Cryptocurrencies have gained sudden popularity across the globe in the last couple of years. Many only heard about it; some have made cryptocurrencies their hobby, and some even accept Bitcoin for business. But how do these cryptocurrencies gain value, and why do so many people talk about them?
What is cryptocurrency? Simply said, a cryptocurrency is a digital asset. Crypto is considered a currency because it was designed to function as a means of exchange, similarly to current fiat currencies.
An innovative technology called the blockchain is used to store data about all cryptocurrency transactions that are made over the internet. Everyone has access to the history of all transactions on the blockchain, which can be used to verify the owner.
One of the best aspects of the crypto concept is its economic structure. All users have the ability to exchange their Bitcoin or any other altcoin with other participants in specific crypto exchanges and then pay with it for goods or whatever object they wish to obtain. Also, a growing number of enterprises accepting Bitcoin payments are making cryptos even more useful.
Cryptocurrencies have several advantages, such as no central authority control, minimal fees, transparency, and fast transactions.
Advantages of cryptocurrency
- Crypto never sleeps
Cryptocurrency markets are constantly open, which gives cryptocurrencies an advantage over other traditional institutions. Crypto may be the ideal solution for investors who want to make profits outside conventional working hours. Crypto markets are open 24/7, 365 days.
- Inflation hedge
Cryptos aren’t connected to a particular currency or country. Their value reflects worldwide demand rather than regional inflation. In cryptos, thanks to the limited market cap, the amount can’t get out of control, resulting in extremely low to no inflation. Most respected coins, such as Bitcoin, have an ultimate limit.
- Blockchain as an underlying technology
Cryptocurrencies are tied to the network that stores all the information about them rather than the currencies themselves. Due to the decentralized nature of blockchains, data is secured, and there is little chance of hacking.
Disadvantages of cryptocurrency
Cryptos have some disadvantages that should not be ignored:
- Complex understanding of the concept
If you aren’t a technological expert, the concept of cryptocurrencies as well as blockchain may seem super difficult. Attempting to put money into something you don’t fully comprehend is a danger in itself.
Prices of cryptocurrencies can rise rapidly in a short period of time but then plummet immediately after. Therefore, this may not be the best choice if you seek consistent profits.
- Newcomers often lose capital faster than ever
Cyberattacks, scams, and all other harmful attempts to obtain control over crypto funds are something that experienced investors are aware of, but novices are more sensitive to these pitfalls leading to quick losses of their capital.
Knowing the advantages and disadvantages of crypto assets, how do they gain value?
How does the value of cryptocurrency increase?
A cryptocurrency value is based on its trading volume on crypto exchanges and the use to make payments through cryptocurrency payment platforms. The economic value of digital currencies is determined by supply and demand. Supply is the number of available goods, while demand is the number of people who wish to own them. When analyzing its worth and growth potential, cryptocurrency is a balance of both.
The value of cryptocurrency is directly linked to the amount of participation and support it receives from users. This means that the future success of cryptocurrency depends largely on the faith and usage of its user community. Cryptocurrency is still a relatively new concept, so it relies heavily on user adoption in order to grow.
The value is influenced by the people who already own or want to invest in cryptocurrencies, and they are the ones that keep their demand high. The more it is discussed, used in payments, and retained as an exciting, unique investment possibility, the more worth it gains.
Assets in the cryptocurrency market are growing in value due to both the abstract factors associated with them and the recent surge in profits for different coins. Investors today are willing to take on greater risks in order to achieve bigger rewards, and they appreciate the convenience of cryptocurrency transactions without high costs.
What types of crypto are available?
As of late June 2022, more than 20 000 cryptocurrencies are available, with new ones appearing weekly. Among the most popular crypto assets are Bitcoin, Ethereum, Litecoin, Cardano, XRP, Solana, and Dogecoin.
These are three main categories of cryptocurrencies:
1) Bitcoin (BTC) is the father of all cryptocurrencies, and it is a capped cryptocurrency. It means that there will be no more than 21 million coins. Bitcoin is primarily seen today as an investment instrument and as a store of value. Bitcoin’s mining system is based on Proof-of-Work. A network of miners performs sophisticated mathematical operations to maintain the Bitcoin blockchain operational. Miners are rewarded for their efforts with newly mined Bitcoin.
2) Altcoins are alternative coins to Bitcoin with subtle differences. The difference between Bitcoin and altcoins is hidden in their blockchain. There are some altcoins that have an infinite supply, which is what affects their use. The mechanism of authentication used to authenticate transactions also varies amongst altcoins. Several altcoins use Proof-of-Work systems, while others use Proof-of-Stake consensus, which substitutes miners for validators and offers a more energy-efficient method.
3) Tokens have been designed in order to employ smart contracts or tokens as currency. Standard cryptocurrency coins employ the mining process as a tangible representation of the asset. Tokens, however, are not physical representations of anything. They lack a blockchain and are only utilized in decentralized applications, also known as dApps. They may be used to buy from dApps and earn reduced expenses and voting fees, which make them increasingly popular.
Like any other asset, cryptocurrency gains value depending on the level of financial engagement. If the demand for cryptocurrency exceeds the supply, it increases its worth. When a cryptocurrency is beneficial, people want to invest in them, which drives up desire. People do not want to sell it because they want to use it. This indicates more demand than supply, and the value rises. Cryptocurrencies may prove confusing to newcomers. It’s a concept that requires getting used to technology and innovations. Working with cryptocurrencies, like anything else, has its advantages and disadvantages.