Do You Know How To Value Cryptocurrency Before Buying It?
Valuing cryptocurrency is not as simple as many believe. Everything that is written below should be seen just as an introduction to the topic. In order to understand the potential and value of any digital coin, you have to consider various really important factors.
How To Value A Cryptocurrency
When looking at traditional investments, like real estate or stocks, you need to go through fundamental analysis that evaluates company viability and financial health. You analyze and if numbers are good, you make an investment.
As you perform a fundamental analysis for a cryptocurrency, things are much different. There is no financial statement that you can analyze.
This is because:
- A cryptocurrency is not a corporation. It is a digital currency that has value or an asset present in a network. Viability is based on community participation.
- Cryptocurrencies are still in an early development stage. This means that limited use cases exist in the real world, making it hard to perform a fundamental analysis. Cryptos are complex so it is very important to assess coin potential and viability.
What Influences Crypto Value?
The most important factors to analyze are:
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Utility
The coin that you invest in needs a really strong foundation in order to incentivize real world use. The utility of a coin is directly connected with value.
As there are more people that develop apps and execute transactions with a cryptocurrency and use increases, demand increases. As demand increases, prices go up.
Different utility options exist with cryptocurrencies, like dividend payments, an exchange medium or voting rights. The coin that cannot be used is just speculative and at its bases, value does not exist.
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Scarcity
In economics, if there is a limited item supply, value is increased, especially when demand increases. Scarcity is thus created.
With cryptocurrencies there is just a limited supply available in circulation. The best example of this is Bitcoin since it has a maximum supply that is fixed at 21 million BTC. Demand pushes up value when the coins have utility and if scarcity exists, value is even higher.
There are some cryptocurrencies that use “burning”, which is a mechanism through which a part of the coin supply is destroyed. This is done in order to increase value by affecting scarcity.
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Perceived Coin Value
The last really important thing to analyze when you try to determine the value of a cryptocurrency as an investment is perceived coin value. This practically means how the coin is seen by the market.
The projects that are constantly achieving milestones put in the white paper are perceived as having a higher value. Also, partnerships and collaborations with other projects or credible companies show expansion. This also increases perceived coin value.
Obviously, news that enhance perceived value, like launching a new protocol version, increase perceived coin value.
Conclusions
The elements mentioned above are the most important ones you need to look at if you want to value a cryptocurrency as an investment. They are vital if you want to make an investment in any cryptocurrency.
