Cryptocurrency is a new evolutionary type of digital currency that has value. The value is defined by the market. As such, like any other currency or unit of account, the value is based on perception, usage, and velocity of transactions. In the old days prior to 1971, currencies were backed by gold or other precious metals; but today, currency is based on the ability to exchange or barter.
Bitcoin, for example has a maximum of 21 million whole units, divisible 100 million times. With over 7 billion people on the planet, if even 1 billion were to adopt Bitcoin, 21 million whole units would not spread very far without a significant price tag.
Cryptocurrencies were originally designed as a non-government issued method to barter and exchange for products, commodities or services, and as a digital form to store assets without relying on the local regulated central banking system. In this section, we will offer information on the price of Cryptocurrency. The purpose is to open your minds to the potential and possability of using alternative currency at a fraction of the price it costs to use government regulated currency. This section is not limited to Bitcoin or Ethereum, nor does it favor one form of crypto currency over the other.
What Defines Cryptocurrency Prices?
The following variables are used to define the price of all cryptocurrencies:
- Blockchain difficulty level.
- The utility of the currency, and how easy it is to use and store.
- Perceptions on its value by the public.
- Limited Supply and supply/demand.
- Price of Bitcoin.
- Energy put in in the form of electricity to secure the blockchain.
- Social Networking & Media Exposure.
- Crypto Currency Investors.
- Scams, Hackers, and False Promises.
- Market dilution.
- Technology and Innovation.
- Confidence in traditional systems.
- Legal/Governmental issues.
- Politics, Wars, and any reason to trust/not trust local currencies.
Crypto Currency – Supply Vs. Demand
Precious metals are known to increase/decrease in value based on their utility demand and limited supply. The price is always to both supply/demand as this variable is a simple economic factor that affects the price and value of all things. Depending on government regulation in your local country, in some places Bitcoin, Ethereum and other cryptocurrencies are classed as a commodity, utility or asset, and in others its considered a security or currency.
The open supply and distribution of bitcoin is at a constant rate and thus unchangeable due to the algorithmic rules. As such, there is a limited supply of the bitcoin and thus price and value are attributed to the number of coins in existance. The more a currency is limited in supply verses the amount of people who want to own the currency is a major attribute to its value.
The energy invested into creating blockchains can be extremely intensive. In the specific proof of work (POW), blockchains which are the most popular form, electricity usage can be extremely expensive. At present, generating bitcoins via mining has become extremely expensive. With almost 17 million bitcoins generated from power use, the energy usage of btc miners to create those coins has become similar to that of a small country. This obviously has both value and contributes to the price, as it takes a certain amount of costly power to ‘mine’ each Bitcoin. Only a certain amount of bitcoins can be generated each year so as more bitcoins are mined, the difficulty to generate the virtual coins increases.
The more secure the blockchain and the higher the mining difficulty, the higher the perceived value and price and the harder the coins are to get through mining. This can have an impact on price and ties in with the energy usage above, in the case of proof of work blockchains such as Bitcoin and Litecoin.
A key factor in the price of any cryptocurrency is its utility. If you cannot use it for something, be it an investment or for payments, then it would have no or little perceived value. In the case of Bitcoin, it is usable for payments on a reasonably high and ever increasing scale, meaning that its utility is high. Its high difficulty and energy usage give it a reasonably high price and as such can be used for an investment. The changes to utility can cause price volatility.
In the case of Ether, as it was designed a smart contract platform this is a practical utility, which increased the price of Ether over many other alternative cryptocurrencies.
The public perception of a cryptocurrency has big bearing on the value of the currency. In the case of Bitcoin, a driving factor can be people reacting positively to the innovations and the fact it is a thorn in the side of the mostly corrupt banking sector and gives competition which cannot be tampered with in the traditional way, but can also receive negative reactions and associations with criminality.
Hacks to major cryptocurrency exchanges such as Mt. Gox can also affect the reputation of Bitcoin and price in a negative way, yet innovations such as multi-signature security on wallets or innovations and payment gateways coming online can create a positive reaction.
