Investigating how risk factors specific to cryptocurrencies, such as the volume of transactions on a blockchain or the number of active nodes in a network, affect their value is an essential area of research for the emerging asset class of cryptocurrencies. To do so, it is vital to comprehend the characteristics of this emerging market, particularly given its quick and irregular development. The first major cryptocurrency was Bitcoin, and Ethereum has served as a foundation for numerous additional ERC-20 tokens. As a result, we analyze and compare Bitcoin, Ethereum, and market-specific risk variables.
What do we mean by “fair market price”?
Fair market value, or fair market price, is the amount that a product would sell for on the open market under the conditions that both the buyer and the seller are acting in their own best interests, are not subjected to excessive pressure, and are given a reasonable amount of time to complete the transaction. The price at which a crypto asset would be sold in a trade between market participants at the specified time and date would be its fair market value. This price is established by the most recent quoted prices that can be seen on a spot exchange platform that facilitates crypto trading.
So how does one come to a cryptocurrency valuation or ascertain what the market believes a digital coin’s fair price to be? How can something that solely resides within computer networks have inherent value? Due to the divergent perspectives on these issues, investors and experts have been perplexed for years regarding cryptocurrency.
What is fair market valuation?
There are many different ways to approach valuation with regard to digital currencies. The majority of these techniques differ in their perception of the nature and character of a digital “coin.”
Supply and Demand-Based
The laws of supply and demand can be used to determine the value of a crypto coin. The interactions of several buyers and sellers on the market for crypto coins, like any other market, lead to price discovery. The fair price of a coin increases if there is a significant demand that exceeds the number of new coins that are generated.
The discounted value assigned to a future investment’s return is known as the “expected value.” For instance, if one compares crypto coins to stocks or bonds, then pricing models determine their projected worth. A crypto coin’s predicted value would be determined by a firm belief in the foundation technology and its promise to be disruptive or even groundbreaking since it does not pay dividends or interest. This method would be comparable to appraising a young tech business or stock that has no current profits or earnings. After predicting an expected value, one can begin speculating on the coin’s existing fair value.
If a cryptocurrency is seen as a network rather than an asset, its value may come from the strength and scale of the network. Network impacts result from numerous users or nodes participating in cryptocurrency mining.
How do we determine the fair price of a cryptocurrency?
Cryptocurrencies are entirely digital. They simply live in a blockchain’s code and have no physical representation. Some people feel they shouldn’t be worth anything because of this. But pricing doesn’t operate that way.
We must first grasp how cryptocurrencies differ from fiat money to comprehend what factors into a cryptocurrency’s value. The main distinction is that a fiat currency is recognized as legal money and is backed by governments. It gets its value from the trust that two parties to a transaction place in that value. Since cryptocurrencies are decentralized, governments do not control them.
The number of nodes is a reliable measure of a cryptocurrency’s value. Node count is a measure of the number of active wallets that are present on the network and are searchable online or on a currency’s home page. One can look at a currency’s node count and total market capitalization, then compare those two figures to those of other cryptocurrencies to determine whether or not it has a fair price.
This might help you determine whether a coin has been overbought. Node Count also demonstrates how robust a cryptocurrency community is. Stronger communities are those with more nodes. Knowing this is crucial for estimating the likelihood that the currency will survive crises.
A currency’s value may skyrocket if it becomes widely used. This is due to the fact that the entire supply of the majority of cryptocurrencies is finite, and an increase in demand directly causes a rise in price.
But what other conditions must exist before the general public fully adopts cryptocurrencies? One is the extent to which cryptocurrencies may be used in everyday life or the number of locations that accept them as a form of payment. A cryptocurrency will be in an excellent position to potentially play a significant role in the future if it has a business application in everyday life similar to today’s fiat currencies.
Cost of production
Another aspect that affects a cryptocurrency’s value is its direct and indirect production costs. As an illustration, the cost of producing Bitcoin is high. One explanation for why bitcoin is valuable is the time and effort expended in mining. This covers the cost of producing specialized hardware, such as servers, CPUs, graphics processing units, and cooling systems.
Even if the energy spent to create new bitcoins appears unnecessary, mining remains the only way to guarantee user safety. It also prevents governments from just shutting down the Bitcoin network.
Cryptocurrency coin values fluctuate constantly depending on the level of demand for them as well as how much people believe they are worth. It is also evolving in response to an expanding network of users and miners.
Even if we can determine fair market prices, cryptocurrency investments remain among the most volatile. Therefore, any prospective buyer must conduct thorough research. Knowing how to estimate the coin’s fair market value will be essential if you want to have a chance to make a significant profit or just participate in the enjoyment.