In this crypto guide, we take a deep dive to answer one of the biggest questions in digital finance:
How does cryptocurrency gain value?
This is one of the most sought-after questions and something that every cryptocurrency investor wishes they know. If you know what gives crypto its value you can also predict if a coin is a good investment or if you are better off leaving your money in your pocket.
After reading this guide, you will be more familiar with why digital assets have become so valuable and also the key factors that move the needle in valuing these coins. Also, you will see the cryptocurrency landscape from a different angle after knowing the real secrets to why crypto goes up and down in such a wild fashion.
Knowing which crypto is about to go up is one of the most difficult things to predict in digital finance, especially in the long term. Many coins get pumped in the short term and traders step on each other to get in for a quick gain. But knowing what coin will stay around for years to come is the most important skill for any crypto investor.
If you want to skip along to a specific part, click the items in the content table below.
Part 1 and 2: I have structured this article to show how cryptocurrencies gain fundamental value in the first part and in the second part I will discuss what causes the price of cryptocurrencies to go up and down in the short term and in the long term.
Part 1 (valuation)
- Different kinds of cryptocurrency
- Why is cryptocurrency valuable?
- What gives cryptocurrency value?
- How does cryptocurrency increase in value?
- How does cryptocurrency decrease in value?
Part 2 (price)
- What makes crypto go up and down?
- What causes crypto to go up
- What causes crypto to go down
- What other investors ask
Different kinds of cryptocurrency
While speaking of crypto valuations we can’t stop without mentioning all the different coins and tokens that are available on the market. Today there are over 20.000 different cryptocurrencies in existence and they all serve different purposes and are built in slightly different ways.
Below is a list of all the different types of cryptocurrencies circulating on the web with a short description included. It’s worth knowing what the different coins do and where they belong to better understand how and where they get their value.
Legacy coins are the more established cryptocurrencies that were launched way back in the early days of crypto. Those coins include Bitcoin, Ethereum, Litecoin, Monero, etc. These coins have been around for more than a decade and they deserve a spot among the quality coins that have survived countless bear markets.
These coins have also proven to be one of the better investments among digital assets due to them staying in the game as a token that is still sought after by the major population in the crypto world. Legacy coins carry the torch for the whole crypto community and they will probably stick around for another decade or so.
Altcoin stands for Alternative Coin and is any cryptocurrency that is not Bitcoin, for example, Cardano and Solana are both altcoins. Anytime you are researching a cryptocurrency other than bitcoin, you essentially research for an altcoin. The number of altcoins keeps growing each month and the value of this group of coins is actually more than Bitcoin itself.
Many believe that altcoins will soon take the number one spot and surpass Bitcoin as a new leader, however, at this moment we don’t seem to have a clear winner. Ethereum is the second biggest altcoin and is also the coin that is closest to taking down Bitcoin for its number one spot.
Stablecoins are any token that resembles the value of a fiat currency, or national currency, such as USD or EUR. For example, USDT is a stablecoin that has a value pegged to $1.
The obvious use case for a stablecoin is to serve as a secure and stable investment for your digital asset. If you do not wish to be a victim of market volatility it is a good idea to put all your money into a stablecoin and keep your value the same.
There are many new stablecoins getting released to the market and some of the more famous ones are USDC, BUSD, and DAI. All these tokens have their value pegged to $1 and investors are storing a lot of their wealth in these stable tokens.
A utility token is a cryptocurrency that is created to serve a purpose on a platform that requires a token to pay for services and goods. Golem Token (GNT) is a utility token where the users of this network use GNT to share their computing power with other members of the same network. All tasks and actions performed on the Golem blockchain are paid for with GNT.
Privacy coins or security tokens are tokens that protect or mask your identity and Monero is one of the most popular ones. Monero is an anonymous cryptocurrency that doesn’t leave tracks behind when you make a transaction. Through the Monero blockchain, you can send and receive tokens without showing the full information of the transactions.
Other popular security tokens are ZCash, Oasis Network, Secret, and Decred.
