Cryptocurrency is the new craze for retailers and investors. But one factor about digital currencies always worries investors — volatility. Cryptocurrencies have witnessed massive hikes and drops in value, and that can push any diligent crypto fan into deep thought. But what exactly impacts the value of cryptocurrencies? What are the factors that affect the values? Let us discuss points that we need to keep in mind before investing in a cryptocurrency.
Cryptocurrency, though not tactile and visible like fiat currency, is quite similar in usage. Both the currencies draw their importance in society from their acceptance and usage among people as an exchange medium. That brings us to the first factor that determines cryptocurrency's value —demand. As the usability of a coin increases, its demand rises, which, in turn, increases the coin's value. This has been one of the important reasons why major cryptocurrencies have appreciated in value in the last few years.
This refers to a number of active wallets with respect to a cryptocurrency that can be found on the internet or the homepage of the currency. This is also a factor to determine whether a coin can overcome market crises.
Of course, there are production costs incurred when mining crypto coins. The direct costs and the costs of resources that have gone into the mining of the coin determine its value. Higher the production costs, the higher the coin's value.
This follows from the first point. The greater the number of takers, the greater will be the value of a crypto coin. That's because, unlike fiat currency, which is produced by national mints in huge numbers, crypto coins are generated in very limited amounts. This is an important factor to help determine cryptocurrency value.
Prudent investors weigh the security as well as future prospects provided by blockchains to zero in on a particular cryptocurrency. Beginners may go for the ones that provide maximum security to their coins. However, professional investors look for the future potential of blockchain technologies.
Market regulation by professional crypto traders can also affect the value trends of a coin. This is known as the work of “whales” in the crypto world. This cluster of investors often causes a rise or drop in the value of coins.