Crypto is the new kid on the block in today’s financial world. This branch of economics has gained enormous popularity in a very short time due to its rapidly rising prices; leading many people into thinking that it is easy to make money with crypto. Now, what if I told you it is actually possible?
What Is Cryptocurrency?
Before anything else, let’s get one thing straight: cryptocurrency is not something physical like coins or paper notes. It only exists in the digital world and can be likened to virtual currencies or digital money. The main difference between traditional fiat currency (like pesos, dollars, etc.) and cryptocurrencies like Bitcoin is that the latter can’t be controlled by any government authority or central bank since they’re decentralized monetary systems operating independently of a central server.
What Determines the Value of a Cryptocurrency
The value of crypto is determined by various factors, some of which are as follows:
Supply
One of the most important roles in determining the value of a cryptocurrency is the supply of an asset. An asset that is available in plenty will have low prices, while a scarce one is more likely to have high ones.
For example, the supply of BTC has been dwindling since day one. In order to slow down the production rate over time, the protocol allows only a specific amount of bitcoins to be created at once. When it comes to BTC, its supply has been slowed to less than 4%, and it was about 7% just a few years back.
Production Costs
Another very important aspect is the cost of production of the coin, just like for any other commodity. The production costs are usually determined by calculating the total costs of electricity required to mine and the fixed costs for infrastructure. Additionally, the difficulty level of the current algorithm can also play an important role.
Due to the high costs of mining, many miners are shifting to cloud mining at the moment. With more and more ways to earn crypto, especially including cloud mining, we can also notice an increase in investors. This leads to harder algorithms, more competitors, and finally in higher production costs.
Use Cases/Industries Being Entered
Huge new markets are being opened every day thanks to blockchain technology. Industries like healthcare, real estate, banking, money transfer, financial trading, etc are attracting trillions of dollars worth of investments each year and even more, money is spent on maintaining and growing the infrastructure. Given how powerful blockchain technology is, we would expect that it will be used in these industries throughout 2018 and beyond. The more industries that use a specific cryptocurrency, the higher its price will potentially go.
Technical Analysis (TA)
It’s pretty impossible to predict the future of cryptocurrencies, but Technical Analysis—a method used by traders to forecast future prices based on past performance—has been widely popular among market participants for decades. If TA is applied correctly and wisely, it can give one huge advantage over others in trading certain assets (stocks, bonds, commodities, etc). Cryptocurrencies are no exception and while some TA may seem like pure speculation at first glance; there usually
Demand
When it comes to demand, the value of a specific asset is determined by how many people are buying and selling it. If you go on the crypto market history page, you’ll notice that all cryptocurrencies have lost significant amounts of their value at some point in time, except for Bitcoin. This is because Bitcoin has always been desired by investors, even during its down periods. Together with its limited supply, it makes sure that BTC will continue taking up significant portions of the overall cryptocurrency market cap. Cryptocurrencies, especially bitcoin, have attracted the attention of retail investors over the years. Geopolitical and economic considerations are the most important factors when it comes to Bitcoin’s demand. For example, in order to circumvent capital controls, some countries use cryptocurrency.
Countries with devalued currencies and high inflation also seem to show more interest in cryptocurrencies. For example, Bitcoin is very popular in Venezuela, even though you may never guess so. Criminals use the token for their illicit activities, which results in an increase in demand.
Competition
As mentioned above, all cryptocurrencies have a large pool of miners at this moment. The most popular one is still Bitcoin, and competition here is very huge. People build warehouses and use high-end ASIC rigs to be able to compete. Therefore, this leaves almost no room for individual miners to compete for the reward.
However, you can always join a mining pool or try out a cloud mining service if you’d like to invest some money in crypto. Awareness and demand of cryptocurrencies have increased, and so is the people’s knowledge on the topic. Be careful and choose wisely who you are going to work with.
Regulatory Bodies
Originally, cryptocurrencies were developed due to the financial crisis and a disappointment in regulatory bodies in the derivatives market. Usually, crypto is still moderately unregulated and is known for being a regulation-free ecosystem. However, this fact has its own benefits and drawbacks.
The good thing is that the coin can be used freely across the whole network without the involvement of government-imposed control. Still, this also means that criminal consequences through the usage of crypto are almost impossible to stop. This is why many investors are still deciding not to join the ecosystem. On the other hand, investing in crypto can be a great method to avoid being taxed, which is also a big plus.
The biggest cryptocurrency exchanges have proven themselves as one of the safest sources for transactions and investments. However, there are still some smaller exchanges that might suffer from a lack of transparency or volume. Be sure to read whitepapers carefully before making an investment!
