Cryptocurrency Pricing Principles
Cryptocurrencies have changed many financial rules and ideas about money and financial instruments. If fiat money is issued by mints of different states, and Central banks control the issue of money, including by influencing their exchange rate and determining the state’s monetary policy, then cryptocurrencies are issued by independent miners around the world. No one controls the release of cryptocurrencies, and anyone who buys the appropriate equipment and installs special programs can become a miner and mine those cryptocurrencies that are beneficial to him and that technical equipment and capacities allow.
This is where cryptocurrencies differ in principle from fiat money. To create them, you do not need to receive any permissions, you only need to have the appropriate equipment.
But if the rate of fiat money is determined by the economic and political power of the state, its GDP, economy, industry, production and even the army of the state, then the price of cryptocurrencies is determined only by the market.
For fiat money, there is the power of the power that issues them, behind cryptocurrency there is only the miner who extracts them, the cost of its equipment, the cost of electricity and the total cost of mining.
Back in 2009, Bitcoin developers agreed that the cost of Bitcoin is determined by the cost of the electricity that is required to produce it.
Every two weeks, the program automatically controls the complexity of Bitcoin hashing so that it takes 10 minutes to mine the block. If more powerful equipment or capacities are used, the hash complexity is complicated, so that the block is processed for 10 minutes. Thanks to this, Bitcoin mining has grown into a technology race. At the moment, the price of Bitcoin is determined including its cost price, because if the Bitcoin exchange rate falls below the cost price, it will not be profitable to mine and the miners will switch to other currencies.
There are many different cryptocurrencies that use other hashing algorithms and the extraction of which is quite cheap and affordable for many. But if cryptocurrency is easily mined, then it cannot be expensive. After all, miners sell all mined cryptocurrency on exchanges. Exchanges determine the real value of cryptocurrency.
What is cryptocurrency volatility
Volatility is the fluctuation of cryptocurrency rates.
The price of a cryptocurrency is determined by its usefulness. How much this cryptocurrency is needed by the cryptocurrency community and depends on the distribution of this cryptocurrency.
Having obtained cryptocurrency, miners need to sell it. For someone to buy this cryptocurrency, it must be useful and necessary for the crypto community. If fiat money is provided with the power of the state that issues them, then cryptocurrency is provided with its usefulness and necessity.
The cryptocurrency buyer must see the prospects of the cryptocurrency and its usefulness and know what it will bring to him.
At the moment, the main utility of most cryptocurrencies is that they can be speculated. That is, buy at a lower rate, and sell at a higher rate.
Cryptocurrencies do not have strong and reliable collateral that would allow them to have a stable value. They are not provided with gold, nor oil, nor even dollars.
Although there are exceptions, there is one single cryptocurrency that is absolutely stable. This is Tether. The Tether exchange rate is pegged to the US dollar. The entire issue of USDT – Tether cryptocurrencies, is secured by Tether cash reserves in bank accounts in USD.
Reasons for cryptocurrency volatility
The main reason for the volatility of cryptocurrencies is the lack of stability. Investors do not know what to expect from cryptocurrencies.
Among the causes of volatility are also called:
- Lack of government regulation. Investors simply do not know the rules of the game, since there is no single regulation and far from all states have determined their attitude to cryptocurrencies.
- Lack of security. Cryptocurrency exchanges and wallets are constantly hacked. This news comes so regularly that many investors doubt the overall security of cryptocurrencies. In addition, any hacking of the exchange sharply depreciates, as traders begin to frantically withdraw money from their other exchanges.
- News. Cryptocurrencies themselves are very unstable, so any application can either raise the course or bring it down.
- Lack of collateral. Cryptocurrencies are not backed by anything other than USDT. Neither the state nor the factories with assets stand behind them. Behind cryptocurrencies are only miners. Thus, cryptocurrencies are provided only with the cost of their production.
- Worldwide introduction and distribution, utility. The most popular cryptocurrency Bitcoin is the most stable cryptocurrency.
- Lack of worldwide application. At the moment, cryptocurrencies do not even accept online stores due to their volatility and other problems associated with them. Cryptocurrencies are inconvenient as a universal means of payment and settlement.
- Cryptocurrency issues. The lack of security, instant payments and high transaction fees hinder the worldwide use of cryptocurrencies as a universal means of payment. But the volatility and lack of government regulation hinder the use of cryptocurrencies by business.
Pros and Cons of Volatility
Volatility is good for trading. When the rate rises or falls 10% or more per day, this is a great chance to earn. Buy currency during its fall and sell at the peak of the rise.
The main thing here is not to confuse. Now a large number of inexperienced traders – beginners have come to cryptocurrency. In pursuit of profit and fearing to lose and lose it, they buy currency on the rise, when there is a lot of excitement around cryptocurrency, and then the recession begins and traders lose money.
In cryptocurrencies, you need a sober head, you need to know the laws of the market and be able to wait.
But what is good for the trader is bad for cryptocurrency in general. The economy, like any entrepreneur, needs stability. The seller of the store should know that tomorrow cryptocurrency will cost as much as today and nothing will change, then he will safely accept it.
