There is no way how to evaluate the value of bitcoin, unlike evaluating company stocks.
The technology underlying a cryptocurrency is extremely important. Decentralized currencies are resistant to censorship, but they are also nearly impossible to simply shut down.
There is no need for a third party to ensure additional trustworthiness or transparency due to the use of public ledgers.
Bitcoin remains the most popular decentralized cryptocurrency, with increased interest in potential applications based on its core blockchain technology over the last decade. However, in an extremely dynamic (and often volatile) market, Bitcoin has encountered a number of competitors, including other digital tokens such as EOS, Cardano, Ripple, and Ethereum (among many others), all of which have experienced both bull and bear runs.
Many blockchain-based tokens now have market values in the millions to billions of dollars, with the entire crypto ecosystem worth more than a trillion dollars. Cryptocurrency has grown into a significant economic force. Another critical aspect of technology is its safety.
Because cryptocurrencies are digital, bugs in the coding are possible. For example, an ethereum-based smart contract for a democratic digital investment fund, known as the DAO, contained a bug that was eventually exploited by a hacker who stole more than $30 million in ether. To address this issue, a change to the ether blockchain was proposed. Some in the Ethereum community agreed that it would solve the problem, but others refused to change the code out of principle, fearing that it would jeopardize ether's credibility. Ethereum was then divided into two versions: Ethereum (the new code version) and Ethereum Classic (the original code). Both are still tradeable, and everyone who owned ether at the time received a copy of both the new and classic versions. This is known as a fork, and it can have a significant impact on the price if miners and other network participants cannot reach an agreement.
So, how does one determine what the market considers to be the fair value of a digital coin, or how does one arrive at a Bitcoin valuation? How do you consider intrinsic value for something that only exists within computer networks but has appreciated in price faster than even the hottest technology stocks? When it comes to Bitcoin, these questions have perplexed investors and analysts for years, with opposing viewpoints on the subject.
Count of Nodes
The number of nodes in a cryptocurrency is a good indicator of its value. Node count is a measurement of how many active wallets exist on the network that can be found by searching the internet or visiting a currency's homepage.
This is one method for determining whether a coin has been overbought. Node Count also indicates how strong a cryptocurrency's community is. The greater the number of nodes, the stronger the community. This is important to understand in order to calculate the currency's chances of overcoming crises.
In order to analyze whether or not a currency has a fair price, one can search for the node count and the total market capitalization of the cryptocurrency then compare those two indicators with other cryptocurrencies.
Expected-Value Based
For instance, if one views Bitcoins as equivalent to stocks or bonds, pricing models appraise its expected value. Expected value is the discounted value attributed to an investment's payoff in the future. Since Bitcoin does not pay dividends or interest, the expected value would be due to a strong belief in the underlying technology and its potential to be disruptive or even revolutionary. This would be a similar approach to valuing a start-up company or young tech stock that does not have any current earnings or profits. Once an expected value is forecast, one can start to make estimates about Bitcoin's current fair value.
To determine whether a cryptocurrency has a fair market price, look up the node count and total market capitalization of the coin, then compare those two metrics to other cryptocurrencies.
For example, if one considers Bitcoins to be equivalent to stocks or bonds, pricing models estimate their expected value. The expected value is the discounted value assigned to an investment's future payoff. Because Bitcoin does not pay dividends or interest, the expected value is based on a strong belief in the underlying technology and its potential to be disruptive, if not revolutionary. This is a similar approach to valuing a start-up company or a young tech stock with no current earnings or profits. Once an expected value is predicted, one can begin to make educated guesses about Bitcoin's current fair value.
Based on supply and demand
Because of large online exchanges like the ones listed on popular cryptocurrency exchanges, usability has increased dramatically, resulting in a significant increase in market cap over the last few years. As a result of their growing popularity and adoption by many businesses, more and more governments and countries are attempting to figure out how to implement them as well. All of these factors have contributed significantly to the rise in cryptocurrency prices.
The value of anything that can be traded, including all cryptocurrency on the market, is heavily influenced by supply and demand. For example, if more people try to buy bitcoins while others want to sell them, the price will rise, and vice versa. Because the supply of many cryptocurrencies is limited, the increased popularity has caused prices to rise.
The value of a bitcoin can also be calculated using supply and demand principles. The Bitcoin market, like any other market, achieves price discovery through the interactions of a large number of buyers and sellers. If there is a high demand that exceeds the number of new bitcoins mined, the fair price for Bitcoin rises. Bitcoin, like many other assets, has a limited supply (21 million will be produced by the year 2140), but unlike other finite-supply securities, the new supply of Bitcoin cannot be increased by decree or vote among shareholders or boards of directors. As a result, the price of Bitcoin is inextricably linked to its scarcity. This elevates Bitcoin's value to that of a collectible, such as rare baseball cards or artwork. However, if a coin is embroiled in scandals such as serious hacking attacks, or if a new coin becomes widely known as a scam, demand for it can fall quickly - very quickly. As a result, a domino effect can occur, causing the price of a cryptocurrency to fall even faster, as many traders and miners want to cash in on their profits. Such events can also be felt beyond a single cryptocurrency: for example, a drop in the Bitcoin price has frequently resulted in a correction of the entire cryptocurrency market.
