Whether you are new to the practice or have been trading for a while, you must know one thing for certain. Any and all the cryptocurrency are subject to high price volatility which is dependent on a number of different factors.
In this article, we will be talking about the different denominators that directly impact the price of all the digital currencies. The price fluctuation can impact the demand of a currency and impact the investment interest by different people.
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How is the Value Impacted?
A cryptocurrency is inherently different from a fiat currency on a number of factors. One of these is that all the cryptocurrencies are decentralized and have a fixed supply. This makes them invulnerable to any government and less likely to go through inflation. All the cryptocurrencies are decentralized which means they are not governed by any centralized body like a fiat currency is.
All the trading done on any crypto platform is included in a decentralized ledger. This is a public ledger which means that there is not one governing body in charge of all the information of both the parties involved. The transaction details are available for anyone to view even if certain personal details are kept under wraps. Now that you have an idea of the public ledger, here are the factors that determine the value of a cryptocurrency.
The Limited Quantity
Since we are talking about the factors that can affect the price of cryptocurrency, we have to include all the aspects whether they lead to an increasing price or a decrease in it. The scarcity factor is a big driver in the price of any digital currency. Know more about it with okx.com.
It follows the simple principle: the less the amount of coins, the more the value will be. For instance, all the people interested in bitcoin trade know that there are only a limited number of bitcoins left to mine. This means that the value of the coins already in circulation will be increased with the constant mining of new bitcoins.
On the other hand, any currency which has a larger value it’s subject to price decrease. Some cryptocurrencies also engage in burning coins which allows them to make sure that every coin on a blockchain is unique. This leads to a limited supply and hence leads to a stable valuation.
The Production Costs
The cost of production will in turn impact how the cryptocurrency will be valued. Before understanding how production costs impact the price, we have to talk about what they are. Let us take an example of Bitcoin for easy understanding.
During the mining process, a number of expensive equipment is employed for a long period of time. There are a number of special servers being employed by miners along with their time and energy. They are paid for their work in monetary manner as well as with virtual the production cost then includes the price of all the equipment used as well as the labor fees for the miner.
If the production cost increases, the value of cryptocurrency will be directly impacted. However, one needs to understand that there are exceptions to this rule. Proper research will help and invest in determining if production cost will affect the price of a particular cryptocurrency.
The Node Count
A node count symbolizes how many people are invested in a particular network. It shows the trust investors have put in a particular cryptocurrency and also impacts its long term valuation. A higher node count indicates that a larger number of people are actively involved in a particular community. It basically indicates the number of wallets across different platforms that are being used by investors.
A lower node count will tell that the engagement of investors is comparatively low in a particular network. The more a community is involved in a network, the more likely it is to stand the test of time. A high node count indicates a stronger community which will in turn lead to a higher valuation in terms of price.
Restrictions and Regulations of Governments
Since the cryptocurrency network is decentralized, it does not fall under the jurisdiction of any given government. This has long been a point of contention for many governing bodies. The restrictions and regulations the government imposes on any particular cryptocurrency can impact its price. There are high chances that there will be some regulations imposed on cryptocurrencies in the future.
This can lead to a significant disinterest of many investors across different communities. A lower participation will lead to high price volatility. Additionally, one will also have to factor in the taxes on each particular transaction and trade. Once cryptocurrency moves towards centralization; its price will be directly affected.
The Market Capitalization
The market cap or market capitalization is one of the most common ways to determine the valuation of a particular digital currency. Since there is an unlimited supply of coins in a cryptocurrency, it can be easily calculated by anyone interested to know the market value.
All one has to do is multiply the current value of a coin to the total value of the coin supply. This is the most rudimentary method of analyzing the price of cryptocurrency. While calculating the market cap, the main difference will be on the basis of the current coin price and the quantity of the coins currently in circulation.
The Takeaway
Getting an idea of the price valuation is important before investing in any particular digital currency. The market cap will keep on fluctuating depending on multiple factors that we have mentioned above. The primary reason for fluctuation is the node count and the production costs.
Additionally, one also needs to be aware of the coins in circulation that will determine whether or not the price of a particular cryptocurrency will increase or remain stable in the long run. There is a chance that digital currency will be subject to government regulations which will affect its price.
