Knowing how to calculate the value of an asset allows you to position yourself more effectively on the stock market. But is that possible with crypto-currencies?
The significant upward trend in Bitcoin prices and crypto-currencies in general is prompting traders to invest heavily in them.
Both institutional and retail traders are expressing an interest in cryptos, as evidenced by upward price trends.
Let’s start with BTC, the mother of all cryptos and still the market leader today.
The first thing to understand about BTC and crypto-currencies in general is that the price does not depend on any financial institution. It is therefore only the law of supply and demand that determines its value.
In other words, when demand increases, the price will also increase. On the other hand, when supply increases, the price will fall. The current magic of Bitcoin is mostly achieved by a rise in price, leading to a rise in demand, then a rise in price, etc.
Regarding mining: at the moment, a new block is added to the blockchain every 10 minutes as a reward for mining. But in reality, mining hardly influences the Bitcoin price any more, since the contribution has become quite small.
Indeed, the algorithm used by BTC involves a gradual decrease in rewards as one approaches the ceiling of 21 million BTC in circulation. This is known as "Bitcoin halving", a process that involves cutting mining rewards by half approximately every four years.
The increase in supply through mining no longer influences the price. This is also how experts minimize the future impact of this cap on Bitcoin prices, even though other investors remain quite skeptical.
In order to predict the price of a company's stock, an investor compares the intrinsic value of the stock to the current real value. If the intrinsic value is higher, it is a good time to invest in the stock.
Can we do the same with crypto-currencies ? Actually no, even though it seems impossible to calculate the real value of a crypto currency. So the only value that can be displayed is "How much is it traded on the stock market ?". However, some experts are looking into the matter. Some theories have been put forward.
The NVT ratio is calculated by dividing the market capitalization by the trading volume. The NVT ratio thus determines the interest of the various market participants, in other words "the network", in the currency in question. This ratio is used to anticipate the upward and downward price movements of a crypto-currency.
This ratio is based on fairly simple logic : the more interest a cryptocurrency attracts, the more its value will increase. To calculate this, divide the number of users by the volume of daily transactions and compare it with the values of past days. You will obtain a ratio trend curve that can predict future price variations of the crypto-currency in question.
This factor follows the logic of the network effect. However, the indicator is not obtained from calculations. This time, it must be the result of a thorough analysis of social networks. The more people talk about a crypto-currency, the greater the chances of its value increasing.
This factor is still very controversial. Some specialists have even shown that it is rather the opposite, that the value of a currency decreases as it becomes popular on social networks.
This is perhaps the most controversial theory of all, but it is worth noting. The indicator is taken this time from global money laundering data. Indeed, crypto-currencies have become the fallback stocks for this activity. They are not attached to any institution and wallets, like transactions, remain completely confidential.
Thus, when the phenomenon is on the rise, it’s likely that the value of cryptos will increase. Nevertheless, this factor seems to be valid only for some currencies like Bitcoin or Ethereum, more precisely the historical ones.
BTC prices were around €25,000 at the beginning of the year. In April, they were able to cross the €55,000 mark while the world was in the middle of a health crisis.
On May 12, 2021, Elon Musk, the boss of Tesla, announced that his company would no longer accept crypto-currency payments for any of its electric vehicles. The reason given was that of environmental preservation, since the mining of cryptos generates significant energy consumption.
BTC prices collapsed in the following weeks, losing half its value in one week. During the third quarter, the upward trend then resumed for most crypto-currencies without any real explanation.
These different events confirm once again that the prices of crypto-currencies do not obey the same laws as those governing other stock market assets. They really only obey the law of supply and demand. Although the latter is fairly predictable, what is less predictable is the behavior of market participants.
Here are some things that can influence investor behaviors :
Nevertheless, the bullish trend in crypto prices this year, apart from the retraction in May and June, is in response to market logic. It is the response to predictions by some investors of a medium-term uptrend in crypto prices in general.
It is also explained by the sudden drop in May and June, which forces holders of cryptos to keep them until at least they return to their pre-crisis values. This conservative policy of holders undeniably leads to a decrease in supply. On the other hand, demand is increasing due to the good shape of crypto-currencies in general. This trend between supply and demand is naturally driving up the current value of virtual currencies.
Currently, it is not difficult to track the prices of a crypto-currency. All it takes is a quick search on any Internet search engine. Most of the sites that will come up can show you a chart with the price history according to a certain period. On some sites, you will also find other information such as market capitalization or the number of tokens outstanding.
You can also register to a broker site in order to regularly monitor crypto prices. Depending on the broker you choose, it will be possible to customize your interface and display only this asset class, for example.
The only thing you need to understand is that crypto prices are given in parity with another currency. Generally, the dollar and the euro are the most used if you use an English or French speaking search engine. Thus, instantaneous price variations can also be the result of an appreciation or depreciation of the parity currency. Pay attention to this important detail. BTC/ETH type cryptocurrency parities also exist, but are rarer. They are only offered by a few brokers.
