New markets like cryptocurrency can be overwhelming to navigate if you are new to the system or you are trying to figure out how to profit from it. Before you delve into understanding investing and trading in cryptocurrencies,
It’s important to understand what the price cost of cryptocurrency is and how to gauge its value. You might see or hear people use price, cost and value interchangeably, but the meaning behind all these three terms are different.
In this article, we will take you through the basics of price, cost and value of cryptocurrencies so that you can make informed decisions with your crypto.
Understanding the Basics
To dive into the world of cryptocurrency, it’s important to first understand what we mean by cost, value, and price. In traditional finance, these terms have specific definitions that carry over into the crypto world, albeit with some nuances.
Cost generally refers to the amount of money needed to acquire something.
Price is the current amount of money required to purchase an asset on the market.
Value can be seen as the worth of an asset, either intrinsically or as perceived by the market.
What is the cost of acquiring cryptocurrency?
This can be attributed to the exchange fee or the on ramp crypto solutions provider’s fee levied in lieu for their services.
Whenever you buy or sell a crypto or when you make a crypto transfer on-chain you pay a fee for it. This is the cost of transactions in crypto. These fees may be categorized as maker fee, service fee and transaction fees depending on the nature of crypto transaction.
What is the price of cryptocurrency?
The price of cryptocurrency represents the current amount of money required to purchase a single unit of that cryptocurrency on the open market. Unlike traditional assets like stocks or commodities, which are often valued based on underlying business fundamentals or physical goods, the price of a cryptocurrency is primarily determined by supply and demand dynamics within a highly speculative market.
An overlooked fact about cryptocurrency prices is that it can vary slightly between different exchanges. This is due to differences in liquidity, trading volume, and regional demand.
What influences the price of cryptocurrencies?
Several factors influence cryptocurrency prices, including market sentiment, technological developments, regulatory news, and broader economic conditions.
Positive news, endorsements from influential figures, or successful technological updates can enhance investor confidence, leading to price increases. For example, this year we saw multiple ETFs being approved and traded led to a soar in prices.
Regulations can have a profound impact. Supportive legislation can legitimize and boost crypto markets, while restrictive laws can hinder growth and suppress prices. Countries like El Salvador adopt BTC as legal tender. During times of war and the pandemic, many institutions across the globe received relief through crypto donations.
The price is also influenced by the cryptocurrency’s supply; for instance, Bitcoin’s price is partly driven by its capped supply of 21 million coins, which creates a sense of scarcity.
Another example of prices affecting due to supply could be burning crypto. Its not like physically burning it but removing a certain amount of cryptocurrencies out of circulation to maintain the price of the asset from any possibilities of inflation.
What is the value of cryptocurrency and how to assess it?
Assessing the value of cryptocurrencies is a fairly complex process, but we will simplify it for you. To assess the store of value of cryptocurrency, look for three basic characteristics. Use as a medium of exchange, Unit of account and store of value (you must have heard this many times). Let’s look into these.
Unit of account: Lets say you have 10 bronze coins and 5 of your friends also have the same bronze coins issued by the same government. Now, you and your friends decide to buy a bagel. You pay 1 bronze per bagel. Not a penny more not a penny less. This currency system makes the trade fair. Each one of you have brought a bagel at the same price.
Now, does crypto too have a unit of account. It sure does. So, imagine you are in a city and you want to have a bagel. The bagel seller accepts Bitcoin. The bagel is priced at, lets say, $2 . Now, you pay the seller $2 USD in BTC depending on the price of BTC today. (1 BTC = 100,000,000 satoshis)
The widespread adoption of Bitcoin across growing countries is a testament that BTC’s unit of account can be vouched for.
Medium of exchange: This is one of the most crucial aspects of assessing the long term value of a cryptocurrency. A medium of exchange is an instrument used to facilitate the sale, purchase, or trade of goods between parties. For something to function effectively as a medium of exchange, it must be widely accepted and trusted by participants in the economy.
Cryptocurrencies are increasingly being used as a medium of exchange, especially in online transactions, cross-border payments, and in regions with unstable national currencies. Many businesses have adopted crypto as a mode of payment. Especially large cap cryptocurrencies like Ether and Bitcoin.
Store of value: This applies to some of the major cryptocurrencies like Ethereum, Bitcoin and stablecoins that are pegged to its fiat currency equivalent. This means that the asset can be safeguarded, retrieved, and exchanged in the future without deteriorating in value. (Note: this is not financial advice) Cryptocurrencies like Bitcoin and Ethereum have been called out for their ‘store of value’.
Conclusion
The value, price and cost of cryptocurrencies are interlinked with each other. In many ways cryptocurrencies are similar to how we assess traditional financial markets, but what makes cryptocurrency so special is technology, its decentralized nature and potential to positively disrupt businesses across the globe.
Not to forget that the crypto market never sleeps. Hence understanding the cost price, the actual market price and value of cryptocurrencies is key to staying ahead of your crypto investing game.
