If you are a beginner in the field of investing in cryptocurrencies you must have wondered how the value of any particular cryptocurrency is determined. In this article, we will help you understand the factors which determine the price of any digital currency. All of these determinants work together to create a fluctuating price movement of the crypto market. The following factors are all equally important to properly analyze how price volatility works in relation to digital currency.
Through the Market Cap
The first and the most obvious of determining the value of cryptocurrency is through market capitalization. The market cap of each digital currency is different because it depends on the number of coins in circulation and the current value of each coin. Know more about different cryptocurrencies through okx.com.
Anyone can calculate the market cap of any cryptocurrency by multiplying the supply of coins with the current price of each coin. One might argue that comparing prices of one coin with the prices of another one is enough to make an analysis. However, the circulating supply of every cryptocurrency is different which will directly impact the market capitalisation.
For instance, if we compare two cryptocurrencies where the circulating supply of one is higher than the other, we would also need to consider the price of each coin. Only proper calculation of market capitalisation will allow for determining the correct value of a digital currency.
Through the Node Count
The engagement of different investors across the world directly determines how a particular currency will be priced. The investment of different investors as measured through the node count. A node count includes the number of active wallets that are currently operating on any particular blockchain network. One can easily determine the strength of the community by looking at the note count of any respective currency on the internet.
Typically, one can determine the value of any currency through the analysis of the node count along with the market capitalisation. The node count gives a good idea of how many people are currently engaged in valuable transactions on the platform. Proper comparison can also help anyone understand whether or not a currency is overbought, and hence wrongly valued.
Through the Scarcity
We have already established that the value of a cryptocurrency will be determined by the coins circulating in the market. But apart from the number of coins currently circulating, one also needs to include the overall number of coins that will be in circulation. Let us take the example of Bitcoins.
There are only a limited number of Bitcoins currently in circulation and a finite number of coins that are left to be mined from the blockchain. Because of this limited quantity, all the investors are aware that there is a scarcity which will protect this particular digital currency from inflation.
Additionally, the scarcity also ensures that there is no problem of counterfeiting because each coin will have its unique identification code. The currencies that are not of a limited quantity can engage in the burning mechanism. This helps create a finite number of coins in circulation at any given time which leads to an increase in the market value.
Through Government Regulations
If there is one factor which can significantly impact the value of a cryptocurrency, it is government regulations. All the cryptocurrencies across different blockchain networks are currently decentralized. This means that they are not under the governance or jurisdiction of any regulatory body, be it a bank or a federal organization.
If government regulations were to be imposed on any cryptocurrency, it will significantly impact its market value. People will have to pay taxes on their crypto transactions. If government regulations were to be imposed, transparency and decentralization will not be effective anymore.
This will cause a significant distrust of all investors across different cryptocurrency platforms. Since government restrictions will directly impact investor engagement, it will also lead to the change in value of any particular digital currency. Additionally, this would mean different regulations for different countries which will lead to higher price volatility
Through the Costs of Production
The cost of production also impacts how much cryptocurrency will be valued. The production costs include the cost of the hardware and software equipment along with the energy bill. Miners work continuously for days on end and are thus paid in a fraction of the coins that they mine.
The higher the cost of production of a particular cryptocurrency, the higher its price valuation would be. You can take the example of Bitcoins which take a lot of energy and resources to mine. There is only a finite value of Bitcoins left which also impact the production costs and increase the value of the coins mined. Different blockchains determine the costs of production which is why it will fluctuate according to the type of digital currency.
Through Accessibility
The last factor is the accessibility of a particular cryptocurrency and its adoption by all the interested investors. The more the people engage with a digital platform the more likely its value is to increase. Accessibility is also directly related to the demand of a particular currency.
This means that even if a finite number of coins are available, more and more people would be interested in buying it. Since there is no shortage of buyers the price of each coin will increase drastically. Accessibility will also lead to the currency becoming more mainstream. It will also lead to the price increasing even farther.
The Takeaway
All of these factors work together to ensure that investors get a clear idea of how the value of a digital currency is determined. Look at the market capitalisation and the node count to understand the engagement a particular digital currency offers. Because of the decentralized process and a limited number of coins in circulation, the accessibility and demand of cryptocurrency is increasing globally. Even after factoring the price of production investors are engaging to a great degree.
