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. As of May 2024, the total market capitalization of all cryptocurrencies exceeds $2 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?

Demand: The higher the demand for a cryptocurrency, the higher its price will be. For example, a cryptocurrency could unveil a new utility that draws new users into the platform — 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! 

• Remember, it’s very difficult to predict demand for a cryptocurrency over time! Be wary of overly optimistic price estimates.
• Before you invest in a cryptocurrency, take a look at its inflation rate! High inflation makes price appreciation less likely.
• 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. 

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. 

1. Utility 

When cryptocurrencies have ‘utility’, they allow users to perform specific actions. This can increase the demand of a specific cryptocurrency. 

For example, Ethereum has utility because it gives users access to some of the world’s most popular decentralized applications and NFTs. 

2. Market sentiment 

Demand for cryptocurrencies is partially determined by general market sentiment — the overall attitude of investors towards cryptocurrency. A rise in market sentiment could lead to a rise in prices. 

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 big step forward for the cryptocurrency industry — which meant investors felt more comfortable investing in Bitcoin and other digital assets. 

3. Competition 

Just like physical products and services, demand for cryptocurrencies is impacted by competition.

For example, before the Ethereum Merge, competitors to the Ethereum blockchain attracted users by highlighting the ability to use decentralized applications and trade NFTs with lower fees and faster transaction speeds. 

4. Governance 

Governance is a system for implementing changes into a blockchain. Reliable governance processes can have a big impact on price. 

For an example of how governance can impact price, we can take a look at 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 before 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.

5. Tokenomics 

To better understand how the price of your cryptocurrency may change in the future, it’s important to pay attention to ‘tokenomics’. This refers to the cryptocurrency project’s monetary policy — in other words, how the project ‘manages’ supply and demand. 

Different projects have different approaches to tokenomics. For example, BTC has a hard cap of 21 million coins, while Ethereum ‘burns’ a percentage of transaction fees. 

Other projects have a ‘vesting schedule’ for cryptocurrency — for example, early investors may not be able to sell their holdings until after a year. 

6. Liquidity 

A cryptocurrency’s liquidity refers to the efficiency or ease with which a token can be converted into cash without affecting its market price.  Liquidity can have a big impact on how your cryptocurrency is valued. 

The more liquid a cryptocurrency is, the easier it is to be able to sell the coin at its current market price.

When a cryptocurrency has low liquidity, you may not be able to sell all or a portion of your tokens without moving the market price of the coin lower, as there may not be enough demand to absorb/buy the tokens.

In cases such as the fall of FTX, the underlying FTT token was highly illiquid. Therefore, when holders of the token all wanted to sell at the same time, the price crashed.

7. Technical Analysis 

Some investors use technical analysis to make short-term price predictions on a cryptocurrency. Technical analysis involves studying charts and market data to identify price trends. 

Of course, technical analysis comes with limitations. Some critics emphasize that past trends are not necessarily a reliable indicator 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 impacts the world’s biggest cryptocurrency — Bitcoin. 

Supply for Bitcoin: 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. 

Demand for Bitcoin: Demand for Bitcoin has historically been much harder to predict. Since Bitcoin’s creation, BTC has seen massive price fluctuations as a result of multiple media hype cycles. However, Bitcoin’s demand seems to have steadily become stronger over time, as some investors see it as a hedge against inflation and a way to get exposure to the growing cryptocurrency ecosystem. 

Bitcoin’s limited supply and growing demand has 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 centralized organization controlling the blockchain and collecting 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 cryptocurrency may lose value: 

• High inflation rates 
• Negative market news 
• Hacks or rug pulls 
• Regulatory actions 

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. 

Are crypto price predictions accurate? 

While it’s common to see eye-popping cryptocurrency price predictions, it’s important to remember that most of these predictions are inaccurate. 

Predicting a cryptocurrency’s price can be difficult 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? 

From 2021-2023, the cryptocurrency market appeared to be correlated with the stock market. Some analysts noted that financial institutions seemed to trade cryptocurrencies the same way they traded growth stocks (such as companies in the tech space). 

However, the correlation between crypto and the stock market seems to have disappeared around July 2023. 

Today, the fact that cryptocurrencies are an uncorrelated asset is seen as an advantage. Many investors see crypto as an opportunity to diversify their portfolios! 

How do recessions impact the price of crypto?

Generally, cryptocurrencies have fallen in value during recessions. During uncertain times, many investors flock towards ‘safer’ assets. 

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.