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When discussing crypto, conversations often center more on price surges and drops than the underlying technology. While I prefer not to focus solely on price volatility, it’s essential to address this topic as a cautionary point and to provide insights into the causes behind these price fluctuations.
I am not a financial expert, and my perspective on the valuation of crypto or companies may be limited.
In a previous article, I provided an overview of various types of crypto. Read it here.
Determining the value of cryptocurrencies like Bitcoin is, much like valuing commodities such as gold or silver, a complex process. Factors such as scarcity, circulation, supply and demand are critical. Additionally, unique aspects like adoption, regulations, and user base influence the value of Bitcoin and other cryptocurrencies.
Bitcoin has a capped supply of 21 million coins, making it comparable to precious metals where scarcity is a key factor in valuation.
Out of the 21 million Bitcoins, approximately 19.9 million have been mined as of this writing. The remaining coins will be released gradually through mining, influenced by computational power and the halving cycle. Halving, which occurs roughly every four years, reduces miners’ rewards, making it increasingly challenging and expensive to generate new coins.
Check live circulation (Total supply) data on CoinMarketCap.
Halving and Costs
Post-halving, mining becomes more expensive as it demands greater computational resources. Consequently, Bitcoin’s price is partially influenced by hardware and energy costs. Tools like the Bitcoin Rainbow Chart help visualize historical price trends and provide insights into potential future price movements based on halving cycles.
Mining a single Bitcoin can be very expensive, with electricity costs ranging from $1,324 to $321,112, depending on the electricity prices in the country. Additionally, winning the Bitcoin mining “lottery” requires a significant investment in powerful hardware and at least 1% of the total mining power. This “lottery” refers to the randomness and competition of successfully mining a block.
Learn more about Bitcoin mining costs
Bitcoin Rainbow Chart
Bitcoin’s supply decreases over time due to its capped issuance (a maximum of 21 million coins) and the estimated 3–4 million coins lost due to forgotten or inaccessible private keys. Ultimately, buying a cryptocurrency involves acquiring a unit that holds value and can be exchanged for fiat money, goods, or services.
The smallest amount of Bitcoin you can buy is called a satoshi. One satoshi is equal to 0.00000001 BTC.
Altcoins, or alternative cryptocurrencies, encompass over 10,000 tokens, including stablecoins, platform/network coins, utility tokens and Meme coins. Here, I’ll focus on platform/network coins and utility tokens.
For networks like Ethereum, valuation depends on factors such as:
- Number of users
- Daily transactions
- Transaction speed
- Scalability
- Applications (dApps) leveraging the network
Ethereum is one among hundreds of networks. While competitors claim to be faster or more scalable, only time will reveal which networks sustain long-term viability. Buying Ethereum means acquiring a digital asset that enables participation in its blockchain, including access to smart contracts, self-executing agreements written directly into code.
Blockchain startups often fund their projects via tokens on platforms like Ethereum. These tokens’ values can sometimes be easier to estimate, as they may resemble internet-based services. For example, Ripple (XRP) offers services similar to PayPal, enabling fast and low-cost cross-border transactions.
Market capitalization (market cap) represents the perceived value of a company or asset in the market. This allows us to compare the value of a non-crypto company with a blockchain-based company offering similar services. For tokens, market capitalization refers to the total value of a specific cryptocurrency. It is calculated by multiplying the current price of a single token by the total circulating supply.
At the end of 2024, Ripple (XRP) has a market capitalization of around $130 billion, compared to PayPal’s market cap of $90 billion.
While a 1-to-1 comparison between a non-crypto company and a blockchain-based company may not be entirely accurate, it can give an indication of whether the price aligns with what the blockchain-based company offers.
See data on CoinMarketCap or Market Cap PayPal.
24 Dec 2024, CoinMarketCap market summary for XRP (Ripple)
Extreme price fluctuations in crypto are driven by factors such as market cycles, sentiment, and FOMO (Fear of Missing Out).
FOMO often begins when people on social media hype up a cryptocurrency. They buy to drive up the price and then sell (a rug pull) when others start buying. This process is known as a pump-and-dump.
Pump-and-dump schemes are common with coins that have very low values, often with many zeros. For example, if a coin is priced at 0.000001 and its price rises to 0.000002, it may seem like a small increase. However, that’s actually a 100% gain. But if you buy at 0.000002 and the price falls back to 0.000001, you’ll lose half of your investment. These dramatic price swings can be misleading, especially with coins that are traded in such small increments.
Like stocks, mortgages, vehicles, and luxury goods, crypto operates in cycles. However, its cycles are often more extreme due to its nature as an emerging technology. FOMO can amplify price increases significantly. It’s hard to say in which stage of the market cycle we are, and even if we’re seeing a repetition of an earlier cycle, it doesn’t mean that the peaks will necessarily be higher than the previous ones.
For Bitcoin, you can argue that the halving, which reduces the new supply and raises the cost of mining, plays a role in potential future price increases. However, for tokens with a fixed circulating supply (pre-mined), the halving effect doesn’t apply. In the long term, it’s better to assign value to tokens based on the services they offer rather than solely on speculative price movements.
More information about Market Cycles
The Psychology Of A Market Cycle
This index gauges market sentiment using data like volatility, trading volume, and social media activity:
- Extreme Fear (0–24): Panic selling and potential price bottoms
- Fear (25–49): Cautious market sentiment
- Neutral (50–74): Balanced market
- Greed (75–100): Strong bullish sentiment and FOMO
See Crypto Fear and Greed Index
Crypto Fear and Greed Index
Altcoins often follow Bitcoin’s market cycle but with a delay. During an “Altcoin Season”, investor focus shifts from Bitcoin to altcoins, driving their prices upward.
Cryptowinter is a period when the price of cryptocurrencies stays low, typically fluctuating within a small range. This doesn’t mean that there’s no new development or news; rather, it reflects a time of market stagnation, where prices remain subdued and investor sentiment is generally cautious. Despite the quiet market, innovation and progress continue, with new projects and advancements still happening behind the scenes.
At its core, crypto is software and a network of users, similar to the internet or a bank. Bitcoin alone boasts over 80 million users. Understanding the technical and market factors can help make informed decisions in this volatile market.
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