How is the price of cryptocurrency defined
Cryptocurrency is a new revolutionary type of currency. Like any other currency or unit of account, they only have value because people think it has value. Some currencies are backed by gold or other precious metals; others are backed by nothing but hot air although have value because people think it has value and use it as a unit of exchange.
Cryptocurrencies were designed as a unit of exchange and as a place to store assets without relying on a central bank. This article will discuss the price of Cryptocurrency in general and what affects the price, it is not limited to Bitcoin but this will cover all cryptocurrency.
What defines the price of a cryptocurrency?
The following features are the main driver of cryptocurrency price, but not limited to these.
Limited Supply and supply/demand.
Energy put in in the form of electricity to secure the blockchain.
Blockchain difficulty level.
The utility of the currency, and how easy it is to use and store.
Perceptions on its value by the public.
Price of Bitcoin.
Confidence in traditional systems.
Precious metals gain their value/perceived value due to their utility and limited supply, and price is often tied to supply/demand. Supply/Demand is a simple economic factor that affects the price of many things.
In some countries Bitcoin and other cryptocurrencies is classed as an asset, in others as a currency.
Bitcoin, for example has a maximum of 21 million whole units, divisible 100 million times. With over 7 billion people on the planet, if even 1 billion were to adopt Bitcoin, 21 million whole units would not spread very far without a significant price tag.
The supply is also bought in at a constant rate and is unchangeable due to the coconscious rules. This creates a supply that is limited, and thus people will pay more to get the coins they think have value.
Block reward halving’s, like the Bitcoin halving of 2016 caused the price to slowly increase as the halving approached, due to the reduced supply of new incoming coins imminent. This can affect the price of many cryptocurrencies, but in the case of Litecoin, did not even make a major dent in the price.
The energy put into securing blockchains can be intensive. In the case of proof of work (POW) blockchains which are the most popular form, electricity usage can be intense. In the case of Bitcoin, the blockchain uses as much energy securing it at present as a small country uses. This has a factor on the price, as it takes a certain amount of energy on average to ‘mine’ one Bitcoin. This goes up with difficulty increases.
The more secure the blockchain and the higher the mining difficulty, the higher the perceived value and price and the harder the coins are to get through mining. This can have an impact on price and ties in with the energy usage above, in the case of proof of work blockchains such as Bitcoin and Litecoin.
A key factor in the price of any cryptocurrency is its utility. If you cannot use it for something, be it an investment or for payments, then it would have no or little perceived value. In the case of Bitcoin, it is usable for payments on a reasonably high and ever increasing scale, meaning that its utility is high. Its high difficulty and energy usage give it a reasonably high price and as such can be used for an investment. The changes to utility can cause price volatility.
In the case of Ether, as it was designed a smart contract platform this is a practical utility, which increased the price of Ether over many other alternative cryptocurrencies.