If you are investing in cryptocurrency, knowing about price volatility is important. Multiple factors impact the price movement of the market. From the decentralization to the cost of production, many factors affect how a particular cryptocurrency is valued at any given time. In this article we will be talking about multiple factors that directly impact how a digital currency is priced. Proper analysis of these factors will help an investor with practical application. So, without much wait, let us begin with the description of the important aspects.
The Scarcity of Coins
If there is a limited amount of any asset, its value is likely to increase significantly. Any valuable mineral is high and valuable because it is scarce. The same logic applies to cryptocurrencies because of the limited nature of the digital coins. For instance, everyone knows that there is a specific amount of Bitcoins currently in circulation.
Apart from them, a finite number of Bitcoins remain to be mined. After all of the Bitcoins are mined, a very limited number of them will remain in circulation. This has led to a general understanding that the value of this particular cryptocurrency is likely to increase in the future. Know more about the crypto market at okx.com.
Apart from Bitcoins, there are other digital currencies that have a burning system in place. As per this burning system, certain coins are removed from circulation from time to time so that only a limited number of coins remain in the market. This increases the price of the altcoin.
The Node Count
The cryptocurrency price movement is extremely volatile because it also depends on community engagement. A way to measure the interest of individuals in a particular digital currency platform is through node count. Node count talks about the active wallets on any given blockchain network. It can be checked for each separate digital currency to determine how strong a community is.
A higher node count indicates that multiple people are active and are investing in a currency. A lower node count generally denotes a lower rate of engagement and a comparatively weaker community. Through the analysis of the node count one can check if it corresponds to the market cap. This will help the invested know if a currency is overbought and whether the price will be affected in the future.
The Costs of Production
- Source: cryptoupline.com
A factor which contributes to how much one invests in cryptocurrency is the cost of production. The cost of production basically relates to how much it amounts to when a miner mines the coins of a digital currency. The direct cost of any cryptocurrency is related to how much it costs in producing them. For instance, let us talk about Bitcoins.
The cost of production of Bitcoins is significantly high for a variety of reasons. The production of Bitcoins requires costly equipment that runs for days on end. The price therefore includes energy bills as well as the cost of the hardware system. Along with these costs, there are some labor charges that minors are entitled to.
These can be a fraction of the Bitcoins mined or can be in terms of fiat currency. These costs become a part of the price valuation of a digital currency. To some up the higher the cost of production the higher the value of a particular Bitcoin or altcoin.
The Market Cap
Let us talk about market capitalisation which is an important factor in correctly evaluating different cryptocurrencies. It is a clear cut factor which determines and affects cryptocurrency price movement in the market. The market cap can be calculated by multiplying the number of coins currently in circulation with the current market price of one coin.
The reason why this calculation is important is because even if a coin is priced higher than its counterpart, the market capitalization would be less if the coins and circulation for the former are less than that of the latter. The market cap helps all the new and old investors to analyze the actual value of a cryptocurrency and its future price fluctuation.
The Perceived and Actual Value
A significant determinant in the price of a cryptocurrency is the perceived value of the project management and the company. The actual value of any new digital currency is not very high. It is the potential on which investors bank upon. This generation of profit from a perceived value would not be possible without accurate analysis.
For instance, any project is evaluated through its software and market accessibility. Once the investors per sevet to be lucrative enough to stay in the market for a longer duration, they are more likely to invest in it. The more positive an analysis, the better returns for the company. The better returns for the company, the better the cryptocurrency value.
The Utility of the Currency
- Source: medium.com
The utility of a currency is directly responsible for impacting its price. Cryptocurrencies are available on a block chain and are decentralized so they are beyond the control of any particular governing body. The utility of a digital currency in any blockchain network determines its price movement.
The value of a currency will also be dependent on the number of users demanding a particular service catering specifically to an altcoin. The utility in terms of transactions is also important so that there are real world connections that users can benefit from. Institutional investment in cryptocurrencies has increased their utility significantly.
The Takeaway
We hope that the factors mentioned above help you understand how the pricing of cryptocurrency fluctuates in the market. Understanding the community engagement investment costs and perceived value is just as important as research into new market trends. Gone are the days when digital currencies were only used digitally.
Cryptocurrency is seeing real life applications which influences its market cap through multiple institutional investments. All of these factors taken together give a good idea of how price volatility works in relation to digital currency.
