micropayments.
For instance, one Euro can be divided into 100 euro cents. Similarly, bitcoin –which is the largest digital currency by market cap can be divided into 0.00000001 BTC.
The smallest Bitcoin unit is known as Satoshi. One Bitcoin can be broken down into 100,000,000 satoshis.
Just like Bitcoin, other digital currencies can be broken down into smaller units.
The main difference between fiat currency and cryptocurrency in terms of divisibility is that the latter have a two-decimal precision, meaning it has larger divisibility than the former.
In order for any currency to remain effective, it must be difficult to counterfeit.
If a currency is easy to counterfeit, it allows malicious parties to thrive by flooding the economy with fake bills. This has an adverse effect on the currency’s value.
Due to its complex, decentralized blockchain ledger system and other technologies used by different cryptocurrencies, it is virtually impossible to counterfeit them.
Counterfeiting digital currency would require one to manipulate the entire system and confuse all participants in a network, which is not a small feat.
Meanwhile, Counterfeiting fiat currency doesn’t require an overwhelming amount of effort, resources, and computing power. This makes digital currencies a safer alternative.
One of the selling points of digital currencies is the use of blockchain technology.
This is a distributed ledger system that is trustless and decentralized, which means those participating in the crypto market must establish trust in each other for the system to work.
The system is highly flexible, and it makes cryptocurrencies have utility outside the digital currency space.
Durability is one of the key differences between cryptocurrency and fiat currencies. A dollar or euro bill in its physical form can be, for some reason, rendered unusable if it’s torn, burnt, or destroyed, for example.
Digital currencies are not prone to any form of physical damage. This is what makes cryptocurrencies valuable. Nonetheless, this doesn’t mean that digital currencies cannot be lost.
If, for instance, you own some bitcoins and you lose your cryptographic key, the coins in the corresponding wallet can be rendered unusable. This does not mean that the bitcoins will be destroyed. They will still reflect on the blockchain’s records.
Wallets, cryptocurrency exchanges, and a host of other tools and technologies make cryptocurrencies easily transferrable from one party to another within minutes or even seconds.
Transaction costs in the crypto world are extremely low, regardless of the size of the transaction.
Transferability is one of the most critical aspects that differentiates fiat currency vs. cryptocurrency.
Fiat currencies are overtaken by cryptocurrencies in terms of scarcity. Governments are allowed to create as much money as they need at any time.
Even though you might be tempted to treat this as an advantage, it is an aspect that devalues this currency. With cryptocurrencies, there is a defined number of coins that can be put into circulation.
The number of bitcoins that can be put into circulation, for instance, is 21 million.
This limitation guarantees digital currency users that 1 BTC in 2020 will be worth 1 BTC in 2050. Since there is no limitation on fiat currency, 1 US dollar in 2020 will not be worth 1 US dollar in 2050.
7. Inflation of Fiat Currency
Cryptocurrencies are a virtual medium of exchange between two or more parties. They permit direct transactions between parties without the influence or intervention from an intermediary such as a financial institution.
Something worth noting is that there is a limit placed on cryptocurrencies, which means they cannot be over-mined. This reduces the chances of inflation.
For fiat currency, a government may decide to print more currency, and this results in inflation. In case a government chooses to print too much currency, this can result in hyperinflation.
Approaches to cryptocurrency valuations
What ARK Investments—and ensuing firms and individuals—identified is that cryptocurrencies represent and comprised a wholly unique economic model that required its own form of analysis.
To assess the value of the assets, they developed an approach called the Equation of Exchange. The formula looks like this:
MV = PQ
- M = Size of the asset base
- V = Velocity of the asset
- P = Price of the digital resource being provisioned
- Q = Quantity of the digital resource being provisioned
4. Inflation of Traditional Currencies
In an inflation scenario, fiat currencies can greatly influence cryptocurrencies just like they influence each other. If a certain fiat currency falls in value, the price of Bitcoin, for example, would go up in relation to that currency. A domino effect ensues, reflecting the change in most other currencies, both fiat, and crypto. This happens because one is able to get more of the suffering currency by trading it for cryptocurrency, ending up with more money when the fiat gets back on its feet. This is slowly happening right now, as the USD is experiencing variations in value, so all cryptocurrencies are also shifting and spiking daily.
How are cryptocurrencies valued?
Following the complex nature of cryptocurrencies and the technology behind all of them, it is even more important for you to engage in thorough research to ascertain the viability and potentials of the crypto-coins.
This is to ensure that great cryptocurrency investment decisions are being made in the cryptocurrency market.
These decisions are what will be guiding you in loop of investments for each of the coins you may want to invest your hard earn cash.
Regulations and Bitcoin’s Price
Bitcoin was released in the aftermath of a financial crisis precipitated by the loosening of regulations in the derivatives market. The cryptocurrency itself remains unregulated and has garnered a reputation for its border- and regulation-free ecosystem.
Bitcoin’s lack of regulatory status has both benefits and drawbacks. The absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies. However, governments and interested parties are continuing to push for cryptocurrency regulation.
Investors also influence prices when they become overly excited over an asset, causing it to be overvalued. They can also cause it to drop when they panic about possible losses.
The development of a regulatory framework is only a matter of time, and the effects it will have on Bitcoin’s price are unknown. For example, in the United States, cryptocurrency rulings delivered by the Securities and Exchange Commission (SEC) can impact Bitcoin’s price. In October 2021, the price of Bitcoin surged to $69,000 a few weeks after the SEC approved the first U.S. bitcoin-linked ETF: the ProShares Bitcoin Strategy ETF (BITO). However, a few months after reaching that price, Bitcoin’s price was hovering around $40,000.
China’s bitcoin trading and transaction ban in September 2021 affected the cryptocurrency’s supply and demand. Mining farms in China were forced to pack up and move to cryptocurrency-friendly countries. Prices fell from around $51,000 at the beginning of September to about $41,000 at the end of the month, then quickly regained and surpassed previous price levels as operations picked back up.
Social media postings from well-known people or celebrities can effect how investors feel about on Bitcoin, which affects its price.
Key aspects of valuing cryptocurrencies
To develop a full concept for how to value cryptocurrencies, it’s important to keep in mind three specific topics: Utility, Scarcity and Perceived Value.
Utility is, obviously, how a coin can be or is used, and its use in the specific blockchain network to which it is related.
Ether, for example, is the currency of the Ethereum blockchain, which has gained success because of the growing value of Ethereum’s smart contract technologies. ETH is required for anyone on the blockchain to execute commands and develop applications, so ETH is a currency within this system.
As Ethereum technologies are leveraged more often and people execute more transactions with ETH, its value increases.
Scarcity is another unique aspect of cryptocurrency. In traditional economies, scarcity and rarity drive the value of an item. Think of diamonds. Or luxury cars. One of the things that gives them value is the lack of them in the marketplace. The same can be applied to cryptocurrencies as they are in limited supply.
Perceived value also drives the relative value of a cryptocurrency. In the crypto marketplace, perceived value can be achieved by various means.
Within the community, value can increase if a project continually meets its stated goals. Or value can increase if people outside of the crypto market see value in a blockchain network. Again, Ethereum is a good example.
And, of course, there’s Bitcoin, in many ways the primary cryptocurrency, often generating massive interest among the general population.