Valuation is a financial process that seeks to ascertain an asset’s worth. There are several valuation methods, and one may be better than the others depending on the item valued. Furthermore, each valuation result may produce a different result.
Cryptocurrencies are relatively new financial assets, and the factors determining their value may be dissimilar to those found in conventional methods. Here, we will look at factors that affect the value of a cryptocurrency and its most used valuation method.
Factors that affect a crypto’s value
Cryptocurrencies are digital assets that only exist in a Blockchain. Therefore, they differ from other currencies and financial assets. They are also not regulated by a central authority. However, they are tradable assets, and their value in the market can be affected by several factors.
Supply
Cryptocurrencies usually make known their mining plans, including their token burning plans. There are three main things we look at when talking about token supply.
Maximum supply
Maximum supply is the fixed number of tokens that will ever be mined, and the project’s owners make this known before any mining is done. You can find this information on its website or white paper.
Circulating supply
This refers to the number of tokens currently being sold or bought. However, it usually does not include the number in crypto wallets because they are not being used.
Unlimited supply
Some tokens, such as Ether, do not have a maximum cap on the number of tokens that will be mined, and hence have an unlimited supply of tokens.
Supply greatly affects the value of a cryptocurrency as it is used in determining its market value as we will see in a moment.
Demand
Market demand refers to the consumers’ desire to buy a particular good or use a service and how much they are willing to buy at a given time. Just like other financial assets, demand affects a cryptocurrency’s value. The more a cryptocurrency is bought, the more supply reduces, resulting in its value increases. Simply put, crypto value is high when demand is greater than supply.
Price
The price of a cryptocurrency can be very volatile as it fluctuates every day. A crypto’s price is largely affected by supply and demand, and if you understand this core concept, it will be easier to know how well a cryptocurrency will do.
However, certain cryptocurrencies are pegged on a fiat currency. For example, USDC is pegged on the US dollar on a 1:1 ratio. This means that its price will fluctuate depending on the market value of the dollar. Such cryptocurrencies are affected by inflation and can be more volatile.
Node count
Every cryptocurrency investor has a crypto wallet where private keys are kept. Your private keys allow you to buy and sell cryptocurrencies. Node count refers to the number of active crypto wallets on a crypto’s website. Node count helps investors measure the strength of a cryptocurrency and whether it will be able to survive a crisis.
Adoption
Adoption refers to the rate at which a cryptocurrency is accepted in the market, including the number of places accepting it as payment. Adoption is affected by the real-world problem the cryptocurrency is trying to solve, and the more the currency is adopted, the more demand increases, which raises its value.
Production cost
Cryptocurrencies are produced through crypto mining, which is the process of verifying and adding new cryptocurrencies to the blockchain. This is all done by a decentralized network of miners using a computer. A cryptocurrency cannot function without this network of miners.
Mining can be a very expensive process that requires investing in equipment, and sometimes the more competition, the harder it is to mine. In the crypto market, the more production costs, the higher the crypto’s value.
Competition
There are currently thousands of cryptocurrencies, and more are coming up every month. This means the competition is very high. However, a cryptocurrency that builds its networks and solves a current blockchain limitation or real-world challenge will increase in value compared to others.
Crypto whales
A crypto whale is a crypto investor with large amounts of a specific cryptocurrency. A crypto whale can significantly influence the market value of a cryptocurrency when they buy or sell it. However, most crypto whales choose to use ‘Over the Counter’ crypto trading, where they trade with each other off the blockchain.
How can I value my cryptocurrency?
The most common valuation method used to determine the value of a cryptocurrency is market capitalization, determined by multiplying the token price by its circulating supply. Cryptocurrencies are categorized as large-cap, mid-cap, and small-cap according to their market cap. Market cap is, therefore, a great way to measure the value of a cryptocurrency.
You can find the market cap of different cryptocurrencies in dedicated data aggregates and websites. These sites are beneficial in comparing which tokens are best for investment.
They include:
- CoinGecko
- CoinMarketCap
- Kaiko
- Crypto Daily
- Messari
In summary
Cryptocurrencies can be very volatile, and a currency’s value can suddenly hike or drop, giving you massive benefits or significant losses. Consequently, it is important to understand how valuable your potential investment is, what affects it, and how to determine this value.
Disclaimer: Investing can be quite a wild ride – especially when you don’t know the terrain! To keep things from getting too rocky, take some time beforehand to get familiar with all of the risks involved. Our site is here to up your investor game by providing all available intel about platforms and trends, but we don’t take responsibility nor can we be held accountable as advisors. That being said, it’s still important for you to make educated decisions that match what works best for YOU – just remember: no amount of savvy will guarantee success or protect against loss so invest money you can spare.
