Cryptocurrencies Valuation and its Evolution
Cryptocurrencies have grown quickly over the past few years, leading to a huge buzz and often intense speculation. What’s more, the term “cryptocurrency” has been used to describe a wide variety of virtual currencies. The market capitalization of the cryptocurrency industry is estimated at around $1.17 trillion in May 2022. Cryptocurrencies are digital or virtual currencies that utilize cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. At the same time, the value of cryptocurrencies is determined by the market forces of supply and demand. This article provides a complete guide to cryptocurrencies valuation and its evolution.
Cryptocurrencies valuation and evolution
Cryptocurrencies have gained mainstream popularity and attention, being accepted as means of payment on various platforms. Bitcoin, the first cryptocurrency to be created and released, was created in 2009. Since that time, hundreds of other cryptocurrencies have followed, sharing their development and evolution.
The advancement of technology has played a crucial role in the emergence and development of cryptocurrencies. It has enabled the creation of blockchain-based cryptocurrencies that operate in a decentralized manner, running via a peer-to-peer network. As a result, the crypto evolution has made virtual currencies available to everyone, allowing them to be exchanged and transacted securely.
What is cryptocurrency?
Cryptocurrency is a digital currency that utilizes cryptography to secure its network and verify the transfer of funds. The creation of a cryptocurrency uses a decentralized peer-to-peer network. Basically, cryptocurrency can be used as a form of digital currency, a payment system, or a method of investment. As a means of investment, investors buy cryptocurrencies to profit from market trends. Bitcoin and Ethereum are among the most popular cryptocurrencies that are traded on various platforms.
Essentially, the cryptocurrencies valuation is influenced by factors like supply and demand, investor sentiment, and the regulatory environment. Thus, the crypto evolution is an ongoing process that includes continuous efforts to evolve the technology and enhance security measures.
History of cryptocurrency
The first cryptocurrency was Bitcoin, created in 2009 by an anonymous programmer; however, Satoshi Nakamoto claimed to be the creator. Since then, more than 20,000 cryptocurrencies have emerged. While the idea of cryptocurrency can be traced back to the 1980s, American cryptographer David Chaum introduced the first proto-cryptocurrency called DigiCash. What’s more, while Bitcoin emerged in 2009 and was followed by thousands of other cryptocurrencies, the cryptocurrency evolution covers a variety of different platforms and models.
Generally, while traditional currencies are governed by a centralized authority and managed through the banking system, cryptocurrencies are designed to operate based on the principles of decentralization. This means that there is no governing body that regulates or controls cryptocurrencies. How does cryptocurrency work?
How does cryptocurrency work?
Cryptocurrencies are encrypted digital currencies that use blockchain technology to manage the generation of new units and transfer assets. The entire process of creating cryptocurrencies uses a decentralized peer-to-peer network with no central authority or regulatory body. Following are a few components of the cryptocurrency ecosystem:
- Nodes – The term “nodes” refers to the individuals that run cryptocurrency nodes on a peer-to-peer network. According to the blockchain, each node has its own copy of the full database, called a blockchain. This database maintains all relevant information about transactions and asset creation, as well as the ability to transfer assets and make payments. The nodes are connected to other nodes via a peer-to-peer network, allowing them to verify transfers and exchange cryptocurrencies securely.
- Mining – Mining is the process of creating a new cryptocurrency. As per the blockchain, mining is a computationally-intensive process that involves various verification steps. Typically, this process involves solving complex algorithms using sophisticated hardware and software. In order to generate new coins, a miner needs to confirm transactions and verify blocks in the blockchain database. This process mathematically ensures the creation of new coins.
- Blockchain – Well, the blockchain is simply a digital ledger system that records all cryptocurrency transactions, assigning them unique identifiers. Essentially, each block represents a collection of transactions that are stored on the blockchain. Whenever a new transaction occurs, it gets broadcast to all nodes via the peer-to-peer network, enabling them to add it to the blockchain database.
- Wallets – Generally, wallets are software programs that allow users to store their cryptocurrencies. These wallets typically consist of a user-specific wallet address, private keys, and additional security features. In addition, the wallet stores user funds and provides a platform to make and receive payments. The database of all transactions associated with each account sits in the user’s wallet.
- Anonymity – Considering the nature of cryptocurrency, users’ anonymity is a significant element of the crypto evolution. The technology allows users to remain anonymous while executing transactions and transfers. It allows users to operate with a certain level of anonymity. In fact, there is no evidence that government officials can track transactions and monitor accounts, which is why cryptocurrency allows users to remain private.
Evolution and social trends of cryptocurrency
Cryptocurrencies have gained popularity as means of currency, payment, and trading. Over the past few years, there has been increasing demand for cryptocurrencies, which has attracted individuals and businesses to the crypto market. Considering the nature of the technology, much of the crypto community has preferred to trade and invest in cryptocurrencies via centralized exchanges or online cryptocurrency brokers.
How is crypto evolution helping the world?
Cryptocurrencies are revolutionizing business and transactions in the world. As a result, many countries have embraced cryptocurrencies as means of currency and payment. Here are a few fields where cryptocurrencies are helping to make the world a better place:
- Tech developers – Cryptocurrency allows tech developers to build apps, create new products, and gain access to a growing market of cryptocurrency users. In the past few years, this has created an explosion of technological innovation in various fields. In this regard, cryptocurrency has significantly helped the tech world to build new products, apps, and tools.
