How the crypto price is determined
This article details the factors that determine the pricing of various cryptocurrencies
The technology behind cryptocurrency is that of public ledgers, so third parties permission is not needed, therefore increasing the transparency of digital wallets. However, cryptocurrencies are decentralized therefore very volatile in pricing. Some of the most significant factors of determining the price of a cryptocurrency are the following:
The opportunity costs and direct costs of producing a crypto coin is also a factor that determines the value of a crypto coin. For example, Bitcoin’s cost of production is relatively high. The energy and resources put into mining BTC clearly serve as a reason to understand its current market valuation. Production costs also include the added cost of manufacturing customized hardware like servers, GPU/CPU, and cooling systems for the hardware. If a coin witnesses hacking attacks or scandals, its demand goes down rapidly, causing a domino effect.
The usability of cryptocurrencies has increased exponentially in the last few years, thanks to online exchanges. This has resulted in several governments trying to explore ways of implementing digital currencies in their financial system, thus leading to a vast increase in market capitalization of most cryptocurrencies as adoption rates are rising. The rising demand or adaptability of crypto coins is one of the fundamental factors affecting its pricing.
Node count is actually the measure of the number of active wallets on a network that can be searched on the homepage of a particular digital currency. It is an excellent indicator of the valuation of a crypto coin. For analyzing whether a token has a fair price or not, one can search the total market cap as well as node count of the currency. Both of these can then be compared and checked with other cryptocurrencies. One of the enormous benefits of node counts is that it reflects how strong the community of a particular currency is. The more node counts, the stronger its community of supporters. It can also make one understand if a coin is overbought.
Since cryptocurrencies are coded, there are chances of existing bugs in the code. An ethereum-based democratic digital fund named DAO had a bug that was exploited by a hacker to steal $30M worth of ether. In order to fix this issue, a change in the ether blockchain was discussed, leading some to agree while others disagreed with changing the code due to fear of affecting the credibility of ether. This resulted in the splitting of ethereum into two versions – Ethereum (new one) and Ethereum Classic (the original one). Such an event is called a fork, and it has a tremendous impact on the price of cryptocurrencies in the network.
Inflation in fiat currencies
If the price of the traditional fiat currencies falls, the price of cryptocurrencies goes up in comparison to that. This happens because one would be able to get more of that fiat with crypto coins.
If a crypto coin gains colossal popularity and larger adoption rates, its valuation can shoot through the roof. This happens because the total number of cryptocurrencies are usually limited, so the increase in demand can lead to a direct shooting in price.