Value of Cryptocurrencies
There are many factors that determine a cryptocurrency’s value. First off, we should clarify the different types of crypto digital assets on the market, and the distinction between price and value.
Coins vs. Tokens
In the world of cryptocurrency, there are two forms of digital assets: coins and tokens.
Coins have a single purpose: to be used as a currency or form of payment. They have their own blockchain and are mined. Some examples of coins are Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), and Dogecoin (DOGE).
Crypto tokens, on the other hand, are digital assets that serve a variety of functions. Some are used as a means of rewarding validators or node operators on platforms built on top of blockchains like Ethereum. Others are used as “stake” on blockchains with proof-of-stake (PoS) consensus mechanisms, or as a way to facilitate community governance over a project’s decisions. A couple examples of tokens are Shiba Inu (SHIB), Chainlink (LINK), and Decentraland’s MANA token.
Tokens can also represent a share of real estate or art, or in the case of non-fungible tokens (NFTs), are a unique digital token with artistic or sentimental value.
Price vs. Value
The price of a cryptocurrency or token, similar to other assets such as stocks, is determined by market factors like supply and demand.
To calculate a cryptocurrency’s price, one divides a coin’s market capitalization (the total dollar value of all coins on the market) by the circulating supply of coins (total number of coins mined).
The price of a crypto asset depends on supply and demand, and can go as high as someone is willing to pay for it. If there is high demand, there will be a higher price. There is no maximum or upper bound that limits a coin’s price, although there are ways to realistically gauge how high the price of a coin can go.
Generally, the greater the supply, the lower the price will be. Some coins have very high supplies, and are known as inflationary coins. For instance, Dogecoin has a supply of over 132 billion coins, while a deflationary coin like Bitcoin has a much smaller supply of around 18 million currently. Bitcoin’s maximum supply is capped at 21 million – once it reaches this, no more coins can be mined.
Thus, the tokenomics (a term used in the crypto community to describe a crypto’s economic model) of these coins sets the guard rails on realistic price movements. This is not to say that Bitcoin cannot and will not reach $1 million per BTC at some point in the future, but this largely depends on the public’s adoption and use of Bitcoin as a form of everyday payment.
Currently, Bitcoin is used as a store-of-value to hedge against inflation. Because of its hedging utility, demand for BTC has soared over the past few years, peaking at nearly 70k per BTC this year. If the public eventually recognizes BTC for its value as a digital currency and means of daily payment, demand will be even higher. Price, therefore, is often determined by an asset’s underlying or intrinsic value.
However, when an asset’s price is too high and does not reflect an asset’s intrinsic value, it is said to be “over-valued”.
What Determines a Cryptocurrency’s Intrinsic Value?
The intrinsic value of a cryptocurrency refers to its underlying service, good, function, or technology that it facilitates or performs. Let’s look at a few examples of cryptos and their underlying functions.
Bitcoin, as a digital currency, is intended to facilitate secure, private and decentralized payments over the internet with low fees.
A token like LINK, meanwhile, is used to reward node operators who run Chainlink’s oracle network, which gathers data from off-chain sources and sends it to smart contracts on the Ethereum blockchain to support DeFi operations.
MANA tokens are used to represent digital assets in Decentraland’s 3D virtual reality world built on Ethereum, and allows users to buy virtual items and land to build their worlds.
Arguments can be made that BTC, LINK, and MANA have intrinsic value, but this value is highly subjective. With crypto, the saying “beauty is in the eye of the beholder” often rings true. One person may think BTC is valuable, while another might think Dogecoin is the future of payments.
When Investing in Crypto, be Wary of the Hype
Because cryptocurrencies are highly speculative, unregulated, and often have unproven use-cases, this commonly leads to them being over-valued. This is due to the surrounding “hype” or FOMO (fear of missing out) that spreads in a community.
Investors sometimes are lured into buying worthless coins because they hear stories about how it made a few people rich, or they are taken in by all the social media hype and get FOMO. When thousands of people think this way, a bubble asset forms.
Bubble assets are hugely speculative and over-valued. The bubble “pops” when the early investors sell for a profit, dumping the price and leaving most people with a loss. This kind of scam is known as a “rug pull”.
While not all over-valued coins are rug-pulls, the end result is the same: a few early investors make immense profits while the majority are left holding their bags.
These crypto assets with little or unproven intrinsic value and high perceived value are often referred to as “shitcoins” in the crypto community. A popular type of “shitcoin” with little intrinsic value that people buy purely because of the hype are “memecoins” like Shiba Inu Token (SHIB), Safemoon, or Feed Every Gorilla Token (FEG). These coins are often deflationary, with huge supplies and therefore a very low market price.
To invest wisely and avoid getting scammed, it’s important to look beyond a currency’s price and examine its intrinsic value – i.e., what it offers to industries, people, and the crypto ecosystem as a whole.
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