Let alone a decade, in 2020, one BTC was priced at $6,965.72 and as of November 2021 – it was priced at $67,549.14. In order to profit from such appreciation, we have tried to form a comprehensive guide to help understand how Cryptocurrency Gain Value.
Cryptocurrencies work on a technology called ‘BlockChain’. They first came into existence in 2009 when Satoshi Nakamoto invented Bitcoin. Since then, Cryptocurrencies have evolved – other currencies have emerged that prove to be more efficient than Bitcoin. Some people believe Cryptos are the future while others think of these to be the new fad. Whatever they are, they have made some people extremely rich.
Over the past decade, BTC returns have outperformed the best-performing stocks and have been probably the best performing asset class – for people who consider Cryptocurrencies to be an asset class.
The next question really is … How do these Cryptocurrencies gain value? And this article answers exactly that.
How does Cryptocurrency gain value?
Firstly, we believe, there is a difference between ‘Value’ and ‘Price’.
“Price is what you pay; value is what you get.” – Warren Buffett
It took us some time to understand how cryptocurrencies can be valued. The ‘value’ of something ‘does not lie in the eyes of the beholder’. If two analysts were to value a stock, if no incentives are present – the actual value would be similar in nature. Price on the other hand is completely subjective – you can price something much differently – it depends entirely on your whims and wishes.
If you re-read the introduction, you will find that we have used the word ‘price’ and not ‘valued’ because we understand the difference between the two. Naturally, this half of the article answers the question of how these currencies can be valued and how you can make a value judgment regarding buying and selling a cryptocurrency.
Demand and Supply
The fundamental law in Economics is the Law of Demand, it states that “other things being constant, the price of a commodity rises with a fall in its supply and vice-versa.” The total supply in the case of a Crypto(most cryptos) is limited – every cryptocurrency has its own monetary policy.
Furthermore, in the case of Cryptocurrencies with a limited supply – mining becomes even tougher as their quantity in circulation rises.
And therefore, as the total availability of mine-able coins decreases, the price of the coin goes higher.
But Demand and Supply is not the only thing affecting the value.
Uses of the currency
This point is fairly simple. For a startup to be successful, a serious problem must be solved. Food Delivery wasn’t available and came in Swiggy. For a cryptocurrency to be successful – valued highly – it must solve a problem.
Bitcoin has its value(despite its issue) because of the trust that people have.
Ethereum has its value because it is much more efficient than BTC and has a wider application range.
Solana is useful because of NFTs. Solana and similar cryptocurrency gain value.
ICP has value because it served as the founding stone for Web 3.0. It allows you to be a part of the BlockChain-based Internet network. This network currently is controlled by Google and major tech companies.
If you believe that a cryptocurrency solves a major problem without having a lot of adverse effects, the probability of the Crypto having value rises.
Fairly simple again. If a business has competitors, its value decreases – same is the case with Cryptocurrency. There are ‘AltCoins’ present that provide the same benefits as BTC but without the adverse effects.
People believe that Ethereum 2.0 will be released in early 2022. As the name suggests, it would probably be better than Ethereum.
If the ‘use’ offered by one Crypto can be offered by another – the value automatically goes down.
Cost of Production
Cryptos work on the ‘Proof of Work’ system which is a consensual mechanism. In order to be mined, heavy computational power is required using expensive machinery. Miners compete by solving mathematical problems to ‘mine out’ the coins. The more the miners compete, the tougher(and more expensive) it becomes to mine the coins.
Naturally, the miners will not work unless the reward that they receive for this mining is greater than the cost incurred.
To sum it up, as long as there is demand for the blockchain – there will be an increase in price which further increases depending on the cost of producing(mining) these coins.
Should I buy Cryptocurrency?
Well, there is no real answer to that. If you wish to make an extra buck from the extra money you have lying around, go ahead. If your family is dependent on you, it is better to stay away.
There are a couple of reasons why:
- The ‘final’ crypto might not have been invented yet.
“Out of the 6,000-odd cryptocurrencies currently in existence, only a few are likely to survive”– Raghuram Rajan, former Governor of RBI
Even if the people unite and make Web 3.0 a success, we don’t really know which currencies will make it possible.
- We do not know how Governments will react to Cryptocurrency adoption.
The Government of India has announced a bill to “Ban all private cryptocurrencies”. If the Government decides to go ahead with it – you will lose your money.
The future is unknown. While cryptocurrency does seem like the future, it might be better to stay away.