How Are Values Determined – Coinstec

Cryptocurrencies were designed as a unit of exchange and as a place to store assets without relying on a central bank.

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Cryptocurrencies were designed as a unit of exchange and as a place to store assets without relying on a central bank.

The problem is deriving a value for these coins and determining where price action will take them. Bitcoin has recently sailed past $6000 per coin. Could we have predicting this and is this a true value for the coin. What about Ethereum or all the new altcoins. Fiat currencies are backed by gold or other precious metals; others are backed by nothing but hot air although have value because people think it has value and use it as a unit of exchange.

Precious metals such as gold and silver gain their perceived value due to their utility and limited supply, and price is often tied to supply and demand. Supply and Demand is a simple economic factor that affects the price of many things. In some countries Bitcoin and other cryptocurrencies is classed as an asset, in others as a currency.

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Bitcoin, for example has a maximum of 21 million whole units, divisible 100 million times. With over 7 billion people on the planet, if even 1 billion were to adopt Bitcoin, 21 million whole units would not spread very far without a significant price tag.

The supply is also bought in at a constant rate and is unchangeable due to the coconscious rules. This creates a supply that is limited, and thus people will pay more to get the coins they think have value.

Block reward halving’s, like the Bitcoin halving of 2016 caused the price to slowly increase as the halving approached, due to the reduced supply of new incoming coins imminent. This can affect the price of many cryptocurrencies, but in the case of Litecoin, did not even make a major dent in the price.

An important factor in the price of any cryptocurrency is its utility. If you cannot use it for something, be it an investment or for payments, then it would have no or little perceived value. In the case of Bitcoin, it is usable for payments on a reasonably high and ever increasing scale, meaning that its utility is high. Its high difficulty and energy usage give it a reasonably high price and as such can be used for an investment. The changes to utility can cause price volatility.

In the case of Ether, as it was designed a smart contract platform this is a practical utility, which increased the price of Ether over many other alternative cryptocurrencies.

The medias reporting on Bitcoin in either a positive, or negative way can have influence on the public perceptions of Bitcoin, and can influence the price. This can even be used as an avenue to potentially manipulate the price, as many media outlets are owned by a few individuals and it is a major vector for potential price manipulation, as well as reporting on positive and negative aspects of the currency which can cause the price to fluctuate.

​With all cryptocurrencies, especially smaller less known ones, investors can manipulate / inadvertently affect price in the following ways:

With a large amount of capital at their disposal, can buy a large percentage of the coin supply, then attempt to promote good stuff about the coin to ‘pump’ the price. An investor making a large investment in a small coin can cause inadvertent price increases and falls. People seeing investors have confidence in a cryptocurrency can encourage them to invest, and the more investors and the more demand for a currency, the higher the price.

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