1. Home
  2. >
  3. Blog
  4. >
  5. How are cryptocurrencies valued?

How are cryptocurrencies valued?

How are cryptocurrencies valued

The price of any asset you buy or sell is based on its value.

It is important to know how a crypto is valued so that you know you are getting a good deal when buying or selling on a cryptocurrency exchange.

You will see a range of figures and these can vary on a daily basis, underlining how volatile crypto assets can be.

This guide will explain how cryptocurrencies are value and the numbers and factors to look out for to help you understand what you are investing in.

Coin price

You can check the value of a digital currency such as Bitcoin using cryptocurrency exchanges or there are a range of websites that provide valuation data.

There are a few different figures you will see when you look up a particular cryptocurrency.

One is the coin price.

Similar to stocks, this is the value of a cryptocurrency based on the level of investment and mood towards the asset.

It can change on a daily and weekly basis based on many factors such as supply and demand, mass adoption or general market sentiment.

The price of digital currencies is usually quoted in dollars, which makes it easier to compare each crypto value against each other.

Market capitalisation

Each cryptocurrency has its own market cap figure.

Like with a share, the market capitalisation of a crypto currency is the total value of all the assets in supply.

This can be worked out by multiplying the number of tokens in circulation by the cryptocurrency’s price.

The larger the market cap figure, the bigger the cryptocurrency will be.

For example, Bitcoin is the largest cryptocurrency both by price and market capitalization.

The market cap will also increase as the price of a crypto increases.

That means if the Bitcoin price goes up, so will its market cap.

It also works the other way though, so if sentiment towards bitcoin drops, more people could sell out and push down its price.

This would also push its market cap lower and make the cryptocurrency less valuable.

How to assess the value of a cryptocurrency

There are a range of factors that influence the value of a cryptocurrency.

One of the biggest influences is the level of demand and supply.

Increasing demand can push up prices of cryptocurrencies.

Demand can come from retail investors but also on the institutional side such as funds and banks.

The other side to demand is cryptocurrency supply.

This is determined by how many coins there are available to purchase.

Some cryptocurrencies such as Bitcoin have a finite supply, so the price could rise as the amount available runs out.

A Bitcoin is created through a process called mining and the maximum supply is 21million.

More than 18.5million coins have been produced so far.

Not all cryptos have a fixed supply.

Other cryptocurrencies may be created through initial coin offerings.

These are like stock market listings where new coins are funded and created by the public.

Other factors include competition in the market, mass adoption, the level of regulation, the cost of production and governance.

There are also technical terms that influence the value of a a cryptocurrency such as the node count.

This is the number of active wallets using a cryptocurrency and contributing to the underlying blockchain technology.

The more of these, the more it shows that the cryptocurrency is being actively used and adopted.

What makes a cryptocurrencies rise and fall?

As with any asset, the value of cryptocurrencies is driven by sentiment and changes in supply and demand.

Anything that helps towards creating a viable cryptocurrency and boosts circulating supply can give it value.

Positive news can help boost cryptocurrency values.

This could be government backing. For example, El Salvador has recognised Bitcoin as legal tender, and may use an additional Bitcoin blockchain fork.

Something like this increases demand as does news that suggests a good financial future for the cryptocurrency.

Bad news can push crypto-currency values down as it creates negative sentiment.

This could be onerous legal requirements or a crackdown by a central authority.

Many governments and regulators such as in China, India and Russia have announced bans, which can hit crypto prices.

Why do cryptocurrency prices fluctuate so much?

Crypto prices are highly volatile.

It is still a new industry with a lack of regulation compared with mainstream investments so prices of cryptocurrency tokens can be unpredictable.

Investors have to put money in at their own risk as unlike traditional or fiat money, which has the support of central banks, there is nothing to stop a cryptocurrency going to zero.

One of the selling points of cryptos compared with the fiat currency system is that digital tokens work on a decentralized network.

They operate without central bank control and thrive on community involvement.

Supporters say cryptocurrencies gain value from being independent from the mainstream financial system but the lack of central controls does also mean prices can be unpredictable.

A regulatory authority such as the Financial Conduct Authority in the UK or the Securities and Exchange Commission in the US can make or break existing tokens with bans or tougher rules.

The system can be open to scams as fraudsters try to exploit people with fake coins or the next bitcoin.

