Difference between Stock Market Shares and Cryptocurrency
Cryptocurrency and stocks keep fluctuating on the stock market, but in the first case, that happens on a much stronger level.
Does that means that cryptocurrency has no value within it?
Stock Market Share Prices
The price of a share on stock market depends upon the value of its company and many other factors of the company economic health, but also will vary on its supply and demand.
So, if demand increases the value of a company’s shares goes up, but if the opposite occur, then price show drop.
How about the Cryptocurrency Price?
Unlike shares, whose supply can be increased anytime, the supply of cryptocurrencies is fixed.
However, all tokens on a blockchain are not usually released at the same time, and that could influence on their supply, that depends on the mining process.
Some people say that cryptocurrencies are essentially a form of money, but that talk is getting weaker, because many big companies around the world can already see many types of solutions to their problems on the technology that is growing on the crypto world, and are already closing many partnerships with crypto coins, as we speak.
These virtual tokens were built to use for transaction purposes and carry out other functions of money, but, because of the idea above, they are becoming an investment asset with real possible usage and intrinsic value, that could help world wide.
Utility Creates Value, and every aspect of the software that preforms a useful function can creates value.
Ethereum, for example, which includes a whole decentralized software creation platform which can host decentralized apps, other types of “smart contracts” beyond financial ones, and can be used to create other coins has a great utility.
Since we live in a digital global society, why not go with a distributed crypto network to program and host apps, and everything that arises from it’s utility.
But, If crypto was only valued by utility, then Ripple would be #1 for payments, Ethereum #1 for overall utility, and Litecoin would have a higher market cap than Bitcoin, because, in theory, is faster and cheaper to use.
Therefore, we have to consider that utility is not the only source of value of a cryptocurrency, and the following aspects need to be considered.
- 1- Trust and History
Still, there is a fact that disgust many investors, and it is about the traditional KYC or Know-your-customer.
Usually, when an investor decides to put money on any investment, it is a mandatory process to get to know information regarding your origin of funds, your total income and assets, and owners, etc whereas crypto anonymously.
Therefore, Cryptocurrency is still a question and kind of an enigma to most of people, and considering that Bitcoin was the first to get value and be known world wide in the market it has more trust of the market, and over time grow a brand that is now stronger than the other coins, and that is why Bitcoin is still is #1 on value.
2- Social Media
Today, social media is very strong, and has so much power. So, another big influence on cryptocurrency is coming from social media, where speculative pricing is strong.
3- Demand and Use Within an Ecosystem
Some cryptocurrencies are have a native ecosystem and are naturally used by that environment.
For example, KIK messenger has a native token called KIN, the usage of a token within an ecosystem can help to dictate its value.
Imagine a popular online marketplace that only deals using a specific token of cryptocurrency.
4- Project Maintnance
To secure the ledger and confirm transactions under the current software, there are many processes and types depending on the cryptocurrency technology, so if it takes less work to do that, supposedly, the cryptocurrency should have a better value, opposed to another that takes more work.
For example, Ripple, IOTA, and Stellar have ledgers that take less work to secure than Bitcoin’s ledger.
So, less hashpower is good, as hashpower “wastes” energy). However, the work it takes to create and maintain a system makes sense to use as a justification of value, especially when we count factors like the activity of developers on a coin’s GitHub.
5- Cost and Difficulty of Mining
The cost to mine a coin should give an idea of the rough fair market value of a coin. However, this relationship is complex, because If a coin goes down in price, less miners will mine it, in theory, and the difficulty will decrease. Thus one could profit mining a penny Bitcoin in 2010 and a $20k Bitcoin in 2017 in theory. So we want to stress the cost of mining a coin in the time, not just in any scenario.
Cryptocurrency is a software and it can be updated and evolve.
If, really needed, another zero could be added at the end of cryptocurrency and increase the amount of units in circulation without affecting its supply.
A software update can make a cryptocurrency faster and quicker, so it’s growth is not as rigid as gold for example, and has a open path to higher grounds.
Most cryptocurrencies has a limited supply and a controlled pace at which new coins are issued.
When investors truly like a coin, and thus won’t sell it, it becomes more scarce. This is reflected to some degree on the exchanges where prices increase when there are more demand than supply.
Bitcoin is clearly in the lead in terms of low supply, compared to other coins, like Ripple or Stellar or Cardano.
So, scarcity, just as it happens on the stock market, on a faster level, supply and demand are something also to be considered, on a longer term look.
Bidding wars on exchanges to futures contracts, that already exist on Bitcoin market, are normal these days, just like it happens in the stock market.
Especially in this type of decentralized, and with low volume global market are subject to manipulation what make speculation even harder to hold.
The biggest fact is that speculation is the main influence on the cryptocurrency still, but it is all so new, and as volume increases and adoption increases, and as people get more used to valuing cryptocurrency, the result should not be any different from oil, gold, or a dollar.
Speculate are based on factors like upcoming changes to code, potential forks (which work like user activated dividends), or potential upcoming news (good or bad).
Some speculation is justified and helpful, and some really isn’t, but that is not only on cryptocurrency, every market has this aspect, and investors and traders have to deal with that, especially if something is still new.
Speculation is still a big factor of the cryptocurrency market, and sometimes, even hits the market so hard that creates a bubble, just like at the end of 2017 for BTC or Bitcoin, but that does not take the intrinsic value of a cryptocurrency, and as time goes by, many other factors like the ones explained above started to come to the investors mind.