A different perspective on supply and demand considers stocks versus flows. A stock-to-flow ratio compares the currently available stock in the market to the newly flowing stock that is added to circulation each year. With Bitcoin, the number of bitcoins found in each block mined is reduced by half every four years. Because less new supply is created relative to the outstanding stock, each halving event raises the stock-to-flow ratio. Since its inception, Bitcoin's price has tracked the rising stock-to-flow ratio; each halving has been accompanied by a bull market that has led to new all-time highs.
Effects of Networks
If Bitcoin is viewed as a network rather than an asset, its value can be derived from the network's size and robustness. The number of users or nodes mining a cryptocurrency is referred to as "network effects."
Metcalfe's law, which was originally devised to understand the value of telecommunication networks, states that the value of a network is proportional to the number of its users (or nodes) squared. While there are limitations, this viewpoint implies that as the Bitcoin network expands in size, so will its value.
Adoption in Large Numbers
If a currency gains widespread acceptance, its value can skyrocket. This is due to the fact that the total number of most cryptocurrencies is limited, and an increase in demand directly leads to an increase in price.But what factors are still required for cryptocurrencies to be widely adopted by the general public? The first is the applicability of cryptocurrencies in real-world situations, i.e. the number of locations that accept them as payment. If a cryptocurrency, like today's fiat currencies, has a use case in everyday life, it will be in a very good position to play an important role in the future.
Fiat currency inflation
If the value of a fiat currency falls, the value of Bitcoin rises in relation to that currency. This is due to the fact that you will be able to obtain more of that currency with your Bitcoins. This phenomenon is still visible today, as the Federal Reserve, the European Central Bank, and other central banks have been printing more money and keeping interest rates artificially low.
Regulation
Once cryptocurrency has gone mainstream, the likelihood of government regulation is very high. You should also keep in mind that these regulations may lead to more centralized digital money. This would have a significant impact on a cryptocurrency's price.
According to critics, transactions will be reduced and controlled as a result of regulations and the lack of security that governments may perceive in cryptocurrency. Some institutions may even prohibit them, as attempts in Russia and China have demonstrated.
Production Costs
Another way to think about Bitcoin's value is to think of it as a manufactured commodity, similar to oil or silver. Most commodity prices are determined by the marginal cost of production, or the cost to producers of producing one more unit. According to economic theory, in a market where many producers of the same product (in this case, Bitcoin miners) compete with one another to sell their product to consumers, the selling price will be driven down to its marginal cost.
The direct and opportunity costs of producing a coin are also factors in determining a cryptocurrency's value. Bitcoin, for example, has a high production cost. The resources and energy invested in bitcoin mining can be viewed as one of the reasons why bitcoin has value. This includes the cost of producing specialized hardware such as CPUs/GPUs or servers, as well as the associated cooling systems.
As a result, even if demand falls short of supply, producers will be hesitant to sell below cost and incur losses. According to this viewpoint, Bitcoin's price should be influenced by similar dynamics. Even though it may appear that the energy used to create new Bitcoins is wasteful, it is the only way to provide users with security, as mining is the reason why governments cannot easily shut down the Bitcoin blockchain. However, programmers are debating how to make the process more efficient.
The main difference between Bitcoin production and, say, mining ore or producing something like chairs or tables is that an increase in demand cannot induce producers to produce more bitcoins because it is limited to one block being discovered every ten minutes. As a result, as market prices rise and new and larger miners join the network, the number of bitcoins produced remains constant. What changes is the level of difficulty in mining those bitcoins. This increasing difficulty maintains a consistent 10-minute target between the generation of new blocks. The value of Bitcoin fluctuates based on demand for the cryptocurrency as well as public perception of how much the coin is worth. It is also evolving as a result of an ever-expanding network of miners and users. As more miners join the network, the difficulty for those miners increases, raising the cost of production.
Conclusion
The value of a cryptocurrency can fluctuate rapidly, but over time, the volume of transactions has increased while volatility has decreased. It remains to be seen whether this pattern will continue. The possibility of a significant price correction must be considered. Every trader and investor must weigh the significant potential of cryptocurrencies against the risks that these currencies continue to face. Many factors will influence a digital currency's long-term value, including true mass adoption and the real value that such currencies bring to our daily lives (when compared to other traditional payment methods). Another critical factor will be whether governments and central banks embrace or oppose new technology. Last but not least, usability and safety are critical components that must progress beyond today's standards in order for everyone to keep their cryptocurrencies readily and safely available for use in our daily lives.
All of these factors combined make it difficult to accurately evaluate the price of cryptocurrencies, but they also make the market very interesting for traders and investors on a daily basis. Even if we can identify fair value, investing in cryptocurrency remains one of the most volatile investments, which means that any potential investors must conduct thorough research. However, knowing how to evaluate the coin's valuations will be critical if you want to make a large profit (or simply participate in the fun).