Anyone who has any interest in the cryptocurrency market knows that there are multiple cryptocurrency all of which have different values. As an investor, we need to understand that investment will require understanding the market values of different cryptocurrencies and putting money in accordingly. Some cryptocurrencies are more popular and have stronger communities than others.
To understand what causes this distance between the market values of different digital currencies, one has to understand how a particular currency gets value. There are many different factors that drive the price of cryptocurrency. In this article, we will try to understand how these factors impact the market value of different cryptocurrencies and why they affect some more than others.
Factors on Which the Value Depends
Apart from the price volatility, the market value of different cryptocurrencies is based on multiple factors. The factors impact different cryptocurrency differently which makes their values distinguishable from each other. We will discuss these factors one by one to understand why some cryptocurrencies are more valuable than others.
Supply and Demand
The primary reason which gives a digital currency value is how much it is in demand among investors. For instance, Bitcoin is in high demand because of a limited supply which drives the price of one coin up. The supply and demand mechanism works to impact the market value of any cryptocurrency based on its availability and accessibility.
Some cryptocurrency have a set limit while others do not. Everyone knows that there are only an unlimited number of Bitcoins currently in circulation and a finite number of coins left to mine. This condition makes the supply limited even if the demand increases steadily. It leads to a high price which is comparable to other cryptocurrency that do not offer limited coins.
While the price fluctuations are dependent on the demand is dependent on multiple factors. Decentralized finance and smart contracts are some of the reasons why people are shifting to cryptocurrency. If they become more mainstream people will invest in crypto which will drive the price of some old coins while leaving the others in the dust.
The supply and demand mechanism also impacts the utility of a coin. With high institutional investment the demand for a digital currency rises as it gains the potential to become a mainstream method of transaction. You can read more about market value volatility on Okx.com.
Costs of Production
Now that we have already discussed the supply and demand mechanism we can jump to another factor which is directly related to it. Much like the demand is driven by how commonplace a cryptocurrency becomes, the production costs also make some digital currencies more valuable than others.
The cost of production incurred by the miners is directly related to the demand of the cryptocurrency. A lot of expensive equipment is used during the mining process along with hefty energy bills. The miners usually gain a fraction of the coins that they mined as their fees. No miner would bother with this extensive process if they do not see worth in cryptocurrency.
The reason why Bitcoin has a high value is not only because of supply and demand. It also requires expensive hardware and software during mining. But only because it circulates in a strong community, miners are ready to invest their time in money. This is what makes it more valuable than any other cryptocurrency in the market currently.
Institutional Investment
Believe it or not, institutional investment is a big driver in the market value of different digital currencies. As an individual investor, there is a limit to how much one invests in Bitcoins. Institutional investments are significant because they are strategic monetary engagement of big firms and organizations.
Big institutions that have their grasp on finance and transactions can change the face of cryptocurrency by making some of them more mainstream than the others. For instance, if a big institution being used by a large number of people invests in cryptocurrency, they have the ability to make it a mainstream mode of transaction.
Institutional investment will allow more people to engage with that particular digital currency and use it just as they use fiat currency currently. As a cryptocurrency becomes a mainstream mode of payment, its utility increases which also drives up its market value. While it may be difficult for individual investors to compete with institutions, their engagement is necessary to keep the market value afloat.
Community Engagement
Sometimes the price of a digital currency is difficult to determine because it is overbought. One needs to compare the node count on the market capitalisation of different alt coins to compare their true value. The node count talks about the number of active wallets that currently engage with a particular digital currency.
The market capitalization on the other hand deals with the number of coins currently in circulation and the value of one coin. Looking at these factors determines what drives the price volatility of a particular altcoin. The stronger the community is, the more investors they are to keep the value steady.
Community engagement is different for all digital currencies because of the accessibility of the platform and the user experience. For instance, the community engagement of etherium is impacted by how people make use of its blockchain network. Its future market value is dependent on the upgrades it is supposed to bring for increasing community engagement.
The Takeaway
We hope that you now understand that some cryptocurrencies are more valuable in the market than others. To a large extent, it depends on how users make use of it and keep the value less prone to fluctuations.
The cost of production and the supply is directly based on demand which in turn impacts how valuable a digital currency becomes. Factors like node count give a good idea of how many people are engaged in the community for the long run. The market capitalization is also important to look at for a fair comparison.
