Cryptocurrencies are very volatile, with their value changing from time to time. Many are people who see cryptocurrencies as a great investment plan, especially as it is becoming more and more accepted. Some companies like PayPal have actually accepted cryptocurrency as a means of payment.
What is cryptocurrency?
Cryptocurrency can simply be defined as internet-based digital money. They are created on the basis of blockchain technology. They cannot be interfered with by any government policies or laws as they are not controlled by any central power. Some advantages of using cryptocurrency include:
- They are very flexible.
- They can be divided easily.
- Transactions in cryptocurrency are very straightforward, transparent, and very hard to modify.
- Transaction fee when trading with cryptocurrency is less compared to when using fiat currency; sometimes, there isn’t any transaction fee.
The process of analyzing the crypto markets and speculating the price of cryptocurrency and/ or buying and selling the cryptos is called crypto trading.
What are the different forms of cryptocurrency?
Cryptocurrencies can be categorized into three categories, i.e., bitcoins, altcoins, and tokens.
It is the oldest cryptocurrency and is capped at 21 million bitcoins. It allows individuals to transact electronically without a middle party like a bank. Its history goes back to 2008, when its whitepaper was let out. The BTC network was later launched in 2009. Since its inception, Bitcoin has never experienced a system failure or downtime, and transactions have been seamless ever since. Just like fiat currency, Bitcoin can be used, saved, and transferred. Like gold, Bitcoin is a scarce resource as it is capped and, therefore, it is a great store of value. Bitcoin is very volatile, and its price goes up and down from time to time.
Since the inception of Bitcoin and the release of its source code in 2008, at least 856 other cryptos have been created. These cryptos have been named altcoins or alternative coins because they are alternatives to Bitcoin. Just like Bitcoin, they operate on blockchain technology. They have a very wide range of uses. Some, like Litecoin, are used for transactions just like Bitcoin. Others, e.g., Ethereum, are used by developers in the coding of dApps (decentralized applications) and in the creations of smart contracts. Smart contracts work by allowing a transaction to take place when certain set conditions are met without involving a third party. Altcoins are used in a wider range of fields like gas making, property, and stocks.
Tokens are very different. Unlike Bitcoin and altcoins, they cannot work independently, and instead, they are used in dApps and in the network of other cryptos blockchains. There are about 1500 tokens existing today. Tokens attract more investors as they can be traded for money. Mostly, people buy tokens for one reason, to sell when the price goes up. Some of the cryptocurrencies that host tokens include Ethereum, NEO, Omni, and TRON.
How do cryptocurrencies gain value?
Here are some ways in which users increase the value of cryptocurrencies.
- Demand and supply
Just like any other asset, cryptocurrencies are affected by the law of demand and supply. When the demand for crypto is higher than the supply, the value increases, and when the supply is higher than demand, the value decreases.
Since the launch of Bitcoin, more and more cryptos have emerged. Bitcoin had for long been the one major player in the market until a few years ago when the likes of Ethereum became more accepted. Ethereum has a wide range of uses. This had had a major impact on the value of ether which has become a major competitor to Bitcoin. While competing strongly with Bitcoin, ether is also facing competition from the likes of NEO. People will always consider the better competitor meaning its value will increase.
- Technological development
An upgrade in the technology in certain crypto will lead to the value of that crypto. Take, for instance, the Bitcoin fork in 2017 led to a rise in the value of Bitcoin. In 2021, Ether’s price also changed significantly following the London fork. Technological advancement does not always result in value increase. When Cardano introduced its smart contacts in 2021, its value increased by 22% but dropped sooner due to competition.
- Celebrity touch
Celebrities, in a way, can influence the value of cryptos. Remember when Elon Musk tweeted about Dogecoin leading to a drastic increase in its value? In April 2021, Elon’s tweet on Dogecoin led to a 100% increase in the coin’s value. However, with the wide acceptance of crypto as a means of transacting, celebrities may not be able to influence the value as much in a few years’ time.
Whales are people who buy and hold coins of a certain cryptocurrency in bulk. Some celebrities, e.g., Elon Musk, can be considered as whales. For Bitcoin, one can hold up to 1000 coins while the altcoins limit is usually higher. Rumor has it that Elon is a Dogecoin whale following some bulky transactions of approximately 6.3 trillion Dogecoins that were made in a span of 2 days in October 2021. He has, however, not accepted or denied the claims. Such a huge purchase will lead to an increased interest in smaller investors who do not want to be left out, and so the price may go up.
Users can also increase the value of cryptos in the following ways:
- Mining – mining cryptos have benefits. Mining has a huge influence on supply.
- Holding – some users buy and hold cryptos either to sell when prices go up or to earn dividends from them. Holding reduces supply; hence value goes up.
- Media coverage – how much crypto is talked about in the media has an impact on its value. Users can increase coverage by using their social media accounts to talk about crypto, just like Elon did for Dogecoin.
- Increased utility – as more and more companies are accepting crypto as a means of payment, utility is increasing. In the long run, the value of the most used crypto in day-to-day transactions will increase.
As much as there are people who still see crypto as an investment, there are some who are using it to transact daily. The value of crypto can be influenced by many factors including, whales who buy many coins, how celebrities talk about crypto, technology, and the law of demand and supply.