Every cryptocurrency investor knows that one Bitcoin is worth a certain amount of dollars, the same as other digital coins. But there’s a question that remains and lingers in many people’s minds, including mine. How do we calculate the value of crypto? Honestly, there is no precise way to determine the value. Still, some calculations and assumptions can help us with a reasonable estimate.
This blog will discuss how to calculate the value of cryptocurrency using the available assumptions and why it’s challenging to do so. It will also consider what determines crypto values. Read on to find out.
What Determines the Value of a Cryptocurrency?
You probably know how a crypto’s value can change very fast. With their volatile nature, even within a particular trading period, prices can fluctuate very much. The long-term value of these digital coins is determined by several factors that can have either a positive or negative effect. Here are the significant determinants:
- Supply and demand. The basics of demand and supply of goods also apply to cryptocurrencies. When supply is limited, demand increases, resulting in rising prices. The opposite is also true.
- Media influence. Which sector isn’t affected by media coverage? Media influence can affect people’s perception of cryptos and their value. Having positive news surrounding cryptos and their developments promote the coins, leading to an increase in value.
- Mass adoption. Suppose the community is active and fully engaged in supporting the use of cryptos. In that case, that can have a significant impact on their price. It can help a crypto coin become more accepted and widespread.
- Marketing schemes. Some crypto owners or investors take advantage of social media power and pay influencers to promote their coins. These individuals spread the news about the particular crypto and get people to talk about it and like it.
- Pumping and dumping. Though this is one of the major crypto scams that investors are warned about, it also determines the price of a cryptocurrency. Some individuals create an artificial price pump/rise and then lure others to investors to enter the market. When they do, the fraudsters dump their assets during this period and exit with huge profits.
- Regulation. For now, cryptos are decentralized and out of governmental control. No central bank controls its values. If such restrictive regulations occur, steep drops can occur.
- Technology use. Two notable technologies can determine crypto prices- trading bots and mining. The automated traders (bots) can be used to push prices by establishing an artificial demand for a coin. Mining also affects the value of the digital currency; it’s how new ones are created. The more difficult it is to mine new coins, the limited the supply, the higher the demand, and the higher the prices.
- Node count. This is a measurement of the existing number of active wallets on the network that can be searched on a currency’s homepage. It’s an excellent crypto value indicator. To know whether a coin has a fair price, search for the node count and total market capitalization. You can then compare that with other cryptos.
The Challenge in Valuing Cryptocurrency
Most crypto traders rely on speculations to know how crypto values will move. They look at price charts and guess the movements using either fundamental or technical analysis. The scarcity of cryptocurrencies contributes to difficulty in valuing them. For example, Bitcoin’s algorithm limits it to 21 million in total, Litecoin 84 million, Bitcoin’s Cash 21 million, and Ethereum’s 18 million new ones per year.
Even if individual cryptocurrencies are scarce and limited, the total number of cryptos that can exist has no limit. Programmers can continue to create new ones in addition to the over 2500 existing as they wish. You can imagine that! It won’t be helpful having all those altcoins that most people won’t recognize, adopt, and begin to trade. Currently, Bitcoin, Ethereum, and Ripple dominate the market with over $10 billion capitalizations, but Bitcoin alone has two-thirds on the market share. The remaining thousands of cryptos share the other one-third.
The cryptos’ worthiness will only be realized when just a few makeups most of the market share, instead of all of them becoming diluted like it is now. That will aid in using them as a store of value. Yes, Bitcoin has maintained the largest market share, which is good, but the remaining ones are so many. We can’t even tell how to value the 500th crypto in line. Finally, as long as these currencies remain volatile, that continues to pose challenges in valuing them. Bitcoin’s worth was $6,500 in 2017; it increased to $ 20,000 on 17th December, dropped to $3,000, and increased to $10,000; what a fluctuating trend!
Calculating Bitcoin and Altcoin’s Value
Let’s finally talk about how to calculate a cryptocurrency’s value. While there are no specifically outlined methods to calculate a crypto’s worth, we can use some approaches. One way is to directly take an unconverted price from an exchange and convert it into US dollars or any other applicable currency. Other methods include:
- The quantity theory of money. This method values crypto as a medium exchange. It uses an equation to value money; MV= PT. (M is money supply, V is the velocity of money in a given time, P is price level, and T is transaction volume in a given time). If M doubles while V and T remain constant, P will also double. If we replace Bitcoin with money, it’s value will be P=(MV)/T. The formula can apply in finding Bitcoin’s worth if we know the total number of them in existence.
- Pure store of value: percentage of net worth. This applies to Bitcoin, particularly as it’s considered the most valuable currency and is used as a store of value, just like gold. It’s one way that analysts speculate possible price movements in Bitcoin like they do with gold. The global gold value is at $10 trillion, while the world’s net worth is over $300 trillion. If Bitcoin’s market capitalization attains half of the gold value of around 1.5% global net worth and the total number of Bitcoins existing at that time is 20 million, each Bitcoin will be valued at $250,000. If it only achieves a 10% gold value or about 0.75% global net worth, each BTC will be worth $ 50,000. The pattern can continue with changes in the projected percentages that Bitcoin can achieve.
The Bottom Line
If there’s something that requires thorough study and analysis, it’s how we can calculate the price of a cryptocurrency. The market volatility and other factors make it challenging to do so. Even so, we do know what factors determine cryptos values and can be alert to them. It’s fine to use the available approaches to understand how the crypto values will change over time. Some people have benefitted by seeking professional help from legit institutions, such as https://www.instantloan.sg.