Investing in a financial asset is a major decision which is based on the profitability, credibility and the likely value of the asset in future. For investments in stocks, bonds or real estate, we could evaluate the above credentials by looking into the financial statements of the company, historical price charts,etc. If the value looks attractive, we can invest in such assets without bearing the risk of facing huge losses. However, finding the value of cryptocurrency for the purpose of investing into it is different as we don’t have any financial statements to analyze. Reasons???
Why Is It Hard To Find The Value Of Cryptocurrency
- Cryptocurrency is not a corporation but a new radical type of digital asset. Cryptocurrency was developed as a medium of exchange without depending upon any bank or central authority. The value of cryptocurrency does not depend on its capacity to generate revenue but on the direct participation of the public.
- All the cryptocurrencies are in their infant stage, meaning developmental stage, which implies that there is a limited use of these digital currencies in the real world as a medium of exchange. Therefore, there is lack of proper track record.
So, there is an urgent need of how to find the value of cryptocurrency. But there is no precise inherent method which could give us the exact value of cryptocurrency. Valuing the cryptocurrencies involve estimating or perceiving their values on the interaction of various factors that affect them. Some of the factors that affects the value of cryptocurrency are mentioned below.
Some Factors Affecting The Value Of Cryptocurrency
Demand and Supply
These are the two main economic factors that affect the price of almost everything in the economy. Cryptocurrency is not an exception. For example, there are 21 million whole units of Bitcoins which are divisible upto 8 Decimals.This supply is kept limited so that people have to pay more prices to get the Bitcoins in case the demand rises.
The energy used in securing blockchain can be huge. Electricity required in case of producing the cryptocurrency will also inflate the value of cryptocurrency in case the demand is rising
The price of any cryptocurrency is determined by its utility as in whether you can use it for payments, investments or anything else. The higher the utility, the higher will be the value of cryptocurrency.
Investors can greatly affect or manipulate the value of cryptocurrency in many ways, like:
- Investors having a large amount of capital at their disposal can buy a considerable percentage of the coin supply, which can pump up the prices of cryptocurrency
- An investor investing a huge amount of funds in a small coin can cause unusual rises in the value of cryptocurrency,
- Large whale investors artificially pumps up the prices of cryptocurrency first by buying in huge quantities. This causes FOMO ( Fear Of Missing Out) in the mindset of small retail investors and hence they too invest in the cryptocurrencies. More demand for the crypto-assets is experienced which again inflates the value of cryptocurrency.
Now that we have understood that the value of cryptocurrency depends. Now let’s have a look at the two approaches for finding the value of cryptocurrency.
Some Ways To Find The Optimal Value Of Cryptocurrency
A very important way of assessing an asset’s value is by analyzing its historical price data. This applies to cryptocurrencies as well. Assessing the price data in case of cryptocurrencies involves Sharp ratio. The Sharp ratio is the value of an asset’s return on investment divided by the asset’s volatility. A sharp ratio above 1.0 is considered good. So sharp ratio can be used to determine the best mix of various crypto assets according to their level of volatility.
Network value to transaction ratio
NVT measures the volume of cryptocurrency which is traded to know how active the cryptocoin used in the economy, that is how fast is the circulation rate!
Daily active users
As the name clearly states, the number of users that use the cryptocurrencies are assessed on monthly basis, which helps us to know about its demand and thus the future value of cryptocurrency.
In reality, when we ascertain the value of cryptocurrency ( Bitcoin, Altcoin or a new ICO) for a long term view, the assessment is always qualitative, which means some kind of subjectivity is there. The following main traits are considered in this regard:
- The core team behind the project and their suitability for solving a particular issue.
- Seeing the white paper behind any crypto asset and analyzing whether that problem and solution is meaningful or not.
- Considering, how other blockchain experts think about the project.
This article has discussed that what factors could possibly affect cryptocurrencies and how to give value to it. As already said, the value of cryptocurrency greatly depends on how the community perceives its value. The factors and methods will not give you the exact value of the currency but it will surely specify a range within which its value would be. KryptoMoney.com publishes latest news and updates about Bitcoin, Blockchain Technology , Cryptocurrencies and upcoming ICO’s.
Prarit Singhania is a commerce graduate and is a Technology enthusiast. Working as Sales Manager in Pharma Co. in Day and a tech-writer at Night. Prarit is also a financial trader who invests his time and money in stocks and crypto-market. Prarit believes that blockchain technology will soon have a remarkable impact on traditional businesses, government, and even in our day to day life.