The key to understanding what gives cryptocurrency value is to understand the supply and demand for digital currency. While digital currencies have no intrinsic value, their price is determined by the limited supply and increasing demand. As the demand increases, so does the value of the currency. If there is high demand, there is a low supply, which drives up the value. Here are the four main factors that give a cryptocurrency value. These four factors will help you understand why cryptocurrency prices have increased so much.
Demand
There are three basic components that determine the value of a cryptocurrency: demand, supply, and market cap. The first of these elements, demand, determines the amount of money that can be traded for one coin. The second component, supply, determines how much money can be mined. Increasing supply causes a decrease in price, whereas decreasing demand increases supply. A high supply of coins is a negative demand factor. For these reasons, demand gives cryptocurrency value.
While cryptocurrencies are not tactile like fiat currency, they are both similar in usage, which increases their value. The more useful a coin is, the more it is in demand. Fast transactions, low fees, and acceptance by businesses increase the amount of demand for it. Increasing demand also increases the value of a coin as a store of value investment. However, the value of a cryptocurrency fluctuates based on market perception, which is sometimes rooted in supply and demand factors, and can also depend on hidden market factors.
Limited supply
In economics, limited supply refers to the characteristics of commodities with finite supply. One of the traits of cryptocurrency is scarcity. There is a finite number of units of Bitcoin, and the number of new coins is increasing at a constant rate of 1.3% per year. This scarcity feature makes Bitcoin more desirable than other digital assets, such as cash, which can be printed more and have a negative impact on the market. This limited supply makes cryptocurrency an attractive hedge against inflation.
Moreover, limited supply also allows cryptocurrencies to have high prices. Unlike traditional assets, cryptocurrencies have no centralized authority. As a result, they are decentralized and free from financial gatekeepers. Due to the decentralized nature of the network, demand will continue to increase, and the price will rise. This limited supply also helps cryptocurrencies gain in value when a country’s economy is in a difficult situation. For example, when inflation is soaring in China and the bolivar devalued in Venezuela, traders turned to Bitcoin instead.
Applicability
The global landscape of the cryptocurrency market is constantly shifting, and there are many factors to consider before entering this world. Governments, business, and financial institutions must consider regulatory frameworks, scaling, recognition, efficiency, and perspectives before making decisions based on local markets. While there are few people in the world who understand cryptocurrency, many institutions and investors are now supporting its values. Using this new technology to fund market research projects is one way to ensure a more transparent funding model.
Blockchain is one of the most important foundational technologies, and its applicability in trade promotion is a key priority. Despite the lack of practical use cases today, blockchain is an extremely promising technology that could be implemented in infrastructure and future trade spend. Businesses are eager to implement blockchain into their operations. By adopting this technology, they will increase the utility of existing technology. For example, a new way to pay for advertising is to sell advertising space through a network of sharing displays. Moreover, blockchain allows individuals to send media files to one another.
Community
A cryptocurrency has its value in the eyes of a community. People who are interested in cryptocurrencies often choose to donate them to charitable organizations. Its unique qualities make it appealing as a mode of exchange. Unlike cash, which can be printed in unlimited quantities, cryptocurrencies are limited in number. This helps in deflationary conditions as there are limited units of value available. In addition, cryptocurrencies are an excellent hedge against currency inflation.