Not long ago I was contemplating between betting my “Ang Bao” (Red packet) money on my favourite football team or to invest in some cryptocurrencies.
A quick reference to the Investment Products Cheat Sheet indicates that cryptocurrency is a high-risk instrument that requires high effort. To be fair, it gives a possible high return.
Nothing else can be worse than losing 100% to Singapore Pools right?
What On Earth Is Cryptocurrency?
I guess a quick explanation of cryptocurrency is to see it as something similar to “gold in digital form”.
Like gold, each type cryptocurrency is limited in quantity.
Over time, when more and more gold is mined, the difficulty in locating and mining gold increases as miners are left with lesser gold buried deeper underground.
Cryptocurrencies work rather similarly too! They are limited in quantity.
- Bitcoin has a limited cap of 21 million coins.
- Litecoin has a limited cap of 84 million coins.
Miners of cryptocurrencies, unlike gold miners, do not go around the world with a shovel to mine gold. Instead, they use a mining software to solve cryptocurrencies algorithm to obtain a certain number of coins.
How Are The Transactions Are Confirmed?
The differences between a cryptocurrency and a physical Singapore Dollar note made it difficult for Singaporeans to understand it.
Here are some main differences between your Singapore Dollar note and a cryptocurrency:
|Fiat Currency (eg. SGD)||Cryptocurrency|
|Issued By Governments||Generated By Computers|
|Monitored By Monetary Authority of Singapore (MAS)||Monitored By An Entire Peer To Peer etwork|
|Unlimited Supply (Can be printed)||Limited Supply|
This leads us to the question of how peer to peer network properly ensures the transaction of coins without a regulating authority such as MAS?
A good analogy of how a peer to peer network works is with reference to a poker game:
- Imagine playing poker WITHOUT poker chips
- Each individual player sitting at the poker table does not trust the rest of the players
- Winnings and losses are then tracked using a paper and pen individually
- At the end of the game, all the players calculate their winnings based on whatever they have written down
- The amount is then cross referenced with the rest of the players in the game
Hence, with cryptocurrency, the peer to peer (P2P) is built on a rough idea of the above except that it is digitalized by “players” all around the world.
TL;DR – Demand And Supply Affects Price
- The price of any type of cryptocurrency is determined by the demand for it and supply of it.
- By design, the supply of each type of cryptocurrency has a capped quantity of coins.
- As more people use a certain coin, its demand will surely rise. Given that the fact of its limited supply, it will result in a price increase.
7 Factors Affecting The Price Of Cryptocurrencies
Number Of Coin Users
Due to the limited number of coins, when more users accept a certain type of cryptocurrency as payment, demand for the coins go up. Hence, the more widely a certain type of coin is accepted, the higher the price.
Number Of Lost Coins
Cryptocurrencies can be stored in digital wallets (be it your hard disk or any hardware wallet). However, as people lose their physical wallet, the number of coins available to circulate decreases, increasing price of coins.
The longer certain type of cryptocurrency is in the market, more users will trust it more. Hence, increases the price for it.
Legal Status Of Cryptocurrency
The legal status of the use of certain type of cryptocurrency affects the price. There are countries who incorporated the use of cryptocurrency such as Bitcoin into their payment system such as people can use cryptocurrency without breaking the law.
Stability Of Coin’s Network
The stability of the coin’s network is one of the main concern to many. In an unstable network, the majority of the market can stop accepting a certain coin, and the cryptocurrency will be useless and of no value.
We mentioned above that miners for cryptocurrencies use mining software to solve cryptocurrencies algorithm. The more difficult it is to solve the algorithm, the higher the perceived value of the coins.
Market Sentiment Or Hype
Very much like what we mentioned on the forces that move a stock price, investors of cryptocurrencies tend to have their opinion on certain coins too.
If the investors’ confidence on a certain coin is growing, the demand for the stocks of a particular company increases. This will lead to the price of a particular coin going up.