What Gives Cryptocurrency Value?

Josephine Inika -

Cryptocurrency currently has a global market capitalisation of $909 Billion. Bitcoin has a market cap of $334 Billion, while Ethereum has a market cap of $156 Billion. These numbers clearly show that the crypto industry is valuable.

But how does it get this value? This article answers the question and adds some extra interesting information about crypto you may not have known.

What is Cryptocurrency?

Cryptocurrency is a digital asset that exists in the form of coins and tokens. It's a digital asset that can be accessed from anywhere in the world at any time.

It is used for online trading and payments and as a store of value.

The most popular cryptocurrency is Bitcoin. Other popular cryptocurrencies include Ethereum (ETH), Solana (SOL), Cardano (ADA), and Tether (USDT).

Cryptocurrency is supported by blockchain technology. The blockchain records crypto financial transactions and history and validates ownership of coins and tokens.

The most mainstream use of crypto is for individuals and businesses to pay for goods and services.

It's also used to send funds locally and internationally. With a crypto wallet, you can send or receive money from nearly anywhere in the world with lower processing fees than fiat money.

What gives cryptocurrency its value?

Like any currency, crypto gets most of its value from utilisation.

However, cryptocurrency doesn't have a centralised ruling authority or governing body like The Federal Reserve for the Dollar, the Bank of England for the Pound, or the Central Bank of Nigeria for the Naira.

In the stock market, a company or business's worth is calculated by multiplying the stock price by the number of shares to show market capitalisation.

Depending on demand and supply, a stock's price can either go down or rise. The higher the demand for a stock, the higher its price. The same principle applies to crypto.

Increased demand for a cryptocurrency sends its price up. Lower demand sends it plummeting down.

Demand for cryptocurrency depends on several factors. These are the top three factors that affect cryptocurrency demand and value:

  • Utility Factor

Utility is perhaps the most essential factor determining a cryptocurrency's value. If a coin or token has an apparent use, people will trade it and use it as a store of value.

For example, stablecoins like Tether (USDT) have become an easy way for people to send money locally and internationally.

In 2021, Chainalysis, a blockchain data platform, revealed that Africa received $105.6 billion worth of cryptocurrency—a 1,200% increase from $8.8 billion in 2020. Stablecoins made up a large portion of these figures.

Another example of crypto utility is how Bitcoin (BTC) can be used to pay for Microsoft products and make donations to Wikipedia.

Ethereum (ETH) is used to pay for NFTs and digital art. Sandbox (SAND) and Axie Infinity (AXS) are used to pay for The Sandbox and Axie Infinity online games, respectively.

How a coin is developed and the purpose it is created to serve have a tremendous impact on its value. That's why only about 20 coins make up about 99% of the total crypto market cap, despite the existence of over 13,000 cryptocurrencies.

  • Popularity and Acceptance Metrics

Cryptocurrency prices (and, by extension, value) are affected by popularity metrics like:

  • How many people know it exists and can be used for transactions?
  • How many thought leaders, influencers and prominent figures support it?
  • How often is it discussed on the news or social media?
  • Are there communities focused on its growth or use?
  • How many people are watching its growth?
  • What is the ratio of positive to negative press about it?

Here's an example of popularity metrics affecting cryptocurrency value:

On May 12, 2021, when Elon Musk tweeted that Tesla would stop accepting Bitcoin as payment because of environmental challenges, the price of BTC dropped around 15%.

Twelve days later, Musk tweeted positively about the North American Bitcoin miners' plan to publish renewable usage, and the price of Bitcoin went up 4%.

  • Regulation

One of cryptocurrency's major selling points is its decentralised regulation.

Cryptocurrency runs on decentralised finance (commonly known as DeFi). DeFi lets you do most things banks typically offer, like trade assets, earn interest and so on - but quicker and without third-party services and a mountain of paperwork.

Cryptocurrency is majorly free from centralised authority control like traditional banking. This lack of conventional regulation is positive for some people and pulls them into using crypto.

For others, it is a discouraging factor.

Nonetheless, the positive pull has been significant enough to increase cryptocurrency value. For each crypto critic, there's a crypto enthusiast. This kind of balance helps keep cryptocurrency at a valuable margin.

To Wrap Up

What gives cryptocurrency value is similar to what gives fiat value - utility and popularity. The more cryptocurrency is widely accepted and used for daily individual, business, and corporate transactions, the more its value increases.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.