From Bitcoin to Altcoins, valuation is complex, and market sentiment and service value determine long-term potential.
Author: ggrow
Translated by: Baihua Blockchain
When discussing cryptocurrencies, people often focus more on the dramatic price fluctuations rather than the underlying technology. While I am reluctant to focus solely on price volatility, it is still necessary to explore this topic and analyze the reasons behind price fluctuations as a cautionary point. The following is the main text:
01 Valuation of Cryptocurrencies
The valuation process of cryptocurrencies like Bitcoin is very complex, similar to commodities like gold or silver. Factors such as scarcity, circulation, and supply-demand relationships are crucial. Additionally, unique factors such as adoption rates, regulatory policies, and user bases can also affect the value of Bitcoin and other cryptocurrencies.
1. Scarcity
The total supply of Bitcoin is capped at 21 million coins, making it similar to precious metals where scarcity is a key factor in valuation.
2. Circulation
As of the writing of this article, approximately 19 million of the 21 million Bitcoins have been mined. The remaining Bitcoins will be gradually released through mining, a process influenced by computing power and halving cycles. Halving occurs approximately every four years and reduces miners' rewards, increasing the cost and difficulty of generating new Bitcoins.
Halving and Costs
After halving, mining costs increase because more computational resources are required. Therefore, the price of Bitcoin is partially influenced by hardware and energy costs. Tools like the "Bitcoin Rainbow Chart" can help visualize historical price trends and provide insights into future price movements based on halving cycles.
The cost of mining one Bitcoin can be very high, with electricity costs varying by country, ranging from $1,324 to $321,112. Additionally, winning the "lottery" of Bitcoin mining requires significant investment in powerful hardware and at least 1% of the total mining power. Here, "lottery" refers to the randomness and competitiveness of successfully mining a block.
Bitcoin Rainbow Chart
3. Supply-Demand Relationship
The supply of Bitcoin decreases over time, not only because its issuance is capped at 21 million but also because an estimated 3-4 million Bitcoins are permanently lost due to forgotten or inaccessible private keys. Purchasing cryptocurrency essentially means acquiring a valuable unit that can be exchanged for fiat currency, goods, or services.
The smallest unit of Bitcoin is called a "Satoshi," with 1 Satoshi equal to 0.00000001 BTC.
02 Altcoins
Altcoins include over 10,000 tokens, covering stablecoins, platform/network coins, utility tokens, and meme coins. Here, I will focus on platform/network coins and utility tokens.
Platform/Network Coins
For networks like Ethereum, their valuation depends on the following factors:
Number of Users
Daily Transaction Volume
Transaction Speed
Scalability
Applications (dApps) utilizing the network
Ethereum is just one of many networks. While competitors claim to be faster or more scalable, only time will tell which networks can survive in the long term. Buying Ethereum means acquiring a digital asset that allows you to participate in its blockchain, including using smart contracts—a self-executing protocol written directly into code.
Tokens
Blockchain startups often raise funds by issuing tokens on platforms like Ethereum. The value of these tokens can sometimes be easier to estimate because they may be similar to internet services. For example, Ripple (XRP) offers services similar to PayPal, facilitating fast, low-cost cross-border transactions.
Market capitalization reflects the perceived value of a company or asset in the market. This allows us to compare non-cryptocurrency companies with blockchain companies providing similar services. For tokens, market capitalization refers to the total value of a specific cryptocurrency, calculated by multiplying the current price of a single token by the total circulating supply.
As of the end of 2024, Ripple (XRP) has a market capitalization of approximately $130 billion, while PayPal's market capitalization is around $90 billion.
Although a 1:1 comparison between non-crypto companies and blockchain companies may not be entirely accurate, it can roughly indicate whether the price aligns with the services provided.
On December 24, 2024, CoinMarketCap's market summary for XRP (Ripple)
**03
Sentiment and Market Indicators**
Extreme price volatility in cryptocurrencies is driven by market cycles, sentiment, and FOMO (Fear of Missing Out).
**FOMO and "Rug Pulls"**
FOMO often begins with hype around a certain cryptocurrency on social media. People buy in, driving up the price, and then sell when others follow suit (i.e., "rug pull"). This process is known as "pump-and-dump."
**Pump-and-Dump**
**Pump-and-dump is common in tokens with very low prices, which often have many zeros.** For example, if a token's price rises from 0.000001 to 0.000002, it may seem like a small increase, but it is actually a 100% gain. However, if you buy at 0.000002 and the price falls back to 0.000001, you will lose half your investment. This extreme price volatility can be misleading, especially in trading units of such small tokens.
**Market Cycles**
**Like stocks, mortgages, cars, and luxury goods, cryptocurrencies also have cycles.** However, **due to their nature as emerging technologies, their cyclical fluctuations tend to be more extreme.** FOMO can significantly amplify price increases. It is difficult to determine which stage of the market cycle we are in, and even a repeat of an early cycle does not guarantee that the peak will be higher than the previous one.
For Bitcoin, it can be argued that halving (reducing new supply and increasing mining costs) plays a role in future price increases. However, for tokens with fixed circulation (pre-mined), the halving effect does not apply. In the long run, **valuing tokens based on the services they provide is more reasonable than relying solely on speculative price fluctuations.**
**Psychology of Market Cycles**
**Market Sentiment (Crypto Fear and Greed Index)**
This index measures market sentiment through data such as volatility, trading volume, and social media activity:
**Extreme Fear (0-24): Panic selling, possibly near price bottom**
Fear (25-49): Cautious market sentiment
Neutral (50-74): Balanced market
Greed (75-100): Strong bullish sentiment and FOMO
Crypto Fear and Greed Index
Altcoin Season
Altcoins typically follow Bitcoin's market cycles but with a certain delay. During "Altcoin Season," investor attention shifts from Bitcoin to altcoins, driving their prices up.
Crypto Winter
Crypto Winter refers to a prolonged period of low cryptocurrency prices, usually fluctuating within a narrow range. This does not mean there are no new developments or news; rather, it reflects a period of market stagnation, with prices low and investor sentiment generally cautious. Despite the calm in the market, innovation and progress continue behind the scenes, with new projects and advancements still occurring.
04 Conclusion
Cryptocurrencies are essentially software and user networks, similar to the internet or banks. Bitcoin alone has over 80 million users. Understanding the technological and market factors helps make informed decisions in this volatile market.
Article link: https://www.hellobtc.com/kp/du/03/5711.html
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