Proof of Stake Coins
Proof of stake coin is any coin where the blockchain transactions are verified with a proof of stake model. This model relies on members of the blockchain staking their money in order to validate incoming new blocks. This type of “mining” is costly but doesn’t leave a negative footprint on the environment.
Some popular PoS tokens are Cardano, Solana, Tron, Polygon, and Tezos.
Proof of Work Coins
A proof of work coin is any coin where the blockchain transactions are verified with a proof of work model. This model relies on members of the blockchain to use their computing power in order to validate incoming new blocks. This type of “mining” is very costly and not environmentally friendly.
Some popular PoW tokens are Bitcoin, Dogecoin, Dash, Ravencoin, and Digibyte.
Why is cryptocurrency valuable?
Bitcoin and other cryptocurrencies have value for several reasons where some of them are obvious and others are more subtle and it takes a trained eye to see them.
All currencies that circulate the world are inherently valuable due to the fact that they are used as a medium to transfer wealth. This alone makes them highly valuable since they can be used to purchase goods and services.
But what about cryptocurrencies?
Are they really that good at transferring wealth over the blockchain and are people using coins and tokens to purchase goods and services in their daily life?
No, Bitcoin and other altcoins are not generally used to purchase goods and services due to several reasons. They are slow, expensive, and not yet fully adopted by society, therefore creating a lot of difficulties for users to actually use them for everyday shopping. Just take a good look around you and answer the following question:
Where in my city can I use cryptocurrencies to buy things and how does it work?
Most of you reading this will not be able to answer this question because it’s not possible, yet.
So, why do cryptocurrencies have value, and why is the value of each Bitcoin so high? Below is a list of many possible reasons why the cryptocurrency market and its valuation have skyrocketed during the last couple of years.
Some of these topics can be used to forecast future increases in value if you know how to quantify the metrics. If you are curious to know where cryptocurrencies get their value from, read this next part carefully.
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What gives cryptocurrency value?
To give you a better idea of how the value of a cryptocurrency increases and why the prices move up and down on a regular basis I’ve written down some of the main points.
One of these points alone will not tell you why a cryptocurrency has increased or decreased in value but when you combine them you will paint a better picture of what is going on behind the scenes.
Most cryptocurrencies have a finite supply and that alone makes them scarce. This limitation in supply creates an opposite effect to the inflationary setup that fiat currencies have today and in the long term, it favors the upside.
For example, in the case of Bitcoin, it can never be devalued due to increased supply since there will never be more than 21 million Bitcoins in supply. This is how blockchain technology works and this is also what creates a higher demand than the current supply.
It’s worth mentioning that not all cryptocurrencies have a limited supply and they still after reaching the maximum supply keep minting new coins. A few examples of these types of coins are ETH, USDT, USDC, DOGECOIN, and TRON. When investing in digital assets, a deflationary coin might perform better in the long term.
Compared to other currencies, cryptocurrencies have different use cases on different platforms where the actual coin serves as a medium of a transaction to perform different services or pay for goods.
Ethereum is the most common utility token and it is used to fuel the Ethereum blockchain. Whenever a developer creates a new project or platform on top of the Ethereum blockchain, he or she needs to use the native digital asset Ether to run his platform.
The fact that digital assets are used in this way creates immense value both in the short and long term and this is one of the main reasons why many larger investors have made big bets on crypto over the years.
Throughout history, money was always created by the government and was also controlled by the government. However, with the rise of digital assets, pretty much anyone can code or program their own coin to serve any purpose they want.
The term programmable money (PM) is the evolution of money and it completely disrupts the way we see money today.
Programmable tokens will be used by nearly every business, school, hospital, factory, or company in the future where blockchain is the main solution to their in-house problems. Programmable coins might even be used to handle future elections due to the trust factor that the blockchain brings.
The hype around crypto is on a big rise and at this moment we have barely scratched the surface of how big this wave will become. Barely 2% of the American population owns a Bitcoin wallet and only a slight percentage of the big fund managers around the world have had the guts to dip their toes in the Bitcoin bubble.
