How Does Cryptocurrency Gain Value?

Posted by in Crypto | Updated on November 15, 2022
At a Glance: Cryptocurrency can gain value on exchange platforms. It increases in value based on supply and demand. Value fluctuates based on the market’s perception of its value at any given time.

If there is one thing we all know about cryptocurrencies, it is that they are volatile. The stories about people making millions during a crypto upswing make the headlines frequently – but so do the stories of people who lose everything during the downswings.

Additionally, because there is no physical product or centralized organizing body, it is hard to point to anything and say “see, that good thing happened, crypto values will increase now”. So how does cryptocurrency gain value?

In this article, we’ll take a look at what impacts cryptocurrency valuations and how does cryptocurrency gain value.

What is Cryptocurrency?

A cryptocurrency is, most simply, a digital asset. It is called a currency because it was created to work as a medium of exchange in the same way that we use fiat currencies now.

Transactions are internet-based and are recorded in a blockchain. The blockchain shows the transaction history for each unit and is used to prove ownership. The digital assets are best visualized as virtual tokens. These tokens mean something to the internal system and can be programmed to record financial transactions and other valuable information.

Its use as a monetary system is still crypto’s most lucrative feature. It allows users to send cryptocurrencies between parties in exchange for goods and services provided. Because cryptocurrencies are not controlled by any central authority, it has unique advantages. There are usually little to no processing fees. There is less government control and regulation. This means that cryptocurrencies are portable, inflation-resistant, and transparent in their transaction history.

Crypto Trading

Cryptocurrency trading is a new, and growing, feature of the crypto world. Trading is separate from crypto’s use as a monetary system. Instead, users buy and sell cryptocurrencies as they would buy and sell shares of a company. Purchasing stock grants gives you ownership in a company, whereas purchasing a token grants you ownership of that cryptocurrency. In the U.S. tax system, cryptocurrency transactions are viewed in the same way as stock trading transactions. This reflects how most users are making money from the crypto world.

Just as the desirability of its products impacts a company’s share price, the crypto monetary system impacts the cost of crypto trading. The value of a cryptocurrency is primarily affected by its supply, the market’s demand for it, availability, and competing cryptocurrencies.

How Does Cryptocurrency Gain Value?

Cryptocurrency can gain value on exchange platforms. It increases in value based on supply and demand.

The supply of a cryptocurrency depends on how many new coins are being mined and how many current owners want to sell their coins. 

The demand for a cryptocurrency depends on many factors. Demand will be increased based on how useful it is to own the coins. This means if the crypto monetary system works well (i.e. fast transactions and low fees), if smart contracts become more commonplace, and if more businesses start to accept crypto, the demand for crypto will increase. Additionally, there is an increased demand for cryptocurrencies as a store of value investment.

How does cryptocurrency gain value? Like any market, the value of cryptocurrencies fluctuates based on the market’s perception of its value at any given time. These fluctuations may be rooted in some of the supply and demand factors mentioned above or can happen as a result of hidden market factors.

How Users Increase Crypto Value

There are also a few methods how users increase cryptocurrency value – 

  • Buy low, sell high – using the classic investment strategy, users can increase the value of crypto by buying and holding coins. The buying increases demand and hence crypto value increases.
  • Mining – the act of mining Bitcoins or altcoins can be profitable. It also impacts the supply of cryptocurrencies.
  • Increasing utility – as more institutions invest in crypto and accept it as a form of payment,  its utility increases. As a user, you can contribute to this process. This will increase the value of cryptocurrencies over the long term. 
  • Media coverage – crypto prices fluctuate according to media coverage. Users can impact this through their social media accounts.

What Are the Different Types of Crypto?

There are already dozens, if not hundreds, of different cryptocurrencies, with more emerging every week. Some of the more well-known cryptocurrencies include:

That said, there are currently three broad categories of cryptocurrency:

  • Bitcoin
  • Altcoins
  • Tokens

Each of these types of crypto is discussed in more detail below.

Bitcoin

The original cryptocurrency, Bitcoin, is a capped cryptocurrency. This means after 21 million Bitcoins are mined, no more will be mined. 

Having a capped currency means Bitcoin can be used as a store-of-value investment tool. Investing in a store of value currency can be compared to investing in gold. Although there is some transactional value in gold, it is mostly used as a store of value.

Bitcoin uses a Proof-of-Work mining system. This means a network of miners computes complex calculations to keep the Bitcoin blockchain running. Miners earn newly minted Bitcoins as a reward for their work. Proof-of-Work allows Bitcoin to attach a physical value to its transactional system. A Bitcoin is worth a certain amount of computing power.

Altcoins

Altcoins are alternative versions of Bitcoins, but with minor changes. They are often a result of a Bitcoin fork. There are many different types of altcoins. 

Some major differences between Bitcoin and altcoins can be found in the blockchain itself. Some altcoins have an uncapped supply, which changes how the coins are used. Some altcoins have made the blockchain faster, which speeds up both mining and transactions. 

Altcoins also sometimes differ in the method of verification used to authenticate transactions. While some altcoins use Proof-of-Work systems, others use Proof-of-Stake consensus, which replaces miners with validators. Proof-Of-Stake mining requires a lot less energy and fewer resources than Proof-Of-Work systems since Proof-Of-Work miners have to do much more ‘work’ to mine blocks.

Altcoins can also be used to create smart contracts. These smart contracts can be automatically executed based upon certain conditions. There is no need for third-party involvement and so they can be done immediately. Smart contracts can be used in transactions as diverse as property, stock, and gas, making them a very interesting investment. 

Tokens

Tokens have been created to use smart contracts or tokens as a form of currency. They do not have a blockchain and are used on decentralized applications (dApps). 

Crypto coins use the process of mining and the resulting blockchain as a physical measure of the currency. This is similar to how Reserve Banks used to have gold reserves that backed their fiat currencies. 

Tokens, on the other hand, are not representative of any physical thing. They can be used to purchase from the dApps and can be used to get discounted fees and voting fees making them increasingly popular. This is similar to the decoupling of fiat currencies from the gold standard.

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Final Thoughts

How does cryptocurrency gain value?

Like any currency, cryptocurrencies gain their value based on the scale of community involvement. Cryptocurrency gains value if the demand for it is higher than the supply. When a cryptocurrency is useful, people want to own more of it, driving up the demand. Since people want to use it, they don’t want to sell it. This means there is more demand than supply and the value increases.


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