How Is Cryptocurrency Valued

Each cryptocurrency has its initial value. However, since the crypto market is very volatile, this value changes frequently. If you want to find out how cryptocurrency is valued and which factors will determine its value, you’ve come to the right place.

Our team has compiled an in-depth guide on crypto validation in which we’ll explain why crypto assets need a valuation and how they can gain value.

Here’s what you need to know.

Understanding What Cryptocurrency Is and How Cryptocurrency Is Valued

Cryptocurrencies are digital coins that are most often used as a substitute for fiat. However, digital coins don’t rely on financial institutions, such as banks, to verify transactions. Instead, they use a P2P system that enables all crypto holders to send and receive their coins via blockchain.

In the following segment, we’ll discuss the importance of cryptocurrency validation, as well as the factors that will affect the price of digital coins.

Why Do Crypto Assets Need a Valuation?

Crypto valuation is necessary since it determines the monetary value of a certain cryptocurrency. In addition to showing us what crypto is worth, validations are also performed for taxation, financial reports, and investment considerations.

The valuation process includes many factors, such as supply and demand, cost of production, and competition. Crypto exchanges and government regulations will also affect the price of cryptocurrencies, as you’ll soon find out.

How Does Cryptocurrency Gain Value?

What causes cryptocurrency to rise and fall? Factors like the mining process, utility, supply and availability, and popularity. Now, let’s discuss these factors in more detail.

Mining Process

Crypto coins that use the PoW consensus, such as Bitcoin and Litecoin, are created through the mining process.

The more new coins are created, the smaller their supply will be. This will increase their price. For example, BTC has a total supply of 21 million. The more BTC is mined, the greater its scarcity will be. How many bitcoins are left at the moment? About 1,295,762.5 bitcoins are left to be mined.

This scarcity will make BTC more valuable in the long run. In fact, by the end of 2024, BTC could reach an ATH of $90,000.

Crypto Utility

Crypto coins that have real-world use cases and multiple utility will have a higher value than those that have limited utility. Utility cases include payments, games, DeFi protocols, dApps, etc.

For example, the $DICE token has a multiple-utility nature. Its holders can use it to gain rewards, participate in airdrops, and play games. This makes it more valuable in the long run than meme coins built on FOMO alone. This is why this token could reach the $1 mark by the end of 2030.

Supply and Availability

Another factor that will affect how crypto price is determined is its supply. A meme coin that has a large supply will have a larger number of holders. This will enable it to be listed on some of the best crypto exchanges, which will boost its value. However, a large total supply can also represent a smaller value, as some will have a higher supply than demand.

Popularity

Crypto tokens that are promoted through social media channels tend to create a FOMO effect. The FOMO effect can lead to a sudden jump in the price of a certain token. For example, one of the biggest hypes last month was created around Slothana. This Solana-based meme coin become very popular among crypto investors due to the FOMO effect.

In fact, $SLOTH managed to raise over $15M in less than a month, which is why it was listed on Binance shortly after the end of its presale. The more popular a digital coin is among the crypto elite, the greater its price will be.

Cost of Production

While evaluating cryptocurrencies, analysts will take into account the cost of production.

As mentioned before, coins that use the PoW consensus are created through mining. To create a new block, miners will have to use a lot of computing power. The mining process involves the use of specialized rigs that can cost up to $20,000. It also implies the consumption of a large amount of electricity.

In addition, the mining process includes competition. Namely, miners who successfully create a new block will be rewarded with the cryptocurrency they mine. The greater the competition, the more difficult the mining process will become. This will also increase the cost of the mining process and the value of the currency being mined.

Competition

The crypto market is very competitive, as new cryptocurrencies are created every day. The greater the competition, the lower the value of coins and tokens will be. That’s why crypto analysts monitor how coins perform once they get listed to determine whether they underperform or overperform. For example, if a certain coin trades below its market price, there is a high chance that its value will continue to fall.

To stay competitive, many crypto developers extend the use cases of their tokens to attract new investors and boost their prices.

Cryptocurrency Supply and Demand

Why is crypto going up or down? Due to increased demand and supply. That said, the value of cryptocurrencies is greatly determined by these factors. When demand becomes greater than supply, the price of cryptocurrencies goes up, and vice versa.

For example, if crypto whales decide to sell a large number of their ETH holdings, the supply of Ethereum on the crypto market will increase. Moreover, its supply will be greater than its demand, which means that its value will start dropping.

Cryptocurrency demand can also be increased through burning mechanisms. Burning crypto refers to removing a certain number of tokens from circulation to increase their scarcity. Burned tokens are then sent to eater wallets, which cannot be accessed. The most popular coins that use the burning mechanism include BNB, BCH, and XLM.

Cryptocurrency Exchanges

Crypto tokens that are listed on both decentralized and centralized exchanges will have a larger number of unique holders. This will increase their demand and value. For example, once SLERF got listed on crypto exchanges, its price jumped by 200%, while its 24-hour trading volume reached $1.6 billion. A similar thing happened with SMOG, whose value jumped by more than 900% once it got listed on Jupiter DEX.

Liquidity pools will also affect the value of cryptocurrency. The more liquidity a certain coin has, the easier it will be to sell it at its market price.

High liquidity can also help the coin keep its price stable, making it more appealing to investors. Conversely, low-liquidity coins will have lower market values.

Regulations and Governance

Government regulations can have a big effect on cryptocurrency prices. For example, they can ban crypto mining, which can lead to reduced demand. Moreover, since digital assets are not regulated like fiat, they are more subject to price fluctuations.

Government regulation also allows investors to use futures contracts to bet against the price of crypto, which can reduce their volatility. At the same time, if the governing body changes the investment rules, it could cause the price of digital currencies to decline.

Conclusion

Now that you know how cryptocurrency is valued and which factors affect its price, never invest more than you can afford to lose. Moreover, opt for coins that have high liquidity since their price will be more stable. You should also pay attention to supply and demand. Coins that have higher demand than their supply tend to grow in value.

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