The hype is spreading fast and the more people that get connected to the cryptocurrency community the larger the influx of money will be.
Right now, there are thousands of developers working day and night trying to solve difficult problems with the use of blockchain and cryptocurrencies. Many companies have completely changed their mindset and are now focusing on blockchain-built technology to run their business. This plus the retail hype has created a long-lasting uptrend in cryptocurrency valuations and will keep pushing it as long as more people join.
5. Portfolio diversification
Portfolio diversification is one of the most important factors in the hedge fund, mutual fund, and pension fund business. Bitcoin has been recognized as a digital asset with no correlation at all to the standard financial system.
This means that Bitcoin doesn’t follow any other market and no other market follows the price swings of Bitcoin. This is the dream for most fund managers where they can take 1-10% of their total portfolio to reduce their overall risk.
Once Bitcoin and other coins become household names in the fund industry I’m pretty positive that we will see another huge wave of money coming into crypto. This will definitely push valuations in a positive direction and it might be one of the biggest bull trends yet to come in the crypto space.
6. Payment system
Many cryptocurrencies are designed to be a better payment system than the current systems that are in operation today. Today there are several coins and tokens that are battling the current payment system such as DASH.
Dash is an open-source altcoin that was forked from the Bitcoin protocol in order to serve payments better.
Dash can be sent to anyone, anywhere, instantly, for less than a cent in commission. The biggest obstacle that payment cryptocurrencies are facing is the Transactions Per Minute count which is still led by the Visa and Mastercard organizations.
An improvement that made digital assets faster than Visa and Mastercard would most certainly push the value of the overall crypto space further.
The decentralized nature of digital assets where the need for a middleman is completely cut off is one of the most groundbreaking things about the whole blockchain revolution.
This creates a trustless world where two parties can exchange goods, and services, or run a program without the need for a third-party validator.
Being decentralized has completely changed how we view the future of business and it’s still in its infancy when seen on a global scale. The smart contracts that run most blockchains are created to act as their own middleman and can be used without trusting the counterpart.
Cryptocurrencies and blockchains are very secure in nature, that’s a fact. Every transaction that is made on the blockchain is stored on the blockchain and it can never be removed. The risk of a hack is also extremely small compared to other systems.
In order to hack a blockchain, you would need to own 51% of its mining power which would require a wealth bigger than the GDP of most countries.
As long as you know how to handle a wallet, make a transaction, and store your digital assets, it is far more secure than storing your dollars or euro in a bank account.
Blockchain is built up by immutable ledgers that store the records of all transactions ever made on the blockchain and prevents anyone from double-spending or tampering with the chain. In short, it’s impossible to change the record of a blockchain once it has been done and this is a huge benefit for its users.
Once a block is verified it is impossible to manipulate the information sent in that block and this is another reason why crypto assets have benefited from an increased value over the years.
Mining costs money and this is a direct boost to the value of a blockchain and its cryptocurrency. The cost of setting up a mining rig and keeping it running for days and weeks is a very costly business, but the reward can be very handsome for those who know what they are doing.
The cost of mining directly impacts the value of crypto in a positive way and many see it as the major contributor to the value of the blockchain.
Take Bitcoin as an example. It takes 10 minutes to mine a block and in this block, there are several miners around the world who are trying to solve the puzzle.
This added computing power has immense value to the blockchain and its members. As long as there are miners, either PoW or PoS, it will contribute and increase the value of its blockchain in a positive way.
11. Trading and investing
Trading and investing are also big factors in how cryptocurrency gains value and with the opening of new crypto exchanges and trading platforms each month the volume of trading capital that goes into crypto is on a steady increase.
Most traders are bullish on crypto and the majority of retail investors are holders of crypto that won’t sell any time soon.
For every 100 traders or investors that start investing in the crypto space, more than 50 stay for the long haul in an attempt to grow their personal wealth. After seeing a gain of more than 80 times in the last 7 years, Bitcoin has raised some interest around the world from both small and big investors that are looking for returns.
