A cryptocurrency’s value is generally derived from its utility, use case and, ultimately, demand, among other factors.
A token has utility if you can use it for something. For example, our QASH token provides benefits for our users on Liquid. Utility helps to add value.
If users gain a benefit from using a token, it increases the demand for the token. If the token has utility, people will want to buy it to make use of the utility.
The value of a cryptocurrency comes in part from its perceived use case.
Does the token have a real world use case? Is it useful? Does this use case make sense?
If it does, it is normally more desirable than a token that does not.
Partnerships are a very common talking point for a lot of crypto projects. It is generally regarded that partnerships with big or well-known companies add value and legitimacy to a cryptocurrency.
However, not all partnerships are the same. Some are more significant than others. In the past, some projects have even lied about partnerships or bent the truth to generate interest.
When a partnership is announced, look for confirmation from both parties and delve into the details of the business relationship.
Incentives are similar to utility. These are things that give people a reason to hold a coin.
Some coins have master nodes, where if you hold above a certain threshold and run a node you will receive rewards.
Other coins generate a second token if you hold them (like NEO and GAS), essentially generating a passive income through airdrops.
These incentives can make a coin desirable to have, which increases the demand.
If a token has a high trading volume and tight spread, this makes it easier to buy and sell at a fair price.
If a token is easier to buy, more people can buy it at any given time. This can be a factor in how accessible a token is.
Market cap and supply
A lot of traders will buy a token for potential future growth and appreciation in value.
Future growth is somewhat dependent on the market cap of the coin. It is much more likely that a coin with a 1 million USD market cap will 10x in value compared to a coin with a 10 billion USD market cap. But there are no guarantees.
As a general rule, however, it is important to factor in market cap, and not price per coin, when looking for potential investments.
One interesting thing to consider is the loss of supply increasing value. For example, in the case of Bitcoin, it is estimated that 4 million BTC is lost forever – around 20% of the total supply. This assumed loss is factored into Bitcoin value, but if more Bitcoin were to be suddenly lost, the price could increase because the total supply would have been essentially reduced.
Who is behind the project? It’s all well and good for a project to have big aspirations, but are there credible people in place to get the job done?
You want to see a team of industry professionals with a solid track record.
Every crypto project has a target market, some larger than others. If a project has a solid use case but is extremely niche, obscure or unappealing, it may struggle to gain traction with investors.
If the target market of a project is large, it is possible that the cryptocurrency will have a higher value.
There are just some factors to consider when thinking about what makes cryptocurrencies valuable. This post is of course not financial advice, but it should give you some points to think about. Always do your due diligence before investing in any coin.