Many cryptocurrencies are not known in the public eye bar a few and the smaller ones typically have a cult following, so their prices are much lower than say Bitcoin, Litecoin and Ether.
Many cryptocurrencies are reusing the Bitcoin code and just changing some of the specifications such as the coin supply, proof of work algorithm or adding other features. How much a currency has ripped off of Bitcoin with no innovation or potential utility over Bitcoin can affect its reputation.
Price of Bitcoin
Bitcoin is often seen as the ‘reserve currency’ of the cryptocurrency world. Rises and falls to the price of Bitcoin often has a knock on effect with other cryptocurrencies. Litecoin in particular often has price reactions proportional to the rise and fall of Bitcoin price, but without the difficulty increase that Bitcoin has in respect to the power used to secure both blockchains.
As Bitcoin was the first mainstream cryptocurrency and is the most supported, the price of Bitcoin can often influence the other cryptocurrencies.
The medias reporting on Bitcoin in either a positive, or negative way can have influence on the public perceptions of Bitcoin, and can influence the price. This can even be used as an avenue to potentially manipulate the price, as many media outlets are owned by a few individuals and it is a major vector for potential price manipulation, as well as reporting on positive and negative aspects of the currency which can cause the price to fluctuate.
With all cryptocurrencies, especially smaller less known ones, investors can manipulate / inadvertently affect price in the following ways:
- With a large amount of capital at their disposal, can buy a large percentage of the coin supply, then attempt to promote good stuff about the coin to ‘pump’ the price.
- An investor making a large investment in a small coin can cause inadvertent price increases and falls.
- People seeing investors have confidence in a cryptocurrency can encourage them to invest, and the more investors and the more demand for a currency, the higher the price.
Cryptocurrencies can sometimes be developed for the purpose of running a scam. This dubious activity is most often associated with crypto currency developers who promise the latest and greatest technology, but is also ‘premined’ by the developers before release. In other words, this ensures the people releasing the coin have a large amount of the crypto currency in their possession before it is released to the public. When the currency is released, they dump it on exchangers which crashes the value almost over night. Since the entire crypto currency market is unregulated, it makes prosecuting such scams almost impossible.
Instamining is a variant where the ability of coins to be mined is higher at the beginning after release to achieve the same goal.
Investment scams often cause people to invest in a cryptocurrency or even pay money towards the developers to develop the currency, where the only intention is to run off with the money of investors.
Due to the public nature of a blockchain, premines and instamines can easily be spotted, and when discovered often cause the value of the coin to plummet, this can happen before or after the developers did their dump of coins.
This does not so much apply to Bitcoin, Litecoin, Peercoin or Ether which all had a unique purpose at the time of development. There is many a new cryptocurrency released every day, many rips from the Bitcoin source. Due to the number of cryptocurrencies often with no practical utility* saturating the market, alternative cryptocurrencies can find it hard to gain any sort of ground in an already diluted market.Bitcoin stood out as the first with good development, Litecoin stood out as a ‘silver to Bitcoin gold’ coin, Peercoin used an innovative POW and POS (proof of stake) combination. Ether had a practical utility for being a smart contract token to allow distributed, secure execution of smart contracts, for the price of what the ether token is, which very few cryptocurrencies can do.
Many cryptocurrencies being a clone of Bitcoin minus adjusting numbers, innovation is another thing which can affect price. Sometimes this results in a currency gaining ground, sometimes this alone is not enough but it is a price factor. The key innovations of some currencies are below:
Bitcoin was the first pioneer to introduce cryptocurrency, and was released as open source in 2009. For almost a decade, it has bought many technological innovations on its own and many new are being created. Today, the BTC continues to hold the number #1 spot of cryptocurrency price and is continually increasing.
Litecoin was the development by a former Google employee by the name of Charlie Lee and acts like ‘silver’ to the Bitcoin ‘gold’ rush. It was created for the use of micro payments and has a faster transaction validation system. As such, the Litecoin requires more network capacity due to additional blocks being produced. This Litecoin held the number 2 crypto currency spot for a long time, yet ever since Ethereum introduced it’s Ether coin, since 2016 the Litecoin is the 3rd most popular type of crypto currency.
