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Factors Affecting the Value of a Cryptocurrency

03 February 2022

Cryptocurrencies are currently buzzing in the market. As evident, they feature their own highs and lows depending upon the market condition. But, what are the factors that determine the cryptocurrency value?

Read on to find out!

6 Factors that Influence Crypto Values

Like every other currency, cryptos get their value based on community involvement. This may include demand for the coin, its utility and scarcity. As a matter of fact, most cryptocurrencies evolve from private blockchain firms. So, the value of such cryptos will stem from the company’s image, perceived value and project viability. 

Mentioned below are the 6 major factors that affect the value of cryptos:

  • Node count

The node count exhibits the number of active wallets in a network. This denotes how strong a particular community is. Thus, a high node indicates a strong community, and a low node count suggests the opposite. Additionally, a substantial node count may also denote the decentralisation and strength of a network, both of which are essential factors when it comes to cryptocurrencies.

  • Cryptocurrency exchanges

A token, if available in many exchanges, indicates that more people are purchasing it. Meanwhile, investors needing two or more exchanges to swap their cryptos will have to pay a fee for each swap. This will increase the investment cost

  • Cost of production

This is yet another factor that affects crypto value. Miners use special servers or hardware to produce new tokens and substantiate daily network transactions. Due to their rigorous work, they are rewarded with a network fee and virtual tokens.

So, if the cost of mining increases, the value of a cryptocurrency may also go up. However, this factor does not apply to all currencies. So, investors must conduct proper research beforehand.

  • Government regulations

As cryptocurrencies regain momentum and become more mainstream, their chances of attracting specific regulations by the government are tremendously high. Certain governments across the world do not appreciate the unregulated and decentralised nature of this currency. Resultantly, they take certain measures to control this market.

The easiest way to control the crypto market is to add taxation in transactions. Such regulations and limitations will increase the centralisation of virtual currency, thus, affecting the cryptocurrency price.

  • Scarcity

If there is a limited supply of cryptos, the currency’s price will increase. Meanwhile, if more cryptos are supplied, the price will decrease. 

Moreover, some cryptocurrency projects ‘burn’ current coins by guiding them to an irretrievable address inside the blockchain. This is an indispensable way to control supply.

  • Market cap

Market cap or market capitalisation is one of the most straightforward indicators of a coin’s market value. One can calculate the market cap by multiplying the total coin supply with each coin’s price. 

For example,

Coin A Coin B
Circulating coins = 3,00,000 Circulating coins = 1,50,000
Price of each coin = Rs. 4 Price of each coin = Rs. 5
Market cap = Rs. 3,00,000 x 4 = 12,00,000 Market cap = 1,50,000 x 5 = Rs. 7,50,000

As evident from the above table, even though the price of each coin is more for coin B, coin A leads in terms of market capitalisation. So, investors can get an idea regarding a coin’s value through this method. 

Final Word

There are multiple ways to determine cryptocurrency value. That said, there is no error-free way to determine this. Therefore, investors must conduct proper market research and consider all the risks before investing in cryptos. 

 

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