One of the most mysterious aspects of the cryptocurrency as such is its pricing mechanism. Why does any cryptocurrency cost the precise amount every day and what are the factors influencing it? While some currencies are backed by gold, a physical object which has its value, others, including cryptocurrencies, are backed by people’s belief in its values as a unit of exchange. This is probably the most confusing, though interesting aspect of its pricing.
There is a number of factors direclty affecting price of any cryptocurrency:
- supply and demand correlation,
- energy usage for the blockchain,
- blockchain complexity level,
- utility of the currency,
- price of Bitcoin,
- other factors.
Factors Influencing Pricing
Supply and demand being the basic economic notions also play a role in the pricing of digital currencies. In case of Bitcoin, for example, the overall amount of units being 21 million subject to 100 million divisions, is still not suffice to cover the overall world’s demand of 7 billion people. If even 1 billion were to adopt Bitcoin, 21 million whole units would not spread very far without a considerable price tag.
The impact of energy use and its intensity is seen, in the first place, as a pricing factor as it directly impacts the costs of blockchain maintenance. If we look at Bitcoin, the blockchain uses an extreme amount of energy which amounts to the energy usage of a small country. This undoubtedly does affect the price along with the blockchain difficulty level. Since the more secure the blockchain and the higher the mining complexity, the larger is the perceived value and thus price.
As regards the utility of cryptocurrency, this is of special importance to the value of cryptocurrency, and thus its price. If one cannot use it for investment or payments, then it would have no or little perceived value. As regards the Bitcoin, this cryptocurrency is increasingly used for payments guaranteeing its high utility. In case of a utility changes, the price becomes more volatile and can go either up or down.
The importance of regulations at the cryptocurrency markets cannot be underestimated. As countries start understanding the major role of such currencies, they endeavour to regulate their usage so that the national currency systems are not damaged. Obviously, legal moves which are positive for a cryptocurrency, such as making them official as currency can have a positive effect, while a country banning it could have a negative effect.
Among other factors are also scams, attitudes of the public as well as investors towards the currencies, and also media coverage. For the last year, scams are known to lead to a majority of currencies failures, as well as scandals. Subject to such stories, more and more investors lose confidence in investment decisions as to digital currencies and abstain. Negative and extensive media coverage results in biased perceptions as to currencies and their depreciation.