How does cryptocurrency increase in value?
In this part of the guide, we are going to go through how a cryptocurrency increases in value and what the process is of going from a low valuation to a high valuation.
We will also discuss how the price of a cryptocurrency can move up and down as they do in both the long term and in the short term. So, if you are interested in knowing why your favorite token has lost or perhaps gained value in the short term, keep reading.
Below is a list of the things that can affect cryptocurrency valuations in the short term:
- Node count – For each node that is created on a blockchain means one new user or member. This benefit the blockchain and cryptocurrency directly in the short term. New users are a boost to any platform and the same goes for crypto.
- Increased development – The more developers that are put into a project will ultimately improve the blockchain and therefore beat the competition. This is a direct positive development for each coin out there and the more developers working on a project the better it will be.
- Forks – For each fork created there is a brand new blockchain set up next to an existing one. If this new team is well-equipped and experienced in the field it will create value as soon as the fork takes effect.
Below are some factors that can boost a cryptocurrency in the long term:
- Scarcity – Cryptocurrencies are deflationary, meaning, they don’t print or mint new coins and tokens like the government do with our fiat money. On the opposite side of crypto, each month, billions of dollars and euros are being printed which burns negatively impacts the dollar and the euro.
- Circulating supply – Some blockchains have a burning effect on their total circulating supply which creates a supply drain in the long term and this boosts the forecast of that token.
- Worldwide adoption – This is a given but I wanted to mention it anyway. For each new adopted crypto user that connects to the blockchain the brighter, the outlook is for cryptocurrencies in general. As long as crypto continues to thrive and drive adoption we don’t have to worry about valuations slowing down.
- New use cases – This comes down to new developments and solving problems with the use of blockchains and their utility tokens. For each new use case, the growth gets an extra push in the right direction.
- Inflation of fiat currencies – The inflation of fiat currencies has an inverted correlation with the value of cryptocurrencies due to the fact that digital assets are deflationary.
How does cryptocurrency decrease in value?
These things cause cryptocurrencies to lose value in the short term:
- Errors and failures – When a company fails to deliver on a promise the outcome is directly negative and these kinds of errors are difficult to escape from. 37coins is a widely known project that failed to deliver on Bitcoin transactions across regions.
- Cost of production – If the cost of developing a new platform is too expensive and this is reported to the public it will be taken as very negative for the near-term outlook. In order to keep going, the company will have to sell parts of the company to raise capital which will take time.
- Forks – Not all forks are good and when there is a dispute within a blockchain company it can have a negative effect on either the new fork or the old blockchain left behind.
- Negative news – Any negative news that is leaked regarding a project will affect the overall valuation. Depending on the level of the negativity it can be short-lived.
Below is a list of long-term factors that are bad for the growth of cryptocurrencies:
- Regulation – Government regulation is one thing that can slow down and completely interrupt the long-term growth of digital asset and their businesses. Take a look at China where the government more or less banned all cryptocurrency projects. This caused many companies to flee the country which took a big long-term hit on the local projects.
- Bear markets – 90% of all crypto projects go bankrupt during a crypto bear market. This happens due to the lack of liquidity and the decreasing coin price for each company. With a falling budget, the only thing is to cut down on spending which directly slows down growth.
- Competition – If a new competitor with much better technology and deeper pockets enter the arena it can completely wipe out the frontrunners. If you are investing in a token, make sure to know which competitors are hanging around.
What makes crypto go up and down?
There are several different factors that affect crypto prices and if you have been around the crypto community for a while you know that a price swing of around 10% – 20% is not uncommon.
But why do cryptocurrencies have this kind of volatility and why do prices fluctuate so much? In this section of this guide, I will try to explain some of the reasons that blow up coins in a positive way and some factors that put negative pressure on the price.
No matter what token you are following you should know these factors so you can put a label on the latest price decline or breakout. Also, if you are looking for long-term success in a project that you follow, check some of the factors that cause prices to increase.