In the meantime, it is the cryptocurrency volatility that scares away most sellers to include cryptocurrency as a means of payment. They are ready to put up with many of its shortcomings, but not with volatility.
For this reason, BTC / USDT is so popular on many exchanges. Those sellers who dare to accept Bitcoin immediately change them to stable Tether, to be sure that they will not lose their assets due to the depreciation.
High cryptocurrency volatility indicators: what does it mean
Unlike fiat money, as well as securities (stocks, bonds), cryptocurrency is not provided with anything, neither by the power and economy of the state that issues it, nor by the assets of an enterprise entering the IPO market and issuing shares.
Thus, the cryptocurrency rate is formed not based on the assessment of experts and their real value, but solely on the basis of market needs, fluctuations in supply and demand.
When there is negative news, for example, about hacking the exchange, traders and investors immediately sell their assets. Supply exceeds demand, the price of cryptocurrency drops sharply. The fall also causes a large release of cryptocurrency to the market. After all, most cryptocurrencies are concentrated in the hands of a small number of people. Many of these people bought Bitcoin back in 2010-2013, that is, when the BTC price was less than $ 100 and they have large cryptocurrency reserves in their wallets. A one-time sale of large amounts causes a market crash, as other traders and investors, seeing that the cryptocurrency is falling, are also trying to get rid of their assets.
The lack of stability is also hindered by the lack of government regulation in most countries. Large sellers and investors are afraid to have any business with cryptocurrencies, as their status has not yet been determined in many jurisdictions.
Great volatility is bad for investors, too, since cryptocurrencies have been falling for quite some time and it is now quite difficult to consider them as a tool for accumulating funds.
But high volatility is good for traders, various kinds of speculation and manipulation of the course, but it does not have any economic value.
In order to gain stability, a cryptocurrency must have constant economic value, that is, be useful and contribute to the development of the economy. It should bring something valuable and important to the economy.
Is cryptocurrency volatility inevitable in the future
According to experts, at the moment the most stable cryptocurrency is Bitcoin. Bitcoin is time-tested, it is accepted by many sellers around the world, supported by the crypto community. A whole industry is built around Bitcoin: wallets that support it, exchanges, exchangers, mixers. Bitcoin is easy to buy and sell. Bitcoin has a high mining cost. Bitcoin is provided with the labor of miners, their costs for electricity, the purchase and depreciation of equipment. Theoretically, Bitcoin cannot cost less than its cost, otherwise it will not be profitable to mine and miners will switch to mining other cryptocurrencies.
Thus, analyzing the development of Bitcoin, we can conclude that over time, all cryptocurrencies, if they have any economic value, will become more and more stable.
The more stable cryptocurrencies are, the more willingly they will be used by sellers, businesses, financial institutions and as a universal means of payment.
The most and least volatile cryptocurrencies
Bitcoin is least volatile. This is the very first cryptocurrency tested by time. It has a powerful infrastructure, in which a lot of money has been invested. Bitcoin has its own huge crypto community, many people make money on Bitcoin and feel good.
Bitcoin is an entire industry around which miners, manufacturers of mining equipment, exchanges, wallets, exchangers, specialized media resources, forums are concentrated. A lot of people make money on Bitcoin or in related industries. Bitcoin does not stand still, it is becoming more complicated. Mining Bitcoin requires huge resources, this encourages manufacturers to invent more advanced equipment, and miners spend money on increasing capacities and buying more modern technologies and expensive equipment.
Bitcoin mining has turned into a technology war and the cost of mining is only growing, which means that the price of Bitcoin cannot fall below the cost of mining.
At the same time, young cryptocurrencies are extremely volatile. Often the course of a new cryptocurrency depends on advertising and the promotion of cryptocurrency, on what kind of people are associated with it. Often these people have nothing to do with the cryptocurrency itself. Often, the creators of cryptocurrencies use big names to attract attention to it. When people understand that no one is behind the cryptocurrency, its rate drops sharply.
Also, changes in the rates of cryptocurrencies are strongly influenced by news. New cryptocurrencies do not have a powerful support and service industry, like Bitcoin. Bitcoin is served by hundreds of wallets and thousands of exchanges. And if one of the hundreds of wallets or one of a thousand exchanges is hacked, this will affect the Bitcoin exchange rate, but not as much as if they crack the only wallet that serves a new cryptocurrency. In this case, if the only wallet that serves cryptocurrency is hacked, then the cryptocurrency rate may fall by 90% or even higher.
Another thing is that there is no point in hackers cracking a wallet that supports one single cryptocurrency. The same situation with exchanges. Listing on a good exchange is expensive, so new cryptocurrencies prefer cheaper and less secure exchanges. Often, cryptocurrencies can be bought only on one exchange, on which hundreds or even thousands of other cryptocurrencies are served, and if such an exchange is hacked, then all cryptocurrencies that are served there will suffer. Those cryptocurrencies and tokens for which this exchange was the only one will suffer especially.