The value of crypto is that it does exactly what users want money to do; store consistent value and act as a medium of exchange for goods and services globally, not just locally.
So what determines the value of a cryptocurrency and how does this affect the long-term value appreciation?
Here, are how you predict the price of a cryptocurrency using these metrics.
The metrics give you an overview of whether the price of the coin or token will rise and the factors that will drive the fundamental economics of the token.
- Use case of the crypto project: for instance, when you compare Defi tokens or utility token — looking at their historical price data to other Altcoins that is not Defi or utility token, you discover that most Defi or utility token has an exponential price increase compared to the other Altcoins. To know about the use cases read the crypto project white paper.
- Supply and demand: these are the most important determinants of cryptocurrency price rise. With the rising demand or appetite of investors to hold or adopt as a means of payment, this demand will increase the value. Some factors that shape demands and supply you should pay attention are; coin burning rules, news about new partnership and adoption, legal cases (if the cryptocurrency have a pending legal case like we have seen played out between Ripple and SEC, the price will plummet. These fundamentals give a clue of what the demand and supply will be in the future. If this is positive, you will see the value of the coin increase.
3. Supply cap and scarcity: the value of crypto coins will have a tough time increasing if there’s an excessive amount in circulation without a well-articulated plan to burn the excessive coin and remove them from circulation. Also, if there’s weak governance that ensures that the coin does not exceed the supply cap, such a coin is not advisable to hold for the long term. Scarcity plays an important role in increasing in value of crypto coins.
- Cost of production: the direct costs and opportunity cost of mining a coin also is a factor to consider. If the cost is high, the value of the coin will keep rising in value. Bitcoin for example has a high cost of production. We can see the resources and energy that have been put into the mining of bitcoin as a reason Bitcoin have value.
5. Loss of supply increasing implies coins lost forever, which is trapped on the wallets of deceased traders or wallets the traders have lost their passwords or access to. This assumed loss is factored into the value of the coin because the more this happens the price could increase because the total supply in circulation would have been essentially reduced.
6. Mass Adoption: if a currency gains mass adoption; its value can shoot through the roof. This is because the total number of most cryptocurrencies is limited and an increase in demand leads to a direct increase in price.
- Inflation of fiat currencies: if the price of a fiat currency is devalued or falls, then the price of Bitcoin would go up concerning that currency because people will rush to save the value of their money by converting the fiat to Bitcoin.
- Market capitalization and liquidity.
- The number of active wallet addresses and transfers / Daily trade volume.
- The Price spread is the difference between the buy and sells price. If the spread is high the value will increase because people will like to trade the coins most often.
- Media / Celebrity Hype and Public Sentiments.
Amongst these metrics the pinnacle is supply and demand, this is the most important metrics to look at.
Anything that influences the supply and demands has a huge impact on the price action of a coin, for instance, if the coin has a sound use case may be the coin, is used within the ecosystem to run transactions, like Ethereum the price will keep rising as the demands increases; if a cryptocurrency has a high token supply with a little demand from traders and users, then the crypto currency’s value will drop.
Conversely, if the supply of a particular cryptocurrency is limited, and the demand is high, the value of the coin will increase: this is a basic economic principle.
Another factor you should pay attention to is Negative publicity, you would see the price of that coin take a dip. While, if the same coin were to get high-profile support and good media coverage, the price would almost certainly increase, which implies that human emotion and hype heavily influenced prices.
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