Ether had innovation and was not designed as a ‘currency’ per se but is often used as such. It used its own POW hashing algorithms and system rules, and was designed as a token to use the Ether network to execute computer code such as in a smart contract in a way where it was verifiable what was executed, due to the distributed ledger which is the Ether blockchain.
Unobtanium had a fair launch and was designed as a cryptocurrency which is ‘rare’ to be used as a store of value, with a capped supply of 250,000 coins. This was an innovation in its own right, being merge mined with Bitcoin by some pools also give this blockchain high security. Alas, the price never went anywhere close to Bitcoin and was surpassed by Ether and even Litecoin in some cases. This could change in the future, however if the coin gained more exposure.
Innovation is not always enough on its own, as shown by the Unobtanium coin; but innovation can be a driving factor if it brings something unique with high utility to the table. This factor has been mocked also, by the development of some cryptocurrencies being mocked the fact many other cryptocurrencies just rip off the Bitcoin source code and many new coins a day are coming out with this problem. An example of community members reacting to this by mocking is here.
Confidence in traditional systems
When confidence in the traditional systems increase, such as the price of the U.S dollar going up, this can cause some people to go back to storing assets using traditional currency. This can have an effect on the price of Bitcoin in particular, and in turn the other cryptocurrencies, Bitcoin being the de facto reserve currency of the bitcoin world.
Legal and governmental issues
Legal and governmental issues can influence the price, if a government beings being oppressive with tax or asset laws, it can be trivial to hide assets in a cryptocurrency, this perceived value by a country of investors can cause changes in price. Legal moves which are positive for a cryptocurrency such as making them official as currency can have a positive effect, while a country banning it could have a negative effect.
In the case of Ecuador, they banned the Currency, while some other countries gave cryptocurrency official status as currency for tax purposes. The lack of legal framework in many countries is still a hurdle, as legal precedents for cryptocurrency are still being set. And due to the limited ability to control cryptocurrency on the open internet can mean it can be used against the will of a government even.
Volatility of cryptocurrency
This article has discussed perception of value, the power energy it takes to generate crypto currency, what affects the value of cryptocurrency and what can give it value. It boils down to perception of a majority, anything has value to someone because they believe it has value, for whatever reason they may have. The main factors affecting value of cryptocurrency have been discussed and summarized, and perception of value is what ultimately gives it value, what people are willing to put in to get a unit of cryptocurrency, be it time, fait money or labour.
Keeping cryptocurrency positive in the perceptions of people is key to maintaining value in any cryptocurrency or commodity.
This article has discussed perception of value, the power energy it takes to generate crypto currency, what affects the value of cryptocurrency and what can give it value. The main factors affecting value of cryptocurrency have been discussed and summarized, and perception of value is what ultimately gives it value, what people are willing to put in to get a unit of cryptocurrency, be it time, fait money or labour.
The same applies to any commodity such as food, water, shelter, technology or any other commodity. Effort put into creating/obtaining it and demand. Keeping cryptocurrency positive in the perceptions of people is key to maintaining value in any cryptocurrency or commodity.
The world of cryptocurrency is here to stay, and as people give it value as a store of wealth in the case of Bitcoin, its revolutionary payment processing ability and the ability to work between borders are all reasons to continue to use cryptocurrency.
This article has discussed many of the driving factors of cryptocurrency price and why people give it value. Dilution of the market means many alternative cryptocurrencies will find it hard to gain a foothold.
Due to cryptocurrency being an emerging market and due to the changes it imposes on the financial system, the market is still volatile, coupled with many of the factors above, the price of a coin can rise and fall quickly, making it a risky investment without proper research carried out, but the utility of them can make them usable for payments as well as an investment which was one of the original intentions behind Bitcoin. The volatility is decreasing over time and this should hopefully result in lower volatility levels in the price.