Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
Of course, with such a notoriously volatile market, you’re likely curious about how cryptocurrency adjusts its value. That’s where we come in with the information you need.
How Does Cryptocurrency Gain Value? An Overview
Let’s start with the basics — it’s all about supply and demand.
If the demand is higher than the supply, the value goes up. But if the supply is higher than the demand, the value decreases.
However, we haven’t dug into the nitty-gritty yet. Let’s sink a little deeper into the details.
How Can Users Increase Crypto Values?
Growing the value of your cryptocurrency holdings is a good thing. And there are multiple ways to help bump those figures up.
Keep reading to discover information about mining, media hype, boosting the utility of your crypto, and then buying low and selling high.
1. Mining
Miners use networks to generate new bitcoins (among other cryptocurrencies) and verify recent transactions that will be added to the blockchain.
(A blockchain is like an extensive database of information. Keep reading, and we’ll explore the concept in more detail below.)
So when miners contribute new blocks of transactions to the blockchain, they receive 6.25 BTC (Bitcoin).
The system will only allow the creation of 21 million bitcoins. That means there’s a limited supply, and miners are collecting them.
Remember how we talked about supply and demand? If there’s a limited supply and miners are gobbling them up, that will impact the value.
See? It’s not too complicated in the long run.
2. Media Hype
When a cryptocurrency project receives a lot of hype, more people become interested, which means the demand increases.
And if the demand begins to outweigh the supply, you’ve got a ballooning value. We suggest using social media or other means to draw attention to your project.
We hope you’ll have learned much about what you’ve decided to invest in. What convinced you to join in? Use that logic and get other people excited.
If you’ve seen success, show it, and get your audience excited.
3. Boosting Utility
If you can get more organizations to accept your specific cryptocurrency as a form of payment, its utility (use) goes up.
If a currency is functional, more people will likely want it. This also means they’ll want to hold onto it, meanin you now have a higher demand and a lower supply.
The more you can convince people of the usefulness of your currency, the higher the value.
4. Buy Low, Sell High
Buy your currency at a lower price and keep your mitts on it, as buying reflects demand. As demand goes up, so does the value. And when the value goes up, you can sell high — allowing you to make a profit.
Where Does Crypto Value Come From?
Utility
A cryptocurrency that is of little use is not attractive to people. Why would it be?
They want something they can use.
Let’s dive into the word “utility” a little more — using it as a form of payment to numerous organizations is a utility. But, pulling back, utility in the crypto world gives the holders specific rights.
Another example would be how Filecoin (a type of currency) can use its data storage network.
In short, how well does the currency project you have to go in addressing the problem it is trying to solve? That can give you more insight into its utility.
Scarcity
It all circles back to supply and demand. We keep coming back to that because it’s the basis for everything else, as you have likely surmised.
A certain level of scarcity is suitable for a cryptocurrency because there’s a lower chance for the supply to outweigh the demand.
Growing competition for scarce currency can help boost its value.
Perceived Value
Emotions and points of view can have a world of impact. We’ve seen it countless times in so many different parts of life.
For example, you can see how an emotion like fear can impact the stock market.
Same here: Perception can be a powerful tool.
People’s opinions about a particular currency will impact its value. If people believe it’s valuable, this can help grow its demand.
Belief impacts market price. Some people may look at a coin and feel or perceive that many people will want it and that it will be used quite a bit. The more people buy it based on that perception, the higher the demand rises.
Remember how we talked about media hype? That’s an example of you trying to adjust the perception of that currency.
See how it all connects? Now, let’s dig deeper and talk about proof of stake.
How Do Proof of Stake (PoS) Coins Increase in Value?
First, let’s define proof of stake.
This is a way to prevent fraud by paying users to vouch for a currency’s validity. It’s another means for people to earn cryptocurrency through contributing to the blockchain that isn’t mining.
When users can successfully validate a block and have it added to the blockchain, they are rewarded with cryptocurrency.
These people offer their own coins as collateral (so they now have something “at stake”) for the chance to validate blocks. This is done to ensure these “validators” act honestly because they now have skin in the game.
After all, if a currency’s blockchain falls apart, it will impact the value of that currency. That’s a big reason why protecting its integrity is so important.
Demand
Here we are, back to supply and demand.
And here, we’re talking about the user and consumer demand. With more people wanting to earn passive income (also called “yield”), the demand for these currencies that can be staked increases.
They can use “staked currencies.” This is an example of a “utility” or use.
J.P. Morgan leaders have gone on record to say staking will grow in popularity for institutional and retail investors. Staking could grow to an industry generating north of $40 billion in revenue annually.
Coin Supply
If you put your coins up as collateral (you stake them), sometimes that means they need to be locked up for a specific time. With these assets essentially frozen, it can impact the supply.
Now, let’s talk about proof of work.
How Do Proof of Work (PoW) Coins Increase in Value?
Let’s define proof of work. Whereas proof of stake was about validating existing blocks, proof of work involves adding new blocks. Now, let’s talk about the cost of production, which increases value.
Cost of Production Increases
We’ll use bitcoin as an example since many people mine for it.
This currency’s cost of production is the estimate of the average cost of mining a single Bitcoin per day.
Impacting these are the expenses miners incur for electricity (along with other variables).
The cost of production is one factor that determines the price of bitcoin. The more it costs to produce a currency, the higher the price of the coin, excluding other elements.
Higher price = more value.
What Is Cryptocurrency?
Cryptocurrency is a digital currency. Instead of physical dollars that you can hold, it’s completely virtual.
The “crypto” part of the word comes from the fact it is secured through cryptography. This makes it very, very difficult for counterfeiting or double-spending to occur.
There’s no central authority issuing cryptocurrency. In other words, it is decentralized. That means the government, for example, can't interfere with it. No official authority can.
There are also many types of cryptocurrency — like “traditional” money or fiat currency, with various national currencies such as dollars, pounds, and yen.
As there are different fiat currencies, there are different cryptocurrencies.
Why Is the Blockchain Important?
Blockchains are like databases, but they organize data into chunks or “blocks.” And these blocks are connected like a chain.
Blockchains are essential because they help trace and verify multistep transactions. They are secure, speed up data transfer, and can reduce compliance costs.
It also can’t be changed. This reduces the worry of nefarious actors coming in and manipulating data for their ends. And as others come in to verify the blocks (like we discussed before with “proof of stake''), this also keeps things legitimate.
The Bottom Line
We hope you understand more about how cryptocurrency gains value. These tips may inspire you to become a miner. Or maybe you’d like to get involved in verifying blocks if you can procure the right equipment.
Perhaps you now have the idea of using social media to grow hype around an investment, making it more popular and thus of a higher value.
Pluto is an investing app that helps you automate investing in stocks and cryptocurrencies by building a portfolio of strategies or rules for when to buy and sell. With Pluto, you can quickly build a portfolio of strategies to watch your investments and make better decisions with your own rules like
Please check out our other blog entries if you’re looking for more information. We also have an engaging YouTube page where you can continue your crypto education!
Learn the basics about our services, and as always, please reach out with questions.
Sources:
What Does Proof-of-Stake (PoS) Mean in Crypto? | Investopedia
JPMorgan Says Ethereum Upgrades Could Jumpstart $40 Billion Staking Industry | Forbes
