What determines the value of crypto? (Beginner’s Guide)

Wondering which cryptocurrency will be the next to blow up? 

In this guide, we’ll discuss how cryptocurrencies gain value and walk through a few strategies you can use to make price predictions. 

What is cryptocurrency? 

Cryptocurrency is a decentralized, encrypted unit of exchange. 

Unlike fiat currencies like the U.S. dollar, many cryptocurrencies are not controlled by a centralized authority. Instead, cryptocurrency transactions of popular coins (e.g. BTC, ETH) are publicly visible on a decentralized ledger known as a ‘blockchain’. 

Cryptocurrencies are designed to be an alternative to traditional banks and payment systems. Many investors see them as an opportunity to build wealth and make peer-to-peer transactions outside of existing financial rails. 

Bitcoin, the world’s first cryptocurrency, was released in 2009. At the time of publication, the total market capitalization of cryptocurrency is above $3.5 trillion.

How do you know which cryptocurrency will go up? 

There’s no way to know for sure which cryptocurrencies will go up in value. However, we can use the laws of supply and demand to better understand how the price of cryptocurrency will change in the future. 

According to economic theory, the price of an asset is an intersection of price and quantity.

When demand grows faster than supply, the price of cryptocurrency rises. 

When supply grows faster than demand, the price of cryptocurrency falls. 

How does supply and demand apply to crypto?

Unlike traditional currencies, cryptocurrencies aren’t backed by physical assets or government promises. Instead, their price is fully determined by supply and demand. Let’s break down how supply and demand works for crypto-assets:

Demand: Typically, high demand for a cryptocurrency leads to high prices. For example, a cryptocurrency could unveil a new utility that draws new users to the blockchain— which in turn leads to the value of the cryptocurrency going up.

‍Supply: The more units of a cryptocurrency there are, the less valuable each individual unit is. For example, if a large amount of cryptocurrency becomes available to the public, it’s likely that the price of that cryptocurrency will drop.

Cryptocurrency price: Tips for beginner investors 

If you’re a beginner crypto investor, keep the following tips in mind! 

• Be cautious of volatility: Keep in mind that the crypto is highly volatile! Demand for cryptocurrency can vary significantly depending if the market is in a ‘bear’ or ‘bull’ cycle. If you’re planning to invest in crypto for the long-term, be prepared for price fluctuations.
• Don’t believe price predictions: Remember, it’s very difficult to predict demand for a cryptocurrency over time! Be wary of overly optimistic price estimates. 
• Understand supply: Before you invest in a cryptocurrency, take a look at its inflation rate! High inflation makes price appreciation less likely

7 ways to make predictions about whether a cryptocurrency will gain value 

Now that we’ve covered the basics of how cryptocurrencies are priced, let’s walk through some factors that can help you better understand whether your cryptocurrency will gain value. 

Utility 

When cryptocurrencies have ‘utility,’ they enable users to perform specific actions within their ecosystem. This drives demand, as the cryptocurrency is necessary to access a product, service, or platform.

For example, Ethereum has utility because it gives users access to some of the world’s most popular decentralized applications and NFTs. Users must hold Ether (ETH) to pay transaction fees for these applications, creating continuous demand for the token.

Market sentiment 

Demand for cryptocurrencies is partially determined by general market sentiment — the overall attitude of investors towards cryptocurrency. Positive sentiment can lead to price surges, while negative sentiment can lead to a bear market. 

For example, Bitcoin hit a cyclical high on April 14, 2021 — the same day that Coinbase became a publicly-traded stock. The Coinbase IPO was perceived as a landmark moment for the cryptocurrency industry — which helped drive demand for Bitcoin and other digital assets. 

Competition 

Just like physical products and services, competition impacts demand for cryptocurrencies. Blockchains often compete on features like speed, cost-efficiency, scalability, and security. 

For example, competitors to Ethereum — like Solana and Avalanche — attracted users by highlighting the ability to use decentralized applications and trade NFTs with lower fees and faster transaction speeds. 

Governance 

Governance refers to the mechanisms used to make changes to a blockchain’s rules. A reliable governance process can help ensure adaptability and trust in a blockchain ecosystem. 

For example, consider the 2016 DAO Hack. At the time when the project was hacked and all of its cryptocurrency was stolen, it held 14% of all Ether in circulation. In response, ETH holders voted to create a new fork of the blockchain which rolled back the history of the blockchain to ‘undo’ the hack. 

While the DAO hack could have been a catastrophic event for Ethereum, the blockchain continued to attract new users in the succeeding years. It’s likely that Ethereum’s governance process helped the blockchain avert a crisis. 

Tokenomics 

Tokenomics refers to how a cryptocurrency project controls the supply of its tokens and encourages demand. Understanding tokenomics can help you predict how the price of a cryptocurrency might change over time.

For instance, Bitcoin has a hard cap of 21 million coins, limiting supply. Meanwhile, Ethereum burns a portion of transaction fees, reducing supply over time. 

Liquidity 

Liquidity measures how easily a cryptocurrency can be sold for cash without affecting its price. High liquidity makes it easier to sell at the current market price, while low liquidity can lead to rapid price drops if there aren’t enough buyers.

For example, during the collapse of FTX, the FTT token was highly illiquid. When many tokenholders tried to sell at once, the token’s price suddenly collapsed. 

Technical Analysis 

Technical analysis involves using price charts and market data to identify trends and make short-term predictions about a cryptocurrency’s value.

