How is Crypto Price Determined? A Simplified Guide for Beginners [2023]

How is Crypto price determined - Cover

Introduction

The cryptocurrency market may be unpredictable, reaching record highs and then plummeting dramatically. Understanding the value of cryptocurrencies can help explain these shifts.

Cryptocurrency is not comparable to the US dollar or the Euro because it is not managed by a central authority, such as a government. There are no solid reasons for cryptocurrency’s value to vary in the absence of a centralized organizational authority.

The primary premise on how is crypto price determined is that if a large number of people feel it is valuable, it will become more valued. Without regulation, demand can fluctuate – and in certain circumstances, alter dramatically – depending on other factors such as availability, utility, and competitiveness.

What is cryptocurrency?

Cryptocurrency is a digital, encoded asset used for trading. It can be exchanged for products, services, and investments in the same way as fiat currencies may. Fiat currencies, such as the current money system, are issued by the government.

Cryptocurrency and digital currency are not the same things. Because digital currency is backed by a financial institution, it can be converted into cash by visiting an ATM or bank.

Transactions using bitcoin are recorded on the blockchain and, unlike the digital currency, are not validated by a financial institution. The blockchain is a financial ledger or database that digitally records electronic information to demonstrate ownership. Users can immediately swap cryptocurrencies with other users.

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History of Cryptocurrency

The concept of cryptocurrency emerged in the 1980s. The objective was to deliver untraceable cash that did not require centralization. David Chaum, an American cryptographer, invented DigiCash, a form of anonymous money. It was the first electronic payment method that required software and encryption keys to send and withdraw money.

Then came Bit Gold, which is often regarded as the forerunner to Bitcoin. Nick Szabo created it in 1998, and getting the reward required solving a problem. When these two concepts come together, they resemble Bitcoin.

Satoshi Nakamoto released Bitcoin – A Peer-to-Peer Electronic Cash System, a white paper describing the blockchain network and its technologies, in 1998. Bitcoin, he said, is “an electronic payment system based on cryptographic proof rather than faith.” In this paper, he also stated that bitcoin would not be conceivable without blockchain technology.

In 2009, Satoshi Nakamoto coined the first bitcoin. For the first several months, the first block of 50 bitcoin, known as the Genesis Block, had no real value. The value of one bitcoin then hit 14 cents in April 2009. In November 2009, the value increased to 36 cents.

Bitcoin began to grow steadily. Prices began to rise as a result of coverage in publications such as Forbes. Other types of cryptocurrencies were then produced using blockchain technology. There are now numerous forms of cryptocurrencies, with new ones appearing on a regular basis.

Other well-known cryptocurrencies are as follows:

Cost of Production

How is Crypto price determined - Cost of Production
How is Crypto price determined – Cost of Production

The process of producing new cryptocurrency tokens is known as mining. To decentralize and produce the token, this method entails employing software to verify the block on the blockchain.

Participants must use computational power to solve transaction-related algorithms in order to verify the blockchain.

However, there is a rivalry to mine specific cryptocurrencies, owing to miners competing against each other to verify the next block, which can make mining more challenging.

Mining costs more when more powerful equipment is required. Higher mining expenses raise the value of the cryptocurrency in order to cover production costs.

Because the expenses are too high, attackers utilize cryptojacking in conjunction with unauthorized use of other systems to mine crypto for the power demands. A crypto mining bot placed on a target system can also perform cryptojacking.

Cryptocurrency exchanges

The more prominent cryptocurrencies, like Ether and Bitcoin, can be traded on a variety of exchanges. The smaller tokens may only be available on specific exchanges, limiting access.

To buy bitcoin, consumers must first open an account with a cryptocurrency broker, like KuCoin, Binance, Huobi, or Bybit. Starting an account on these exchanges is identical to opening an account on any other investment platform.

KuCoin

KuCoin has evolved into a top crypto exchange, representing one out of every four cryptocurrency holders globally. It has built a remarkable suite of crypto services, such as futures and margin trading exchange, a fiat onramp, passive income services like staking and lending, a peer-to-peer (P2P) marketplace, an IEO launchpad for non-custodial trading, cryptocurrency crowdfunding, and much more.

Huobi

Huobi Global is among the world’s most liquid cryptocurrency exchanges, with substantial liquidity in the popular BTC/USDT and ETH/USDT trading pairs. Customers can deposit funds and receive rates ranging from double digits to triple digits on a variety of cryptocurrencies.

Binance

Binance is the world’s biggest crypto trading platform. Because of its broad range of trading options and capabilities, it is not particularly user-friendly. Depending on their expertise and skills, investors may face a significant learning curve with Binance.

Cross-chain bridges make it possible for users to swap one cryptocurrency for another. It’s analogous to the exchange of money between countries. There are multiple cross-chain bridges available to aid in the exploration of various blockchain ecosystems.

The next step after obtaining cryptocurrency is to store it. There are three ways to keep bitcoins.