- Financial institutions – The financial industry is the backbone of the economy and is critical for its growth. Cryptocurrency has already revolutionized the financial sector, which is now equipped with online platforms to offer virtual currencies as a means of payment. As a result, the financial sector has been adapting and advancing, improving the economy’s overall functioning.
- Investors – Cryptocurrency has created an entirely new way to invest and earn returns on investments. The cryptocurrency market is filled with opportunities for investors, traders, and speculators. As a result, there is a growing demand for cryptocurrency, which has provided a way to make money with cryptocurrency.
- Consumers and merchants – It has been proven that cryptocurrencies have gained the attention of a wide audience. These groups include consumers and merchants, which has led them to embrace technology as a means of payment. This is because cryptocurrencies are easily available and dependable when making payments or trading with other people or businesses. In addition, there is no middleman or third-party relationship that could lead to charges by the financial industry when conducting transactions.
- Regulators – The cryptocurrency market has opened the door to all kinds of opportunities, which has led many governmental and regulatory bodies to take notice. As a matter of fact, there is an increasing need for regulators to monitor crypto activity and provide oversight. This is because the cryptocurrency market is largely unregulated, which has led to various loopholes and a lack of oversight.
Why must you understand the legality of cryptocurrency?
Cryptocurrency has created a significant buzz since its inception. The market has provided unique opportunities for investors, new-age tech companies, businesses, and financial institutions. However, there is a significant lack of clarity surrounding the legality of cryptocurrencies. This is because various countries and jurisdictions have different views on the use of cryptocurrencies. Most governments are still figuring out how to regulate or enforce laws on cryptocurrencies.
Importance of valuing cryptocurrency
The analysis of the cryptocurrency market is a significant part of an investor’s research. The reason is that this market has the potential to provide opportunities for investors to make money. In this regard, it is important for investors or traders to understand the valuation of cryptocurrency. As such, the decision to buy or sell any cryptocurrency largely depends on the price. In other words, cryptocurrency valuation is significant for investors and traders.
How does crypto valuation multiple help valuing cryptocurrencies?
In financial terms, valuation multiple is a measure used to determine a ratio in comparison to other specific financial metrics. The cryptocurrency valuation multiples help to compare the price of cryptocurrencies to other financial metrics. The crypto market is filled with a diverse range of cryptocurrencies, which are valued differently. As such, it is important to understand how crypto valuation multiple works. This helps investors and traders to determine the most appropriate valuation scheme for each cryptocurrency. But,
How to value cryptocurrency?
Now that you understand the basics of crypto valuation, let’s take a look at the cryptocurrency valuation approaches.
Methods to value cryptocurrency
There are various metrics to calculate the cryptocurrencies valuation. These include:
- Book value to generate a cryptocurrency’s intrinsic value.
- Cash flow methods and discounted cash flow analysis to determine the potential for future growth.
- Ratio analysis provides a comparison between the company or organization and its performance over a specific period.
- Market capitalization formula is used by investors or traders to determine if an increase or decrease in market cap will lead to an increase in value.
The quantity theory of money
In cryptocurrencies, the quantity theory of money is a popular and reliable metric to calculate the fundamental value of cryptocurrencies. This theory states that the price of a cryptocurrency directly results from the amount of money in circulation. Basically, depending on the quantity of money in circulation, there will be an increase or decrease in the demand for a cryptocurrency. In other words, a cryptocurrency’s fundamental value is directly proportional to the supply.
National currency comparison
The cryptocurrency market is filled with a growing range of cryptocurrencies with direct competition. As a result, the cryptocurrencies valuation can be easily influenced by other cryptocurrencies. In this regard, it is crucial to compare the fundamental valuation of cryptocurrencies in a specific country. The national currency comparison helps investors and traders to determine a cryptocurrency’s valuation in relation to its national currency.
Pure store of value – percent of net worth
The main purpose of holding any cryptocurrency is to make money. In this regard, it is essential to determine if a specific cryptocurrency can be used as a store of value. A store of value should ideally be able to maintain its relative value when compared to other cryptocurrencies. As a result, it is important to understand if a particular cryptocurrency can be used as a store of value.
Challenges you face while valuing cryptocurrency
While valuing cryptocurrencies, it is crucial to understand the challenges an investor or trader faces. Volatility is the single most challenging aspect of cryptocurrency valuation. This is because various cryptocurrencies have different values, and there is a need to analyze their individual volatile trends.
Secondly, no regulations exist in the cryptocurrency market, and investors or traders need to understand how a wide range of cryptocurrencies can respond to regulatory or legislative changes. Finally, there is a lack of transparency in the cryptocurrency market, which makes valuing it more complex. As such, it is purely based on supply and demand.
Recent valuation climb of crypto/blockchain companies globally
Recently, the valuations of crypto businesses worldwide have skyrocketed. As a result, there has been increased scrutiny and pressure on investors and companies to ensure the correct valuation. The increasing competition among crypto companies will make it more challenging for them to ensure the correct valuation. This is because investors or traders need to keep in mind the specific market characteristics of each company. As such, it is important for investors or traders to evaluate the cryptocurrency fundamentals before making any short-term or long-term investments in this industry.
Get your crypto valuation from Eqvista!
In this article, we briefly discussed the fundamentals of cryptocurrency valuation. We also looked at how to value cryptocurrencies and the challenges investors or traders face while valuing cryptocurrencies. As a result, it is important for investors and traders to understand the fundamentals of valuation. This will help them keep track of the changes in the cryptocurrency market and conduct a meaningful analysis. Eqvista is here to help value crypto assets. Eqvista’s years of experience with the industry have given us strong insights into the various aspects of crypto.