If anything has characterized the digital money market so far, it is volatility. Therefore, to analyze the future of cryptocurrencies, it is imperative to understand the factors that affect their value. Because we are facing a market that fluctuates much more quickly and unpredictably than we are used to, in the case of cryptocurrencies, their value can increase many points for months or sink up to 50% in just a few days. Therefore, the unpredictability of digital currencies is one of the great difficulties faced by financial analysts when it comes to predicting their evolution.
Factors that Affect the Value of Cryptocurrencies
To know what the value of the cryptocurrency depends on, it is essential first to understand what cryptocurrencies are and how the market works. Supply and demand will be the main factors that will define each digital currency’s price and value. Still, many factors influence and are determining factors, and it is essential to know them and know how to analyze them because cryptocurrencies are another element that companies must have.
The Levels of Supply and Demand
Cryptocurrencies have increased significantly in recent years due to the extensive online exchanges. This has increased its capitalization and has also aroused the interest of many companies or governments investigating the best way to use these digital currencies.
In this way, the price of cryptocurrencies has increased significantly in the face of growing interest. Because, like any product that we find in the market, its value is mainly determined by supply and demand.
Nodes
In an environment where all devices can access all devices through a network, nodes are the point of intersection within this network, and they are, in short, the main hubs through which Internet traffic is routed.
In the case of cryptocurrencies, the number of nodes shows the number of active wallets on the same network, and it serves as an example of how strong the community can be. The increase in the number of nodes is a sign of a strong community, which increases the chances that digital currency will overcome any potential crisis.
Production Costs
Creating a currency involves immediate and future expenses that determine its value. The manufacturing cost of Bitcoin, for example, is relatively high. We are discussing production costs for specialized equipment or servers and the accompanying cooling systems. This process is commonly called mining.
Miners use special servers or hardware to produce new tokens and verify daily network transactions. Therefore, because miners are required to run the blockchain, if mining costs increase, the value of the cryptocurrency may also increase.
The Competition
In a world where innovation is constant, new digital currencies, new tokens, and new projects appear every day. There are very few barriers to entry for new entrants, but producing a sustainable cryptocurrency requires the development of a network of blockchain users. This can mean that if the failures of a rival network are overcome, the new blockchain network can proliferate.
Today we already find cryptocurrencies of all kinds, and there is more and more diversity. And that makes for more viable cryptocurrency projects that can overcome the current restrictions and build a strong user network.
The Cryptocurrency Exchange
When a token is available on many exchanges, more people buy and use it. Instead, those investors who need two or more businesses to exchange their cryptocurrencies will have to pay a fee for each of those exchanges, increasing the investment cost.
In short, the more exchanges required to acquire a cryptocurrency, the higher the cost.
Government Regulations
The growing popularity and momentum of cryptocurrencies have made governments consider applying specific regulations. Some governments do not appreciate these digital currencies’ unregulated and decentralized nature and are beginning to take steps to control this market.
The easiest way to control this market is by applying taxes on transactions. If there are many users of cryptocurrencies in those countries, introducing new regulations will negatively affect their value.
Some countries have chosen to ban cryptocurrencies such as Bitcoin or Ethereum from controlling the market. Still, others have opted to get involved in blockchain technology or are considering developing their national digital currencies. Countries like El Salvador or the Central African Republic already have legal tender cryptocurrencies.
Also, some cryptocurrency projects ‘burn’ current coins to an unrecoverable address, and these coins are taken out of circulation, reducing the total supply. This process occurs when you want to control the price inflation of a cryptocurrency, and it is an indispensable way to control the supply.
