When it comes to the price of cryptocurrencies, there tends to be a bit of a reputation of volatility. Because the market and the tokens within the cryptocurrency industry aren’t backed in the traditional way that fiat or national financial assets are, the way they are valued is different.
Generally speaking, with some exceptions, most cryptocurrencies are not corporations and are open-sourced projects. So when they’re valued, it’s different to the way that a share, bond or stock might be. This makes the price of a token a little less predictable than other financial assets and the market tends to see different trends emerge. (This is unless we’re talking about stablecoins – where the price is pegged to a national currency and doesn’t face the same rollercoaster ride in value.)
So, how do you value a token in an emerging industry? In this, we’ll look at the factors that impact the price of a cryptocurrency token.
How to value a cryptocurrency token
With so many cryptocurrencies out there, it’s hard to know which tokens might hit a massive spike and become valuable and which might underperform in the long term. So when considering which tokens to add to your holdings, it helps to know what might sway the value in the future.
Token supply and demand
Okay, this does embrace the same sort of game that traditional finance plays: Simply put, if the demand increases but the supply remains the same, the price of the token will increase. Some cryptocurrencies have a limit on the number of tokens that can be generated in total. This means that once the total number is in circulation, the supply will be limited and if the demand increases, the price will follow.
A few things which affect the supply of a token include:
- Overall token cap – This refers to the number of tokens that will be available to the public. Bitcoin, for example, has an overall token cap of 21 million Bitcoin.
- Token burning – Some projects will buy back the tokens in circulation and destroy them – a process that happens through smart contracts. This helps manage the supply if there are too many tokens and helps boost the price as demand increases.
- Token minting – On the other side of the coin, some projects will create tokens if the price rises too high and the supply is too low for the demand.
Possible adoption opportunities and token listings
When a trade exchange or cryptocurrency platform announces that a new token will be listed for trade, the price of the token often sees an increase. This is for three key reasons:
- Investors and traders have a new platform for trading the token,
- Cryptocurrency exchanges put their reputation behind the token listing, which leads to more trust in the token’s value, and
- It offers the token a platform for fresh exposure to new traders.
If you can buy a provide function, it offers an opportunity beyond simply value storage. This functionality is more enticing beyond investment and can lead to a higher demand for the token. It also assists adoption, as more people will see the purpose behind a token and will be more likely to buy into the project.
Token investment hype and market sentiment
When influential figures promote a token, it can lead to a price “pump” where new investors want to jump on the wagon. This can result in a “dump”, however, when traders sell off and turn their profit, leaving behind a token with a value that has cooled off. Watching the trading value carefully can help you make sound decisions if you want to buy low and sell high and make money off the hype. Take caution that you don’t invest when the token is cooling off, and risk losing money because of the timing of the trade.
Regulations and government positions
The stance a government takes on a token can have a profound impact on its price. If a government bans a token, it destroys the potential to use or invest in it. This would diminish the demand, and the token’s value would decrease. If governments put regulations in place controlling tokens and making them safer, more people – who may have been cautious and on the fence – might be more inclined to consider investing in the token.
So, what tokens should you invest in?
If you are looking to invest in a token, but you might not know what the value might do, the best suggestion is to do plenty of research around the project. If you want to buy a cryptocurrency to hold, consider whether this is the best time or if trends point towards a dip that might be on its way.
While cryptocurrency prices aren’t predictable, paying attention to the factors that influence the price could lead to well-timed trades and better profit opportunities!
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