The crypto market has become a powerful force in the global financial market despite its volatility and numerous regulatory challenges.
Over the past decade, digital currencies have grown and their prices have been mainly determined by certain factors such as market, technology and management.
This article tells you how cryptocurrency is valued in relation to the tools used in the valuation process.
Market capitalization and its role in valuation
This measurement, based on statistical data, helps investors compare different cryptocurrencies and provides a better understanding of their size and market position.
Cryptocurrencies are very prone to price fluctuations based on speculative trading, liquidity issues and overall volatility. These factors can sometimes significantly change their market capitalization over very short periods of time, for which additional metrics must be used to determine the intrinsic value of the cryptocurrency.
For example, Bitcoin has always maintained enormous dominance in the cryptocurrency market, thanks to its market capitalization. At the time of writing, its market capitalization stood at over $1.2 trillion.
This amount helps to seal its domination. However, such a high market capitalization offers no guarantee of long-term stability, as market fluctuations can reduce its valuation time and again.
Supply and demand: the most important determinants of the price of cryptocurrencies
Supply and demand adjusts for much of the value of cryptocurrencies. When supply is limited, prices can certainly rise, especially if demand for the cryptocurrency proves to be strong enough. This is the case of Bitcoin, the supply of which is limited to 21 million coins.
The scarcity of Bitcoin, as well as its increasing demand, often drives up the price. Various factors come into play when it comes to the demand for cryptocurrencies. The utility of these factors is that if greater utility is derived from a cryptocurrency, then more people would like to use it.
A good example is
Besides utility, demand can be changed by media coverage and social trends. News reports and social media buzz caused cryptocurrency prices to soar or fall in the space of an instant, illustrating the role that public perception could play.
Technological changes and their consequences in terms of valuation
Another important determinant is the technology on which a cryptocurrency is based. When it comes to functionality, scalability, and security, the underlying technology of a cryptocurrency has a lot to do with its valuation. The fact that Bitcoin has a secure and decentralized blockchain network has long helped cement its reputation as a reliable store of value, sometimes considered to parallel that of gold in the digital world.
Ethereum claims to host DeFi applications, putting it in a position where its value is closely tied to the increased adoption of the DeFi market and the impending migration to the Proof-Of-Stake (PoS) consensus algorithm. The transition has emerged through a serious upgrade that will reduce power consumption while improving scalability until it is dubbed Ethereum 2.0.
But even technological risks could affect the value of cryptocurrencies. Any vulnerability in a cryptocurrency’s network, whether due to hacking threats or even the future possibility of quantum computing, certainly guarantees loss of investor confidence and market value.
Regulatory environment and its impact on the crypto market
Regulations also play a notable role in shaping cryptocurrency markets. There is uncertainty over how governments will manage digital currencies in the future, as most of them are operated in largely unregulated landscapes.
Favorable regulations, such as the approval of cryptocurrencies
Conversely, negative regulatory developments tend to generate instability in the market. For example, the Chinese government has sought to
Several other open factors could influence how cryptocurrencies could be traded; these include, among others, anti-money laundering regulatory measures and know-your-customer standards. Stricter regulation arguably reduces commercial activity, while clarity of guidelines may indicate greater confidence in the market.
Mining and Production Cost – Hidden Factors in Valuation
Mining involves solving these difficult mathematical algorithms, requiring considerable computing power and energy. The more difficult it becomes, the more energy is consumed in mining; therefore, the cost of production increases. This, in turn, is consumed by the increase in the value of the cryptocurrency as miners attempt to cover their costs.
For example, the
Macroeconomic conditions and valuation of cryptocurrencies
It is indeed possible that macroeconomic factors influence the valuation of cryptocurrencies. In times of economic turmoil, cryptocurrencies tend to be seen as either a hedge against inflation or a safe haven. Whenever turbulence occurs in traditional markets, some investors flock to digital currencies to maintain their wealth.
Political instability and currency devaluation in some countries are also believed to further fuel the demand for cryptocurrencies. Certainly, countries experiencing hyperinflation would view cryptocurrencies like Bitcoin as a flight to safety.
Adoption by institutional/retail investors
Market value has become an important characteristic of cryptocurrencies, primarily driven by institutional and retail investors investing in cryptocurrencies. Portfolio investments and other large-scale capital expenditures in this area, such as companies adopting Bitcoin on their balance sheets, play a role in bringing more liquidity to the market, helping to stabilize it.
Companies like PayPal and Tesla have implemented the use of cryptocurrencies for transactions, making digital currencies more suitable for everyday retail users.
Realized market capitalization and stablecoins
In a recent article from Paul Lalovich, Agile Dynamics Partner Titled “Determining the True Market Cap of Crypto Assets in 2024,” the author establishes the thesis that traditional valuation methods widely used in traditional finance have failed to fully capture the true value of the crypto market, calling to a more refined approach. .
Paul Lalovich proposes “Realized Market Capitalization” as a solution to the challenges posed by traditional crypto market valuation methods. By realized market capitalization, he argues for an approach in which the market capitalization of the crypto market is calculated based on the last traded price for each individual token, as opposed to the method of using the current price for all tokens.
The rationale for this idea proposed by Paul is to reduce the impact of speculative spikes and provide a clearer picture of the long-term value of a cryptocurrency.
More importantly, the growing importance of stablecoins as a direct link between crypto and traditional finance has not escaped the author, who sees them as a viable alternative to cryptocurrency market valuation, saying that the true value of the market can also be seen through the prism of stablecoins.
A complex and evolving market
Drivers of change in cryptocurrency markets include market capitalization, supply and demand dynamics, technological innovation, regulatory developments, and macroeconomic conditions.
As digital currencies gain greater acceptance, these are crucial factors that any trader must recognize in the changing faces of cryptocurrencies.
