If you’re wondering how to invest in cryptocurrencies, you’ve probably wondered how they increase in value. You’ve probably heard of the soaring demand for cryptocurrencies, but you might also have heard that the demand is declining, as mining costs increase and political uncertainty continues. To understand why cryptocurrency values continue to rise, you should know how it works. There are several different factors that influence the value of cryptocurrencies, including the demand for them, the mining costs, and the new developments.
Demand for cryptocurrencies
There are many factors that determine whether demand for cryptocurrencies increases in value. For example, the use of cryptocurrencies must be widespread and the price must increase if it is worth more than its supply. While some may say that a cryptocurrency is worthless, this is not true. It is a tradable asset whose price is determined by market interest and supply. In other words, more people who wish to purchase a cryptocurrency will likely be willing to pay more for it.
Despite its popularity, cryptocurrencies have always had a dark side. While they were once seen as havens for criminals, they have since progressed in both technology and popularity. The market cap of cryptocurrencies is expected to surpass $1-2 trillion by the end of 2018, and many believe the technology can be applied in many different sectors. Here are a few reasons why cryptocurrency may be the future of your investment portfolio.
The price of crypto is subject to fluctuations, largely because mining operations are unregulated and rely on electricity. While the cost of electricity is relatively low, up to 90% of the total cost is derived from electricity. This means that electricity prices affect the value of cryptos directly, as they are highly sensitive to energy costs. That means that cryptocurrency mining operations tend to locate near low-cost power sources, like state-subsided electricity.
The first natural sellers in the crypto space are miners. As the price of Bitcoin has dropped significantly this year, the total value of coins mined by miners has also sank. That’s because miners are transferring more coins to exchanges than they have in reserve. According to the latest estimates, miners have declared their intention to sell. These predictions are in line with recent reports by cryptocurrency analytics firms. However, there is no definitive answer to the question of whether mining costs affect the value of crypto.
The recent news about the Russian oil embargo is both bullish and bearish for Bitcoin. While the trucker’s story was a savior for Bitcoin, it also rekindled political uncertainty about the currency. It caught the attention of state actors who were pushing back against the use of bitcoin for payment. However, Sam Bankman-Fried, the CEO of the FTX exchange, believes that a less stable political environment would actually benefit Bitcoin. This is contrary to FTX’s recent comments regarding the negative impact of the media’s coverage of bitcoin.
During recent market stress, the correlation between crypto assets and key asset classes increased. One example of this was the COVID-19 sell-off. However, this diversification benefit may decrease if institutional holders continue to invest in crypto. It is important to understand the correlations of cryptocurrencies to traditional assets to avoid major losses. While the correlations are still low, this diversification benefit is likely to diminish as the price of crypto assets continues to rise.
The proliferation of cryptocurrencies has raised new questions about how federal and state regulators should respond to these technologies. The introduction of a nonfungible token on the blockchain makes it possible to transfer real-world goods and traditional securities without the need for an intermediary. Additionally, new exchanges with less centralization are emerging, allowing users to transfer assets directly between themselves. Regulators will need to act in order to protect consumers from these new technologies.
In 2021, the most significant trend will be the growth of decentralized financial services (DFS). These systems are designed to remove the middleman from financial transactions. Experts expect the widespread adoption of digital storage and tokenization through these platforms. Ethereum, for instance, is built on these protocols. It is possible that in 2022, more regulations will impact the industry. By 2021, many people who bought crypto in the previous year will be ready to take advantage of these new developments.