Recently, many people have found it advantageous to invest in cryptocurrency. Although its value is uncertain and can fluctuate wildly, this currently makes for a lucrative market. A cryptocurrency is a form of electronic money in which the generation of units and the transfer of monies are both governed by cryptographic algorithms.
Many cryptocurrencies exist, the most well-known being Bitcoin.
However, these currencies are not backed by a government and cannot be considered legal tender.
How do they gain value?
If a central authority does not back cryptocurrencies, how do they get their value?
- Cryptocurrencies are traded for goods or services. For example, many companies have begun to accept Bitcoin as a form of payment.
- Currencies have historically been used as a method of storing value, and Bitcoin’s volatility makes it a perfect vehicle for storing value.
- Cryptocurrencies are decentralized currencies, which means no authority controls their production and distribution. This means that there is no authority to mismanage currency supply, leading to extreme price swings. Due to these factors, many investors see an opportunity for quick profits. If you are interested in investing in crypto currencies have a look at fxpro withdrawal fee to find out available options out there.
Factors that affect cryptocurrency value
Many people are starting to invest in cryptocurrencies, but there are still some uncertainties about the gain of these currencies. However, is it possible to know how cryptocurrency gains value?
There are two main ways for cryptocurrencies to gain value. The first one is called inflation and the second is through speculation.
What is inflation?
Inflation is the increase of prices and a decrease in the value of currencies. In other words, inflation can be briefly defined as a general increase in prices for services and goods. Inflation can be caused by several factors, such as a decrease in production or the amount of money in people’s pockets.
Inflation results from a growing number of users who sell cryptocurrencies to obtain new ones or real money, this growing number of users is causing the prices to increase.
What is speculation?
Speculation is the purchase or sale of an asset, hoping that the price will rise or fall. For example, people buy stocks hoping that their value will increase and sell them later for a profit. On the other hand, it is also possible for speculators to raise cryptocurrency prices by buying large amounts of them and then selling them when the value is high enough.
There are an infinite number of cryptocurrencies, and they all use different mechanisms to gain value. Some cryptocurrencies, such as bitcoin, have a fixed quantity that can’t be increased, which means that the only way to gain value is through speculation.
On the other hand, cryptocurrencies such as Ethereum have a mechanism that allows the number of units to increase and decrease dynamically depending on demand.
In other words, cryptocurrencies such as Ethereum have a mechanism called inflation, which means that the value of each unit will increase over time.
Several factors influence the price of cryptocurrencies; these factors make cryptocurrency gain value. One of them is inflation, and the second is speculation. As a result of the demand for cryptocurrencies, more people are using them, and their value is growing exponentially. Check the value and pepperstone review before you invest in cryptocurrency.
George is Chief Market and Broker Analyst at brokertested.com. Prior to being recruited by brokertested.com, I served SVS Securities as Chief Market Analyst for two years. Earlier, he joined Morgan Stanley in Nov 2013 as Research Analyst.
George is a well-rounded financial services professional experienced in fundamental and technical analysis, global macroeconomic research, foreign exchange, and commodity markets and an independent trader.