Since the inception of Bitcoin in 2009, the world of cryptocurrency has grown to over 6,000 different cryptocurrencies. In addition, the decentralized nature and increased value in major cryptocurrencies have led to increased levels of trading over the years.
More than ever, crypto trading is now attracting attention and gaining a lot of appeal on Wall Street, celebrities, investors, and even governments. The biggest question is what drives a solid gain of cryptocurrencies since traditional factors like monetary policies, economic growth, and inflation rates do not play a role in any gains or losses.
Demand And Supply
One of the fundamental laws in economics is that the market is in equilibrium when demand and supply are the same. But this is rarely the case, especially in cryptocurrencies where volatility is the order of the day. Because of this, a variance between the demand and supply of any cryptocurrency could lead to a gain or a loss.
When the demand for cryptocurrency is higher or there is a shortage in its supply, the market is not in equilibrium. This imbalance leads to solid gains due to increased prices. Those willing to sell will, of course, increase the prices of the cryptocurrency to raise the stakes, and any willing buyers will raise their bids just to get a piece of a scarce item.
Cost of Production
Like any other commodity, creating a cryptocurrency does incur costs, driving its value. Research shows that the marginal costs of production affect the value of cryptocurrencies.
The cost of production for cryptocurrencies includes direct and indirect costs, like electricity, purchasing of electronics, not forgetting the amount of time one would need to create the code for the currency. Production costs such as electricity bills are incredibly high because of the amount of time and force used in mining a cryptocurrency.
However, the more notable driver of a cryptocurrency’s solid gain when considering its cost of production would be the difficulty in creating its algorithm. If the algorithm proves quite challenging to develop, it will slow down the production rate, leading to a lower currency supply. As seen above, the low supply of any product makes it scarce, leading to increased prices and solid gains for the sellers.
Bitcoin has the largest market capitalization. However, it is reducing as new cryptocurrencies crop up. So far, it is estimated the market has over 6,000 cryptocurrencies, a number that’s expected to increase over time.
One of the greatest competitors of Bitcoin is Ethereum’s cryptocurrency, Ether (ETHUSD). As much as the two have similarities, they serve different purposes. Bitcoin’s goal was to provide an alternative decentralized currency to be used as a medium of exchange and store of value.
On the other hand, Ethereum aims to provide a blockchain platform for facilitating unchangeable programmable applications and contracts using its currency, Ether. Thanks to the increase of awareness and use of Decentralized Finance (DeFi), Ethereum has also picked up, affecting the market capitalization and value of Bitcoin.
This trend is expected to continue in 2022 and beyond. As a result, the market share of Bitcoin might reduce. However, the increased education and interest in cryptocurrencies has and will continue to draw attention to all types of currencies in this asset class, including Bitcoin. Ultimately, the increased demand could lead to an increase in its value.
Coverage By Media
When the media increases its coverage of any topic, it could have a positive or negative outcome. For cryptocurrencies, it leads to fluctuation of prices, which could be a solid gain or loss.
A great example is the involvement of Elon Musk, Tesla, and SpaceX CEO with cryptocurrencies. After a series of tweets about a few cryptocurrencies that caused a craze on social media and news sites, the values of these currencies increased.
While cryptocurrencies are barely a decade old and complex factors determine their prices, it is clear that issues like regulations, production costs, and levels of demand and supply still play a role in whether investors make a solid gain or not.