Cryptocurrencies are taking a huge leap forward and they are pulling more and more people to them. This phenomenon isn’t exactly new, but thanks to the latest jump in crypto value everyone and their mothers are jumping on the crypto train.
Mid last year we could see a huge spike in value and thanks to that we also saw a lot of famous names, brands and investors looking toward the crypto market to turn a profit. Now, these guys probably understand just how the price of the cryptocurrencies get formed and what it depends on, but how about us averages Joes that want to try their luck in trading crypto?! So far we learned what cryptocurrencies are, how they work and how to trade them but what does the price of certain crypto depend on?! What makes it fluctuate like that?
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Now let’s try and break down the factors that make the price of crypto the way it is.
1. Token Supply
Let’s take Bitcoin as probably the most popular crypto. As you already know, Bitcoin is mined and every time a block is mined one BTC is generated. Now the price/value of the coin depends on the coins hard cap. Hard cap is a total number of these coins that will ever exist, which makes them more scarce and as such more valuable. Imagine this picture – you have two equally useful coins and one of them has only one million in existence while the other has one billion. The market logic that applies here is the price of the first one is higher due to its limitations in quantity. What is important to keep in mind is the question – is the supply of the token growing or shrinking and if so, just how fast?
2. Method of Creation
This is pretty straight forward to explain and understand. Just like any other, let’s say product, crypto currency’s price depends on several facts – is it something new entirely, is it a fork of an existing coin, is it built upon an existing chain in coin system. From this, a conclusion is easily drawn – a new coin can get to nearly anywhere especially if it has a good team and good marketing which can hype it up and boost its price. The coin that is a fork of existing crypto has the benefit of the already existing community and infrastructure. If community demanded something new the price of this coin can be high but if is contentious fork than it has a potential to split the community in half. Third, if a coin built upon an existing ecosystem like Ethereum can leverage the same community and developer support than it has a potential of growth, limited though, but growth nevertheless. Only drawback here is that it is highly dependent on the chain it was built on.
3. Token Type
You probably do not know but there are a lot of types of coins out there. We will cover only big ones this time. Fungible or non-fungible coins mean that there are coins that can be looked at as a currency or as a collectable. A collectable (meaning that there would be a limited number of them) in this case can be worth much more than one unit of currency. Non-Fungible coins are rare which implies that their price is much higher while Fungible coins are prolific meaning that there are often millions of them in circulation. Utility or security tokens mean that there are tokens that will allow you to access applications and services, they perform a certain function (Utility), and tokens that don’t have any function and you pretty much hold them until they increase in value (security tokens).
4. Token Velocity
This is another factor that influences the value of the crypto and it shows just how token moves within the network. If it is a high velocity token than the value is lower because it is more frequently passed down and liquidated. Higher velocity tokens are used to make commerce fast and easy but they are often low on value, while lower velocity tokens are those of some significance, rarity and their value grow with time. You could compare these to Gold or and US Dollar. You will use a dollar to purchase coffee most likely before you would take in a gold bar and try and shave a piece to pay for coffee.
5. Token Distribution
What is important to understand is the fact that a healthy crypto ecosystem usually has a lot of equal token holders, with relatively even distribution of the supply across them. Now if it in some case happens that a large percentage of the token is held by only a few people than you have to know that the price of the token tremendously depends on those few holders. They have such big power over it that they can easily lower or raise the price of the token. Just imagine that someone with 30, 40 or more % of your total token starts suddenly selling off than your entire network’s value hits the deck so hard and fast you wouldn’t know what to do. With that amount of supply on the market, your share of the token would be basically worthless.
In the end, as a recap, we will remind you that every token has two values that dictate its market position and price and those are Intrinsic value and Speculative value.
Intrinsic value basically comes down to this – How well does the token fulfill the promises it is supposed to fulfill, does it have any value in the market sector and do people use the token for its intended purpose?!
Speculative value, on the other hand, boils down to this – Will the token be worth more in the future, will the project provide any sort of value in its market sector and will there be enough liquidity to make a return?!
When choosing crypto to trade try and maximize your knowledge about it and try and use these pointers in the process. These will give you a solid understanding of how the price is formed which will eventually lead you to the best choice of the cryptocurrency to trade or even hold for some future exploits.