  1. Leave cryptocurrency in exchange: After purchasing cryptocurrencies, exchanges provide a cryptocurrency wallet in which to keep purchases. Because exchange markets are a popular target for thieves, this approach is the most vulnerable to theft. In February 2022, for example, robbers stole more than $320 million from the Wormhole cryptocurrency platform.
  2. Hot wallets: Outside of the exchange, these bitcoin wallets are held online. They run on all internet-connected devices and are vulnerable to theft because they are stored online. There are additional smartphone apps for storing cryptocurrency, which are classified as hot wallets.
  3. Cold wallets: Cold wallets, as opposed to hot wallets, are kept offline on an external device. This gadget contains all of the information, making it the most secure solution. However, if you lose the key code, it may be difficult to recover the cryptocurrency.

How does crypto value increase?

In the stock market, the market capitalization of a firm is calculated by multiplying the stock price by the number of shares outstanding. The stock price might rise or fall depending on supply and demand. Stocks in great demand, such as Apple and Amazon, command higher prices.

The same logic applies to cryptocurrencies. Price increases as demand rises. When demand for a cryptocurrency exceeds supply, the price of that coin rises.

Some cryptocurrencies, like bitcoin, have a finite supply and only increase by a defined amount. Other cryptocurrencies, such as Ether, have no supply constraints.

Many factors influence bitcoin demand, including how useful the currencies are and whether or not businesses accept them. Other factors that influence the value of cryptocurrencies include the following:

  • Mining: Miners fight for the encrypted number when attempting to generate a new block, and the first miner wins the freshly minted cryptocurrency. Mining can be costly, especially considering the quantity of electricity required to complete it.
  • Increasing utility: When businesses adopt cryptocurrencies, and there is an investment potential, utility rises. The ability to use it in decentralised finance protocols or decentralised apps can also have an impact on value.

    Consider an Amazon gift card against a small store gift card; the Amazon gift card has more alternatives, making it more useful.
  • Popularity in media. When the media covers crypto, the price tends to vary, and this includes social media advertisements.
  • Regulation. When it comes to value, a lack of regulation can be a positive or bad element. Some investors value the flexibility of no regulations, while others are concerned about the absence of regulation and security.
  • Availability. If the coin is more widely available on many exchanges, it may gain value.

Regulations and Governance

How is Crypto price determined - Regulation & Governance
How is Crypto price determined – Regulation & Governance

Developers modify projects to meet current and future needs. Governance tokens, on the other hand, need stakeholders to agree on any modifications.

Investors prefer solid governance, which is a disadvantage of bitcoin. Its value is volatile and can see large swings. Bitcoin, for example, plummeted below $20,000 in June 2022 after reaching a high of $68,789.63 in 2021.

There is some confusion about cryptocurrency regulation. There is also debate over whether Bitcoin is a commodity, like gold or silver, or a security, like stocks or bonds. Because of this uncertainty, neither the Securities and Exchange Commission nor the Commodity Futures Trading Commission has the authority to regulate cryptocurrencies.

Regulations may have a positive impact since investors will feel more confident about investing in cryptocurrencies. However, laws may have a negative impact on the value of bitcoin by limiting demand and modifying investing rules.

How is crypto price determined for PoS coin

How is PoS Crypto price determined
How is PoS Crypto price determined

So, in order for a PoS (Proof of Stake) coin’s price to rise over time, demand must outpace supply. The following are some of the possible causes:

  • The network provides entertaining and useful apps.
  • Developers are hard at work on new apps that people are ecstatic about.
  • The coin has been added to new exchanges, making it easier for people to purchase it.
  • The network’s exchanges are becoming more liquid.
  • The network is receiving a lot of attention from the media, which is good.
  • The network’s inflation rate is low.

These are the factors that can lead a PoS coin to appreciate in value. Now let’s talk about PoW coins.

How is crypto price determined for PoW Coin?

How is PoW Crypto price determined
How is PoW Crypto price determined

So, what causes the price of a PoW coin to rise? A PoW coin acquires value over time as the cost of production rises. This occurs as the number of machines mining it grows or when the mining reward decreases.

Typically, the number of miners will only grow if the amount of money spent on the currency by speculators increases, hence speculative demand can also be a driver in raising the cost of a PoW coin.

What causes the price of PoW coins to rise or fall is one of the most perplexing and contentious issues in the crypto community. If you want a more extensive, academic response to this question, read Adam Hayes’ seminal paper on the subject. 

Otherwise, here’s the quick and dirty answer: When speculators spend money on a currency at a faster rate than the mining reward rate, the price of the coin rises.

Here are a few reasons how does crypto value increase for PoW coin quicker than its reward rate:

  • The coin is associated with a humorous logo or meme.
  • The coin is receiving a lot of attention in the media.
  • It was one of the early cryptocurrencies and is now appreciated as a historic relic.
  • The number of merchants who accept the coin as payment is rising.
  • More exchanges are listing it.

These circumstances can cause a PoW coin’s value to rise.

Conclusion

Over the last 14 years, the cryptocurrency market has risen dramatically, from near zero to trillions of dollars in total market size. However, while some cryptocurrencies have increased in value, others have struggled to gain any traction at all.

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