TMCnet Feature
July 05, 2022

How do cryptocurrencies change in value?



If you are new to the cryptocurrency space, you might contemplate how cryptocurrency changes in value. It is a fair question to think about, like someone having free spins online. Well, cryptocurrency is precious despite its volatile nature. As you have observed, bitcoin's prices have increased and decreased tremendously within the last few years.



While all of these occur, newbies are confronted with the challenge of how crypto changes in value. Since crypto does not have any central authority backing like fiat currencies, their value changes based on several things. Here are a few reasons that contribute to cryptocurrencies change in value.

Supply and demand

A cryptocurrency value is based on supply and demand. Whenever the demand decreases than the supply, the price goes down and vice-versa. For instance, if there is a scarcity, the oil price will increase once the demand does not change. If you did economics, you would understand the law of supply and demand. It is also applicable to cryptocurrency as the value changes whenever the demand exceeds the supply.

Furthermore, cryptocurrencies change in value once the demand increases due to a utility increase or a project gain awareness. Immediately a project gets a broader adoption with high investment; it can increase its value.

Cryptocurrency exchanges

Cryptocurrency values might also change once more exchanges adopt a particular crypto. While digital currencies such as Ether and bitcoin are tradable on several exchanges, smaller tokens are available on a few exchanges. Because of this, investors cannot trade these smaller tokens as they would with bitcoin and Ether.

However, once major exchanges accept these smaller tokens into their ecosystem, their value increases as people will believe that the project is a promising one. With this, the demand will increase because the number of investors willing to buy these tokens will increase. Therefore, as the demand increases, the price goes up, thereby changing in value.

Cost of production

Another reason cryptocurrencies change in value is because of their cost of production. New coins are produced through mining, which comprises using a supercomputer to validate the next block. Cryptocurrency is working the way it is because of the miner's decentralized network. In cryptocurrency exchange, the protocol generates a reward as a token besides the feeds exchanging parties pay to miners.

Cryptocurrencies change in value when the mining cost increases. Miners can only mine if the currency value is high enough to offset whatever cost they incur during the mining process. Therefore, these miners can only continue if the demand increases, changing its value.

Competition

With several cryptocurrencies available and more projects launched daily, the crypto space is competitive. While the entry barrier is low for new competitors, creating a viable cryptocurrency is the main task. However, a useful application built on the blockchain can increase value, especially if it improves any limitation.

Once a new competitor gains momentum on its project, it increases its value and competes with others within the industry. Because of this, the price of the incumbent decreases, whereas the new token increases in value.

Conclusion

Cryptocurrencies' value changes due to several factors, including competition, supply and demand, cost of production, cryptocurrency exchange, internal governance, regulation, and legal requirements.



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