How do cryptocurrency prices compare with fiat currency?

Fiat currencies are established as a form of payment and store of value, but this isn’t the case with all cryptocurrencies.

A central bank can control money supply by printing more or through asset purchases, known as quantitative easing.

Too much printing of fiat currencies can push up inflation, meaning higher costs and bills for everyone.

The value of fiat currency can also be controlled with tools such as interest rate changes, which alters the cost of borrowing.

Increasing interest rates makes it more expensive to borrow money while lowering them makes it cheaper.

Cryptos work differently as many tend to have a fixed maximum supply or may have policies that get rid of older coins.

Many such as Bitcoin and Ethereum also have their own underlying technology known as the blockchain, that helps record transactions and facilitate faster payments across borders.

Cryptocurrencies are less established though and more risky due to the lack of regulation.

The only regulation and controls that currently exists for cryptocurrencies in the UK is through exchanges.

A crypto exchange needs to be registered for money laundering with the Financial Conduct Authority (FCA).

That means they need to check who is buying and selling the coins.

The FCA is also working on new rules on financial promotions, that would make exchanges responsible for checking investors understand the risk of crypto assets such as Bitcoin and conducting due diligence on the tokens they are offering.

You can check if a cryptocurrency exchange has been registered for anti-money laundering by checking the FCA’s crypto asset register.

The regulator also keeps a list of firms that should be registered but haven’t applied, so it is worth checking that as well.

Similarly, in the US, cryptos are treated as commodities.

They fall under the oversight of the Commodity Futures Trading Commission.

Critics say virtual coins will never be widely accepted as a currency due to how volatile they are.

Like fiat currencies, the value of cryptocurrencies comes from factors such as sentiment in the market and supply and demand.

But investors willing to take their own risk may be interested in cryptocurrencies if they want to beat the interest rates on offer from savings accounts,

Regulators and many personal finance experts do warn that there is a high chance of losses investing in any currency, let alone cryptos which have less established track records and trickier ways to measure value due to the volatility, lack of regulation and risk of scams.

How do I compare cryptovalues?

The main figures to look at when comparing crypto currency values is the coin price and market cap.

A high coin price value and large market cap suggests a cryptocurrency is popular and established.

You can compare values and market capitalisations of cryptocurrencies against each other to assess the value of the token you want to buy.

A high price could suggest there is little room for a crypto token to grow, whereas you could find a crypto with a low price that is set for growth and get in at the start to make a decent profit.

There is also the risk, of course that prices fall, and you could compare the declines as well as the increases across different cryptos to work out which is best to invest in and where the best prospects are.

You should also consider other aspects that make a cryptocurrency valuable such as sentiment, supply and demand and adoption.

You can often use a cryptocurrency exchange or data website to rank cryptocurrencies by price or market cap to compare different values.

These websites may also tell you how much the price and market cap has changed over a set period such as a day, month or year.

That is no guarantee of how a cryptocurrency will perform but it could give you an idea of its prospects.

Crypto values FAQs

 

What is the biggest driver of cryptocurrency values?

There are a range of drivers that give cryptocurrencies value.

The main factors, as with any asset, is market sentiment, demand and levels of supply.

Positive can push prices up but they can fall with bad news.

This ties in with supply and demand as more people may be interested in cryptos when there is good news but many may want to sell out when things go bad.

Why does Bitcoin have value?

Bitcoin is the best-known cryptocurrency.

It is the oldest and largest virtual currencies in the market, both of which give the cryptocurrency value.

Bitcoin had first-to-market advantage so has already been adopted by retailers and even some countries as a form of payment.

The virtual currency has an established use and has shown it can act as a store of value, albeit with big swings in prices as you would expect from any cryptocurrency.

Read Next

Newsletter Sign-up

Get access to free financial guides and a monthly curation of the best personal finance content in the UK.

We will not spam you.

*Required

By entering your email address you confirm you are happy with our privacy policy.

Best Investment Platforms

etoro

0% commission buying stocks

68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. Your capital is at risk. Other fees apply. For more information, visit etoro.com/trading/fees

Fineco Bank

Get £500 in trading commissions free for 3 months when you open a new account.

Capital at risk.

InvestEngine

InvestEngine currently offer all new customers a £50 welcome bonus.

*Subject to minimum investment. Check website for details.

Menu