Value is the perceived worth or importance of something. In terms of a digital asset, the value refers to the price one would be willing to pay to purchase an asset. But what gives a cryptocurrency value?
In cryptocurrency value is an interesting subject because price volatility is through the roof. Compare the chart of any cryptocurrency to any traditional stock and you’ll instantly notice the difference. Crypto will have larger, much more frequency price swings.
This means that the value of the cryptocurrency is fluctuating a lot. The bottom line is that the value is the market price – what someone is willing to pay. But this value is derived from a number of characteristics that contribute to the overall valuation of a cryptographic asset. Let’s take a look at some of them.
The overall value of an asset is affected by the amount available. The market cap of an asset represents the total value of all assets available, which is simply calculated by multiplying the price by the circulating supply.
Supply is a delicate thing because the more of something there is, the less value each unit will be worth. However, the overall valuation (or market cap) should remain the same because in theory the total valuation hasn’t changed, just the supply has.
Therefore, if the supply of an asset were to increase, such as when tokens are unlocked, the price per asset would be expected to decrease in some proportion to the amount unlocked. Similarly, if the supply decreases, perhaps due to a token burning, one may expect the price per asset to increase as the supply falls.
The availability to purchase or sell an asset is the liquidity of an asset. If you have an asset that you are unable to quickly sell and turn into cash, the asset is deemed illiquid.
Liquidity doesn’t determine value per se, but illiquid markets can be inflated to mislead investors and traders and create fake value. When markets are illiquid it doesn’t take much buying power to move the market. If a malicious trader moves a market upwards they can make an asset seem like it is more valuable than it is.
In a different vein, some traders and investors view liquid assets are fundamentally more valuable than illiquid assets because they can be quickly turned into cash if necessary.
A fundamental is any building block that contributes to the creation and worth of an asset. There are many different fundamental building blocks including: the founding team, the target market, the product, the progress, the revenue and many more.
Traditional investors use fundamentals almost exclusively to value assets before they purchase. You should learn how to do fundamental analysis if you want to start finding the value of assets.
Here’s how to get started with fundamental analysis.
Congratulations! Now you know what gives a cryptocurrency value.