Cryptocurrencies have gone from digital novelties to trillion-dollar technologies that are widely held as investments and used to purchase goods and services. Their growth is being fuelled by speculation about disrupting global financial systems; yet it’s too soon to tell if crypto assets will actually prove their worth as long-term money investments.
There are hundreds of cryptocurrencies currently in use and new ones emerging each day, each one with its own price based on a combination of factors; one key one being supply, that is how many tokens are available in the market to purchase; demand can also have an effect on value when increased usage increases it accordingly.
As there is no finite supply of cryptocurrencies like precious metals do, anyone with programming skills and an interest can create one. Ethereum stands out among its peers with a market cap of more than $70 billion and 65 million coins circulating circulation; other lesser-known coins don’t even have public exchanges to trade on.
A cryptocurrency’s price is determined by both its market capitalization and circulating supply. Market capitalization measures the total value of tokens that have been sold or otherwise circulated within an exchange; while circulating supply refers to coins currently up for purchase. A cryptocurrency’s price can be determined by dividing its market cap by its circulating supply; for instance dividing by 2 yields its current price.
As is the case with stocks, cryptocurrencies have experienced high levels of market volatility. Their price can rise or fall dramatically depending on investor sentiment and news about each coin; due to this risky investment strategy they should only be purchased when timing is appropriate for maximum returns.
As the popularity of cryptocurrencies has skyrocketed, their proliferation has given rise to numerous derivatives based on their prices and offering investors ways to speculate on future performance without actually holding an asset themselves. One popular form is an exchange-traded fund (ETF), which invests in multiple cryptocurrency assets.
One purpose for which some cryptocurrencies were created was as alternative payment mechanisms or ways for individuals to store wealth online. Some are associated with large projects while others have more limited applications – for instance, Dogecoin was initially created as a joke but has grown immensely popular, even garnering investment from high-profile investors.
Cryptocurrencies could provide an attractive alternative to traditional currency, but their success will hinge on fulfilling all three functions that define money: as a store of value, medium of exchange and unit of account. At present, cryptocurrency only has limited acceptance for payment with volatile prices severely restricting their use as stores of value. They’re also expensive to produce as mining requires large amounts of energy while not being guaranteed by any institution makes them vulnerable to speculation bubbles and other risks.