This will help you narrow down the list of potential investments and stay away from poorly structured business models.
What causes crypto to go up
Short-term price spikes are usually caused by these factors:
- Big buyers/investors – When a large investor enters a smaller cryptocurrency he or she can boost the price two folds in a matter of hours if the sum is big enough. The splash waves are of course the news and even more investors piling up to boost the price.
- Exchange listings – This one is a big one. For each exchange, a coin gets listed on it and connects with active traders and investors that help drive prices up. The bigger the exchange is the bigger the positive effect it will have on the price.
- Traders – If a token has had a quick jump in price due to a positive news article, the price surge can be prolonged by traders jumping on the train for a quick buck. Keep in mind that this effect is usually short-lived and can be over in a matter of hours or days.
- News – Good news that affects the adoption of a token will surely drive up the price in the short term and leave some trailing positive during the coming days or weeks. Each piece of news can have a different effect and news that are directed at earnings are the most positive.
- Influencers – When influences get asked to promote a cryptocurrency it usually causes the price to rise. This is a pretty affordable way of advertising a project or business.
Long-term price gains for a cryptocurrency happen due to:
- Increased adoption – The increase in adoption is the biggest reason why bitcoin and crypto get their long-term price appreciation from. The increase in members, nodes, users, products, projects, developers, and use cases is what makes crypto valuable.
- Technological advancements – When blockchain becomes better, faster, and easier to use, more people will be drawn to use it since more companies will start employing this new tech.
- Government acceptance – At the moment, there are few governments around the world that have taken a welcoming approach to crypto. Most countries are in a grey area where there are no regulations or laws for or against cryptocurrencies. Once the majority of governments approve digital assets and blockchain the price will increase in the long term.
What causes crypto to go down
The biggest reasons for short-term price decline are:
- Emotions – Emotions is the bringer of negative price development in any financial market and every time the price collapse among altcoins it is usually an effect of scared and inexperienced investors throwing in the towels.
- Traders – Short-selling is something that exists in all markets and it is the practice of selling an underlying asset in order to buy it back later at a lower price. When traders short a coin the price starts to fall and this can cause a domino effect.
- News – Every investor and trader is connected to some kind of news media such as a website, Twitter, or google news. Once a negative news article shakes the crypto community it can have a dreadful effect on prices in the short term.
- Whales – The largest investors in crypto are called whales and they are known for shaking things up when they dump their coins onto exchanges. This increase in supply traditionally makes prices fall pretty rapidly.
Long-term price deprivation is caused by:
- Regulation – If governments were to bash down on cryptocurrencies it could cause a long-term negative effect on crypto prices and this is something that is difficult to crawl back from. Once a government has taken a stance it usually sticks to it.
- Bear markets – A bear market is a period of negativity and declining prices in general which can last from a couple of months up to a couple of years and the long-term effect of these price declines is usually a long recovery time that slows down growth overall.
- Failed products – When a product fails to hit estimations or when a platform completely misses out on delivering on promises it can be a huge setback for the company and it can take years to come back from this kind of fall. Most companies change the name of the business and start over from scratch to wipe their slate clean.
- Poor economic situation – If the overall economic situation in the traditional financial system is in a draught it can take a toll on cryptocurrency prices as well. Since global money as a whole has a big effect on anything it touches, once the liquidity starts drying up it can have a long-lasting effect on prices.
What other investors ask
Bitcoin is the first public cryptocurrency and has the largest following in the world among all coins. The Bitcoin blockchain currently has the most users among all blockchains and it’s the frontrunner of adoption in the crypto space.
Increased adoption, government acceptance, large investors, and hype are the main drivers right now.
Bitcoin is the most value able cryptocurrency today.
Unlike traditional money, crypto is not backed by any physical good or government security.
They will most probably keep rising during the years to come with the exception of bear markets along the way.
Yes, most cryptocurrencies with a finite supply have a deflationary effect.