While the soaring prices of cryptocurrencies often make the news, it can be challenging for newcomers to understand why they have any value in the first place. That’s why we’re dedicating this article to explaining why some cryptos gain a lot of value over time.
We cover all the key factors that make cryptos valuable and influence their prices, including the effects of supply and demand, exchange listings, mining costs, legal regulations, and more.
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What Is Cryptocurrency?
A cryptocurrency is a virtual currency that utilizes blockchain technology and advanced cryptography. This combination allows cryptos to be highly secure, immutable, decentralized, and censorship-resistant. They can be sent peer-to-peer from one crypto wallet to another as a means of payment. They can also offer access to services or be held as investments.
Different Types of Crypto
There are three main categories of cryptocurrency that everyone must know. Here’s a quick rundown of each:
Bitcoin
Bitcoin is the largest and most well-known cryptocurrency. It was also the first cryptocurrency ever to be created, so it gets a category of its own. It was launched back in 2009 by Satoshi Nakomoto, Bitcoin’s mysterious creator. Bitcoin is used as digital money, but it’s also considered a good store of value as it is deflationary in nature.
Altcoins
Altcoin is shorthand for “alternative to Bitcoin,” but not every crypto is an altcoin. An altcoin must run on its own independent blockchain to qualify; otherwise, it’s considered a token. When Bitcoin was first launched, there were no altcoins, but now there are more than a thousand. Each altcoin is designed slightly differently and serves a specific niche or purpose.
Tokens
Tokens are created and run on an existing blockchain rather than their own. For example, Ethereum’s blockchain hosts thousands of tokens, which are called ERC-20 tokens, and tokens that run on Binance Chain are called BEP2 tokens. Each token represents an asset or has some form of utility.
Bitcoin’s Price vs. Value
The price of BTC refers to how much it costs to buy a Bitcoin. So if the price of Bitcoin is $50,000, that means it costs $50,000 to buy one whole Bitcoin. The price of Bitcoin is most commonly displayed in USD, but it can also be priced in other currencies.
Sometimes the words price and value are used interchangeably. However, the value can also be what you think it’s worth or why it’s useful. For example, some people value Bitcoin because it’s decentralized or allows them to make payments anywhere, anytime. Others see it as a store of value and a good long-term investment.
What Determines Bitcoin’s Price?
Here are some of the main factors that influence the price of Bitcoin and other cryptocurrencies:
The Supply of Bitcoin and the Market’s Demand
Bitcoin has a fixed maximum supply of 21 million coins, meaning this can never increase. Furthermore, many of these coins are held by long-term investors who are reluctant to sell them. Therefore, the actual available supply for those who want to buy BTC is far lower than the maximum supply.
When the demand for Bitcoin is greater than the available supply, its price rises, and when demand is lower, its price falls.
The Number of Competing Cryptocurrencies
There are more than 6,500 cryptocurrencies that currently exist; however, many of them serve different purposes and therefore do not compete with Bitcoin. Instead, the main competitors to Bitcoin are those designed to be digital cash, such as Litecoin, Bitcoin Cash, Dogecoin, Monero, Zcash, XRP, and Dash.
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The Cost of Producing Bitcoin (Bitcoin Mining)
Bitcoin mining can be an expensive endeavor, but it can also be a lucrative one. It requires expensive hardware, an abundance of power, and advanced computing power. BTC mining is dominated by large players that strategically locate where electricity prices are low and use economies of scale to drive down their costs.
Their Availability on Currency Exchanges
A cryptocurrency needs lots of people wanting to buy it for it to increase in price. However, if a cryptocurrency is not listed on many exchanges, it’s naturally harder for the masses to acquire.
Also, whether a cryptocurrency is listed on the most popular exchanges can have a significant impact on its price. For example, many coins see a boost in price after being listed on a leading exchange like Binance or Coinbase.
The Legal Regulations
The legal status and regulatory environment for Bitcoin and cryptocurrencies worldwide can affect their prices. For example, when China announced a ban on crypto, the market temporarily dropped in value.
However, as cryptos are a global phenomenon, no single country can stop their development, and regulations may be hard to enforce. Also, the likelihood of every country in the world banning cryptos is low, especially as some have already embraced them.
The Internal Governance Stability
The Bitcoin governance model influences how decisions about its transaction and block verification rules are made and how they’re implemented and enforced.
Those involved in the governance of Bitcoin typically include investors, miners, and node operators. If the governance model is flawed, it could affect the stability of Bitcoin, as people may lose trust in the network, how it’s run, and the direction it’s heading.
The Power of the Press
The content the media publishes on Bitcoin and cryptos can temporarily influence their prices. For example, if mainly positive stories are circulating in the press, this may encourage people to buy.
However, if negative news, known as FUD, dominates in the press, it may put some people off acquiring or holding crypto, as they’ll believe it’s risky.
How Does Cryptocurrency Gain Value?
Here are some of the ways Bitcoin and cryptos have value and how that value is calculated:
How is Bitcoin Value Calculated?
You can calculate the total value of the Bitcoin network by multiplying the current price by its circulating supply. For example, if one BTC costs $50,000, and there are 21 million coins in circulation, its total value would be just over $1 trillion. This calculation is known as its market capitalization.
Why Is Bitcoin so Valuable?
The reason Bitcoin is so valuable is that its level of adoption keeps increasing. Many people undoubtedly see value in what it offers, either as an investment or a secure digital currency.
Some people believe that Bitcoin will be the dominant currency of the future, so they are acquiring it now in anticipation. Others like what Bitcoin represents, such as decentralization, financial sovereignty, and a hedge against inflation.
Ultimately, Bitcoin is valuable because there is a lot of demand for it. And as its network grows, it could become even more valuable as there will be many more places and ways to use it.
How Does Bitcoin Make Money?
New Bitcoins enter into circulation through a process called mining. The miners are rewarded for doing so and will continue mining new Bitcoins until they reach the maximum supply of 21 million.
People can also make money from Bitcoin by investing in it and selling it later at a higher price. However, Bitcoin is also a type of money itself and can be held and used as such.
Should You Invest in Crypto for Retirement as a Long-Term Strategy?
Whether you should or should not invest in cryptocurrencies as part of your retirement plan is entirely your decision. However, this section will provide some tips on how you can do it sensibly.
First off, you’ll want to find cryptos that have good long-term potential. That could mean choosing cryptocurrencies that are leading in their niche, are well-funded, have professional teams, have proven reliable and secure over time, or have an active user base.
Some of the biggest, most well-known cryptos, like Bitcoin and Ethereum, have outperformed gold and other asset classes for more than half a decade, showing they can be excellent long-term investments suitable for a retirement account.