However, technical analysis comes with limitations. Critics argue that past price trends aren’t always reliable indicators of future performance.

For more information, check out our guide to the best charting tools for cryptocurrency traders. 

What determines the price of Bitcoin? 

To better understand the concepts discussed above, let’s take a look at how supply and demand impact the world’s biggest cryptocurrency — Bitcoin. 

Why Bitcoin’s fixed supply matters: Bitcoin was made as an alternative to inflationary fiat currencies like the US dollar. BTC has a fixed supply of 21 million units and the final coins will be mined in 2140. BTC’s predictable supply ensures that high inflation will not diminish its value in the future. 

‍Where does the demand for Bitcoin come from? Demand for Bitcoin has historically been much harder to predict. Since Bitcoin’s creation, the asset has seen multiple bull markets — followed by steep price declines. However, demand for Bitcoin seems to steadily grow over time as the asset becomes more and more legitimate in the eyes of investors, institutions, and even governments.

Bitcoin’s limited supply and growing demand have led to steady price appreciation over time — though its price has seen severe fluctuation due to media hype cycles. 

How does cryptocurrency make money? 

It’s important to note that many cryptocurrencies are decentralized — meaning that there isn’t a company or individual who controls the blockchain and collects profits.

Early investors in a cryptocurrency can make profits as the price of the cryptocurrency increases as a result of supply and demand. 

In addition, cryptocurrency miners and stakers can make money by validating transactions and earning a percentage of transaction fees. 

How does a cryptocurrency lose value?

When supply outpaces demand, cryptocurrencies lose value. Here are a few reasons why this might happen:

• High token inflation
• Negative market news 
• Hacks or rug pulls 
• Anti-crypto regulations

There can be multiple reasons why a cryptocurrency project can lose value. 

For example, XRP was once one of the biggest coins in the cryptocurrency ecosystem, but has since lost value. It’s likely that XRP’s decline can be attributed to multiple factors — such as the SEC’s lawsuit against XRP’s parent company Ripple, bad tokenomics, and a lack of development on the blockchain. 

How do cryptocurrencies fail? 

According to CoinGecko, more than 50% of cryptocurrencies have failed. 

Remember, it’s difficult for new cryptocurrencies to attract an active user base and development community. In addition, some new cryptocurrencies are outright scams — where the founding team will hype up a project’s potential before selling off their tokens and leaving investors with worthless holdings. 

Can a cryptocurrency be overvalued? 

It’s possible that a cryptocurrency can be overvalued. Here are a few signs to look out for: 

1. Market Hype and FOMO (Fear of Missing Out): A sudden surge in price without any change in usage or adoption means that there may be an excess of speculation. Be wary of cryptocurrencies that are heavily promoted on social media, but do not appear to be making substantial progress on their roadmap. 
2. High Price-to-Utility Ratio: Evaluate whether the cryptocurrency's real-world use cases justify its value. If a cryptocurrency seems to have limited utility, it’s a good sign that it may be overvalued. 
3. Unsustainable Tokenomics: Cryptocurrencies with unlimited supply or poor token distribution may see inflated prices that are unsustainable in the long run. Understand the cryptocurrency’s supply rate and research how much of the total supply is controlled by cryptocurrency whales. 

Case study: Dogecoin

To better understand how cryptocurrencies may be overvalued, let’s take a look at Dogecoin. While DOGE reached an all-time high of $0.73 in 2021, it hasn’t reached the same price highs ever since. 

Hype cycles: While Dogecoin has benefitted from its ‘memecoin’ status and endorsements from celebrities like Elon Musk, it’s failed to see sustained price and community growth due to its lack of utility. 

‍Tokenomics: DOGE has an unlimited supply — with 5 billion new tokens added every year. Because of these unsustainable tokenomics, it may be difficult for DOGE to reach its 2021 price highs.

Are crypto price predictions accurate? 

While it’s common to see eye-popping cryptocurrency price predictions, you should be wary of anyone claiming that they know the future price of any cryptocurrency. 

Predicting a cryptocurrency’s future price is close to impossible because demand for a cryptocurrency can be influenced by a number of different factors — such as the state of the world economy and general interest in cryptocurrency.

It’s unlikely that any individual can accurately predict all the factors that can influence demand for crypto. 

Are cryptocurrency prices influenced by stock prices? 

There have been times when cryptocurrency has been correlated with the stock market. Some analysts noted that financial institutions seemed to trade cryptocurrencies the same way they traded tech stocks with potential for high growth. 

A report from September 2024 found that crypto prices were moving closely with the stock market as a whole — a sign of how macroeconomic factors like Federal Reserve interest rates impact the price of all assets.

How do recessions impact the price of crypto?

Generally, cryptocurrencies have fallen in value during recessions. During uncertain times, many investors flock away from ‘risky’ assets like Bitcoin.

At the start of the COVID-19 pandemic in March 2020, the price of BTC and other cryptocurrency declined — just like most assets in the stock market. That made many analysts question the narrative that cryptocurrencies could serve as a hedge during a recession. 

However, Bitcoin and other cryptocurrencies saw a resurgence later in the year, when concerns about low interest rates and high inflation in fiat currencies turned many investors towards cryptocurrency. 

Conclusion 

The prices of Bitcoin and other cryptocurrencies are determined by supply and demand. Understanding the factors driving the price of crypto can help you make more informed investment decisions.