What Is the Value of Your Cryptocurrency

Image Credit: Ivars Timcuks/iStock/GettyImages

Part of the lure of investing in digital currency is the ease of entering the cryptocurrency market. Anyone can hop onto a cryptocurrency exchange, fund an account and begin buying and trading bitcoin, ethereum and other cryptocurrencies straightaway.

Advertisement

Once you've entered the crypto market, you'll want to measure and track your cryptocurrency investment's worth and liquidity over time.

Video of the Day

Cryptocurrency Value and Circulating Supply

Until 1971, the U.S. dollar was backed by a physical commodity: gold. Before that time, in theory, an American dollar was redeemable for its value in gold.

Advertisement

When President Nixon ended the gold standard, the U.S. dollar became a fiat currency, meaning it wasn't backed by anything but the government's creditworthiness. The issuing government also controls how much of a fiat currency is produced.

Cryptocurrencies are similar to fiat currencies in that they are not backed by a physical commodity. A cryptocurrency is a medium of exchange that isn't issued or backed by a government, central bank or central authority. The backing for virtual currency is blockchain technology. And the circulating supply comes from users, like those performing Bitcoin mining.

Advertisement

While bitcoin and other digital currencies are not legal tender in almost any country, they are not illegal to use or hold in most countries. In the U.S., the IRS now wants to know when you sell cryptocurrency, convert it into U.S. dollars or use virtual currency as a medium of exchange. That makes it clear that cryptocurrency's value is being officially recognized.

Advertisement

Consider also:Venmo and Cryptocurrency

Cryptocurrency Valuation and Volatility

Like any asset, the price of different cryptocurrencies is based on supply and demand. When there is high interest in the circulating supply, the price increases. If demand goes down, so does the crypto's price. The value of any cryptocurrency can change at any moment, depending on market demand.

Advertisement

The supply of Bitcoin, for instance, is capped at ​21 million​. It is estimated that there are only 2 million more to be mined, which is predicted to happen by 2140. This finite supply drove Bitcoin's price, which reached an all-time high of ​$68,000​ in November 2021.

Advertisement

However, even the rarity of Bitcoin doesn't keep demand steadily rising. The price of Bitcoin recently fell below ​$40,000.Ethereum has risen sharply since its launch in 2015 but has experienced many fluctuations in the past year.

As a relatively new tradable asset, Ethereum, Bitcoin and all cryptocurrencies are very sensitive to volatility. Until cryptocurrency is stabilized by more widespread, legitimized use, its pricing and value will continue to experience fluctuations based on public sentiment and government regulation.

Advertisement

Take Elon Musk's poke at Dogecoin on Saturday Night Live in May 2021. Musk called the cryptocurrency a "hustle" – and Dogecoin dropped ​36 percent​ by morning.

Consider also:Is Acorns a Good Way to Invest?

Advertisement

Cryptocurrency as a Store of Value

According to blockchain and cryptocurrency expert Primavera De Filippi, the main function of Bitcoin (BTC) is a store of value. In other words, its strength isn't as a unit of payment or account but because, like gold, it is scarce and used to store value.

Advertisement

Legendary trader Warren Buffet disagrees, preferring productive assets that create something for the investor, rather than a more speculative investment like Bitcoin or other crypto with a value dependent upon a pool of people who buy it solely because they want to.

Corporate Finance Institute (CFI) defines something with a good store of value as "an item (that) can be held and converted into money in the future without a decrease in value."

Advertisement

As of now, due to volatility, perhaps Buffet's position describes cryptocurrency in the present, while De Filippi's vision looks to a more stable future.

Market Capitalization and Cryptocurrency

The market capitalization, or market cap, of cryptocurrency is the total dollar value of all the available coins multiplied by their price. This metric helps investors see value and growth potential.

Currently, all digital currency has a market cap of over ​$1.72 trillion,​ with Bitcoin holding the largest market cap of ​$702 billion​ and ​Ethereum​ at ​$319 billion.​ The remainder is split up among more than 9,000 other virtual currencies.

The market cap of an individual digital currency reveals the relative size and growth potential of different cryptocurrencies compared side-by-side.

SEC Regulation Cryptocurrency Exchanges

The U.S. Securities and Exchange Commission (SEC) goal is to protect investors, maintain fair markets and help investors make informed decisions. In a 2017 statement, the SEC warned of the lack of investor protection and increased potential for fraud in initial coin offerings (ICOs) and cryptocurrency trading platforms.

More recently, Gary Gensler, chair of the SEC, warned that crypto traded on DeFi platforms might be subject to SEC rules. Gensler stated his mission to ensure investor protection and uncover wrongdoing in cryptocurrency exchanges.

Summary

Your cryptocurrency investment isn't an SEC-regulated, protected financial product. The cryptocurrency market is rife with volatility and speculation. But there is a reason nearly half of millennials are comfortable having some crypto in their portfolios. Investing in digital currency is a high-risk, long-term option that may fit into a diversified investment portfolio.

Consider also:Will Your Work in 2022 Include NFTs?

Advertisement

references