What Determines The Value Of A Particular Cryptocurrency Or Token?


In an earlier article we clearly stated that heavy cryptography is employed to make sure that only a certain amount of a currency or token is ever produced in order to maintain the decentralization of the network. This effectively means that there’s only a limited supply of any coin. Simple economics tells us that if a commodity is in demand, and the supply is limited, the price of the commodity tends to rise. And this is, broadly, what drives the price of a crypto.

That said, the question is half answered. Supply is limited, so we don’t have to worry about that, but what drives demand for a particular crypto? The discussion below will shed some light on this.

Utility

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The first thing to understand is that these coins don’t have any intrinsic value; the coin earns value solely based on its perceived utility. For any commodity to have good demand, the commodity should have a utility that is in good demand. It’s very simple really. If a coin provides a service that helps solve a big problem for a large portion of the population, chances are that people are willing to pay a lot to have access to the limited supply of the service.

Technology

After considering the utility, one must also have a look at the technology that governs the particular commodity. There are many coins out there that have great ideas driving them. However, without proper execution or development, most of the coins tend to just die out. Therefore, it is absolutely essential to study the team and the whitepaper to know the potential bad coins from the good coins. A good idea is less than half the reason to invest in a coin.

Visibility

As with any new commodity launching itself, visibility is key in ensuring that a particular coin is noticed among an ocean of new entrants to the space.

  • Marketing & PR: Some coins out there have higher visibility in comparison to others. A lot of the times, coins get attention due to their unmatched utility and tech. However, there are times that a particular coin gets attention only due to aggressive marketing techniques. At the moment, many of the coins in the market have a good valuation only because of visibility, and not because they have a good product.
  • Media Hype: There are times when media houses make or break a coin. For this, one must only look at the significant rally that was recorded at XRP (Ripple’s token). The coin jumped from under a dollar to over three dollars in a little less than a month. A large part of the reason for this breakout was the hysteria caused by the media. There were a number of articles circulated around how Ripple is ready to be listed on one of the largest exchanges in the world – Coinbase. There was an almost immediate fall in the price when Coinbase confirmed that they have no intention of adding new coins to their exchange any time soon.
  • Exchanges: After the ICO is completed, there’s no way to go out and buy tokens from the team directly. This is because the core team only mines a certain amount of coins to distribute. Once these are exhausted, coins that are already in circulation can only be “bought” or “sold” on exchanges. Generally, the more exchanges that a coin gets listed on, the higher is the visibility. This leads to heavier traded volumes, which in turn, leads to heavier valuations.

In future articles we aim to make more sense of the crypto space. Due to the vastness of the topic, it is hard to give solid conclusions to all the ideas that we introduce in our discussions. That is why, we urge you to write in at content@trefis.com if you have any questions and/or comments regarding the new coverage.

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