If you keep yourself updated about current news, you must have heard about the recent headlines about bitcoin. Bitcoin has become the latest buzzword nowadays. On news channels, magazines and media are always alerting people about the current lows and highs in cryptocurrencies. This makes the crypto world interesting but at the same time investing in it is risky. You must have heard thousands of things about bitcoin and its ups and downs, but do you know how bitcoin or other cryptocurrencies get their value? Learn the valuation of bitcoin and invest in most popular cryptocurrency also must know that ?
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Here in this article, we’ll read about the basics of bitcoin and few other things that will make you clear about its valuation.
How are cryptocurrencies valued?
Like all other currencies, cryptocurrencies are valued according to community involvement which means the coin’s utility and its demand and supply. It is a fact that most of the digital currencies are issued by companies that are related or working on blockchain. In the case of those digital coins, some part of their valuation is estimated from the efficiency of that company in terms of perceived value and project viability.
To make or determine the value of a cryptocurrency like bitcoin, it is important to understand or enhance its utility. Most of the cryptocurrencies are developed using the decentralized digital ledger referred to as blockchain technology. Therefore its utility can be enhanced by making it usable in blockchain-related companies or environments. Bitcoin is highly usable in blockchain-related workplaces, which is why big companies are adopting bitcoin.
Another factor that makes bitcoin or altcoins valuable is the scarcity of digital coins. The scarcity of bitcoin means its limited or finite supply. The value of currencies increases when their demand gets higher than its supply, which implies the crypto world. In the case of bitcoin, the supply is limited, that is, 21 million coins. It can never be increased or decreased. With more and more bitcoins being mined and circulating in the market, its demand is increasing, pushing its value to reach new heights every time. The scarcity of digital coins is another factor that results in the increased price of the coin.
The value of a currency reaches the sky if more and more users start adopting it. There are only a limited number of cryptocurrencies. Additionally, the supply of those currencies like bitcoin is limited, which means when the demand for cryptocurrencies increases, its price will increase. Once cryptocurrency starts getting used in the mainstream as a medium of exchange and store of value, its price will skyrocket without boundaries. This is the case with bitcoin as its supply is limited, but it’s highly accepted in the mainstream while increasing price.
As bitcoin is accepted more by individuals and organizations on mainstream and its value is also increasing, there are higher chances that government implies some regulations on its use. If the government imposes regulations, then the results will be that the digital coin will become centralized, which will negatively impact its price. Currently, as bitcoin is widely used and accepted, the government has imposed regulations on bitcoin. Even some countries have banned the usage of bitcoin, which causes a decrease in its price.
The cost of production is another factor that provides the value of a cryptocurrency. The production cost includes opportunity cost and direct cost that is used in producing digital coins. The cost of producing bitcoin or mining bitcoin is extremely high as specialized computer systems are required to consume high energy, which is harmful to the environment. The energy used in mining bitcoin is wasteful bit it ensures the safety of bitcoin users. Even this is the main reason why the government cannot directly put a ban or close the use of bitcoin blockchain easily.
Only through the market capitalization of bitcoin, its value in the market can be determined. The simple way to calculate the market capitalization of bitcoin or any other cryptocurrency is by multiplying the overall supply with the price of each digital coin. This is the best indicator to estimate the true value of a digital coin.