How Crypto Price is Determined
This article helps new Cryptocurrency users understand the currency market, its valuation and determination of prices; overall, outlining that the Cryptomarket is an exceptionally versatile environment where users can expect anything and everything.
Like the stock market, the digital currency market also fluctuates, but the nature of its fluctuation is very rapid and wild. To determine how the price of a single crypto coin is calculated and determined, we will take one of the most popular crypto coins to date and use it as an example and figure out how its value is determined.
We will take Bitcoin as an example to find out who or what determines the value of a single bitcoin. We know that someone (it can also be a group of people) named Satoshi Nakamoto is the creator of this virtual currency. All the transactions conducted are recorded in blockchains. These blockchains show us the transaction history and are used to prove ownership of these coins.
Unlike traditional currencies, bitcoin is not governed by any authority or government institution or any government itself. Buying bitcoins is different from buying stocks or bonds.
What determines the price of bitcoins
Things like monetary policy, inflation rates, and economic growth measurements do not apply to bitcoins because nobody has authority over these digital coins. But there is a variety of contributing factors that help determine the value of these bitcoins, and these are the following:
- The market demand of bitcoins and the supply of them.
- These coins are mined using GPU systems, and installing these GPUs is a huge investment in itself; therefore, the cost of mining a single bitcoin also determines the market value of these coins.
- The rewards are presented to the miners who verify the transaction in the blockchain.
- Other cryptocurrencies are competing against Bitcoin.
- Internal governance
- The regulations applied on the sale of bitcoins
- Exchange trade rates.
Demand and Supply
The supply of bitcoin can create an impact by allowing new bitcoins to be created at a fixed rate. By slowing down the circulation rate of bitcoins, artificial inflation can be created and which has actually happened. In the year 2016, the circulation rate was at 6.9%, which gradually decreased to 4.4% in the year 2017 and 4.0% in 2018. The supply of bitcoins can also be impacted by allowing the number of bitcoins to exist in the system. The total number of bitcoins that can officially exist is 21 million, and in the year 2020, the number of coins mined was 18.587 million, which is 88.5% of the total bitcoin that can exist.
One can conclude from the above discussion; there are various reasons through which a digital coin’s price can have a significant impact on its market value. Keeping track of the events related to these can help you out while you are investing in the crypto market.