Causes of Cryptocurrency Asset Devaluation
It can be very frustrating to know that a cryptocurrency you have in your wallet has been devalued. Sometimes, many do not exercise patience in keeping this asset to regain value. Instead, they sell it off via a P2P platform or a third party.
It can even be more alarming when you find out that the crypto coin has started regaining value. The question then pops into your head: ‘What causes a cryptocurrency asset devalue?’. Honestly, it can even be more draining when you try to wrap your head around this.
Thankfully, this article is designed to help you decipher the factors that might cause your cryptocurrency to devalue. Also, the devaluation of cryptocurrency has made a lot of people fall for the crypto airdrop scam, which is now rampant on the internet.
Why Does A New Cryptocurrency Price Fluctuate So Much?
The answer to this question is that it is still very much in an emerging state. A crypto that is yet to find its place in the market is subject to fluctuation in the market.
The newness of a crypto may make it highly volatile in the crypto market. Apart from the emerging factor of a new cryptocurrency, there are various reasons a crypto may fluctuate.
Factors That Affect Cryptocurrency Price In The Market
The factors that may determine the price of cryptocurrency could range from the present usage of the coin to the future value of the coin. Below are other reasons a cryptocurrency may fluctuate in the market:
Utility of the Coin
The utility of the coin simply means that a cryptocurrency should have strong use to motivate people to hold the coin. Take an instance. Ethereum. Ethereum is a crypto that has great utility. For carrying out commands and applications on the Ethereum blockchain, one would need to possess ETH to convert into gas fees. This usually represents the computing power used to process this command.
Therefore, it follows the theory of demand and supply. The more people that are interested in developing applications and transactions, the higher the supply would be for Ethereum. Therefore, the prices of this cryptocurrency would increase. So, one of the reasons a cryptocurrency price fluctuates is because of the use and demand.
Scarcity
Scarcity in a cryptocurrency means that the circulation of a particular cryptocurrency would shrink. Just like we learned in economics, when a particular item is very scarce it becomes very expensive to purchase it. Similarly, when demand is higher than supply of a particular cryptocurrency it becomes very expensive to get.
An interesting fact is that some crypto brands go as far as destroying a part of the coin supply. This means that there would not be enough cryptocurrency in supply to meet the demand. As a result, the value of the coin would skyrocket.
Assumed Value
A cryptocurrency may be worth the amount the market deems it. What does this mean? This simply means that the market values the cryptocurrency on a different basis before assuming the price of the cryptocurrency. There are several factors the market would consider before giving a value to a cryptocurrency. Some of these factors include:
- Partnerships with other legitimate companies
- The growth of the market
- Launch of Minimum Viable Product or beta version
Inflation of Fiat Currency
When the national currency of a country declines, the crypto value of that currency is steadily on the uprise. This is because you can get even more of your national currency with your cryptocurrency.
Public Adoption
When a particular cryptocurrency has an increase in demand, the higher the cost of this cryptocurrency. When a cryptocurrency is very high in demand, the price of that cryptocurrency would skyrocket periodically. Take an instance. Bitcoin. The price of Bitcoin is constantly on the increase because people are constantly demanding it.
How To Predict The Prices Of Cryptocurrency
Two methods can be used to predict the prices of cryptocurrency. One of them is using the Technical Analysis approach. This method uses market data, historical prices, and price interpretation. In contrast to the Technical Analysis, the Fundamental Analysis focuses on the economy and companies. Let’s get into the details.
Fundamental Analysis
Fundamental Analysis focuses on evaluating a cryptocurrency’s value through economic and quantitative information. You are asking the question: ‘What is the value of this coin?’
The primary aim of this analysis is to determine if the cryptocurrency is undervalued or inflated based on several factors. When they get results, they can decide if it is wise to enter or leave a market. Fundamental analysis also includes bringing interest into financial resources of past data.
Today’s cryptocurrencies are not loaded with data, unlike the traditional ones. However, you can use several factors when analyzing investment such as:
Target market
Demand, tokenomics, and utility
Releases/Development
Partnerships
Market capacity
Competitor comparison
Community and reviews
Status and active users
Price history and age.
Technical Analysis
This involves studying past market data to predict future price movement. The technical analyst assumes that all data is reflected in the price. The main principle of technical analysis is that past price history determines future actions.
The main crypto used in technical analysis includes bar charts, volume charts and candlesticks. For predicting cryptocurrency prices, the technical analysis appears to be very relevant for several reasons:
High Volatility
Cryptocurrency markets are renowned for their extreme price swings in little intervals. Technical analysts might profit from distinct price patterns and trends that arise from this volatility.
Speculative Nature
Because traditional measurements like P/E ratios or corporate earnings are not used to determine the valuation of cryptocurrencies, technical analysis is a more advantageous technique for speculating.
Less Institutional Influence
Because there are fewer institutional traders in cryptocurrency than in traditional markets, price moves might be less predictable and more prone to emotional trading, which is a perfect environment for technical analysis to flourish.
Features Of A Cryptocurrency
Here are the features of a cryptocurrency
Security
Cryptocurrency Prices are secured by the codes by the cryptography codes. Cryptocurrency owns a private key that helps you secure your transaction. Apart from the owner, no other person has a key to this crypto.
The numbers that are used to make this crypto are very large and very difficult to break. You have nothing to fear with cryptocurrency because the security of a cryptocurrency is practically difficult to enter.
Transactions
When you transact with a cryptocurrency, there is a tendency that you can not reverse your transaction. However, before you confirm a transaction, you will be asked twice. After that, your transaction will be initiated. So, when you are about to process a transaction all you have to do is to confirm your details.
No Permission
This simply means that you do not need anyone’s permission to access your funds. All you need to do is to install your wallet. This simply means that you can purchase anything you want from the internet without complex paperwork.
Rapid
Another characteristic is that they are super rapid. Once you begin a transaction, you can be sure that your transaction will be approved in seconds.
Untraceable Location
This feature clearly states that the physical location of the recipient is not needed for to funds to be sent. Your location doesn’t matter when sending cryptocurrency to somebody.
The transaction would be sent immediately without delay. Of course, you need to possess a reasonable amount of coins in your wallet to enable this transaction.
Fiat Currency vs Cryptocurrency
The backing they receive is the primary differentiating aspect between cryptocurrencies and fiat money. Fiat currencies are backed by central governments, and their worth comes from their declaration of value, which is followed by the parties engaging in value transactions placing their trust in them.
When it comes to fiat money, central banks are in charge of the whole money supply, which also controls inflation. On the other hand, the purpose of cryptocurrencies is to prevent the central government from having the authority to control an individual’s finances. Additionally, since their supply is limited, inflationary devaluation is nonexistent.
The primary factor influencing price changes in the cryptocurrency market is supply and demand. Aside from this, there are two more similarities between fiat money and cryptocurrencies: they may both be used as a medium of exchange for goods and services and they can both store value.
Summary
The bottom line is that cryptocurrency is affected by the theory of demand and supply. When a cryptocurrency is high in demand and the supply is low, the price is high. It is also affected by the needs of the market.
When the cryptocurrency is relatively new, the price of the cryptocurrency fluctuates regularly. So, it is advised to carry out an analysis before investing in a cryptocurrency. This article has highlighted some of the analyses you can do. Thanks for reading and tell us what you think too.
