Vital Factors That Determine The Success of Cryptocurrencies

Cryptocurrencies are certainly different from fiat currencies because they have intrinsic value. However, some claim that cryptocurrencies such as Bitcoin do not have any underlying intrinsic values, and their value is purely based on speculation. However, on this basis, even gold does not have any intrinsic value and hence this argument does not hold much water, because every valuable commodity has a ‘network effect’. There are scores of interplaying factors that affect the value and determine the success of cryptocurrencies including Bitcoins.

Factors That Determine The Success of Cryptocurrencies

Several factors determine the success of cryptocurrencies. The intriguing fact is that most of these factors may not play the same role or have the same degree of impact in every circumstance. 

Platform Companies 

Most crypto platform companies have three stages, start-up, survival, and prosperity. In the start-up phase, the platform companies invest money in acquiring users and try hard to build a sustainable network. In the second stage, they face competition from other companies and as a result, the value fluctuates considerably. The weaker platform companies suffer from losses and eventually start quitting. The stronger companies consolidate, reach the prosperity stage, and attain market dominance.

Role of Blockchain Networks

The blockchain networks also determine the availability and position of the cryptocurrencies due to their network effects. Widespread fluctuations become a daily routine and due to this both Bitcoin and Ethereum have gained consistently. In the digital economy, networks play a larger role sometimes compared to traditional economies. This is because networks invariably drive economic value. 

Production Cost

Cryptocurrency tokens are mostly produced through a process called mining. The miners will have to verify the blockchain. This factor plays a crucial role in the formative days of cryptocurrencies. Whenever there is stiff competition to mine, the miners race to solve the complex problem of verification. Therefore, invariably, the mining costs increase which results in more value for the cryptocurrency. However, the demand factor may override the trend and lead to more unexpected increases.

Degree of Competition

The degree of competition also plays an important role in determining the prices of cryptocurrencies. If a new crypto gains value and popularity, then there are high chance that it will negatively affect the value of its old competitors.

Strictness of Crypto Regulations

The strictness of crypto regulations matters significantly although the governments do not have standard regulations. This makes cryptocurrencies more volatile. However, products such as exchange-traded funds and future contracts can allow investors to bet against the prices of cryptocurrencies. However, stringent regulations usually hurt cryptocurrency investments.

Internal Governance

Cryptocurrency networks do not have fixed rules of governance. The developers design them based on community requirements. Some may allow more say in the manner a token is used or mined. Investors usually prefer stable governance and it leads to stable pricing. The existing token supply is also an autonomous decision of the company launching cryptocurrencies. Some have developed ways to send cryptos to unrecoverable addresses to prevent the widespread expansion of the supply chain.

Bottom Line

The vital factors that determine the success of cryptocurrencies are multiple. Most of these factors are circumstantial factors and no single user has any power to change it. The complex interplay between these factors makes cryptocurrencies a good asset for investment. In the context of users and new investors, it is advisable to understand and study these factors before choosing a suitable cryptocurrency. The booming of the cryptocurrency market is an indication that overall there is positivity regarding the credibility of cryptos.