In this section for Investing in Cryptocurrency, we take into account some considerations to help you decide whether investing in crypto assets is right for you. There are many risks, but the markets are exciting and people have made and lost fortunes in these markets.
Investing in Cryptocurrency - Pricing
The very first determining factor for Investing in Cryptocurrency is the pricing. For tokens that are a claim on an underlying asset such as 1 oz of gold, the price of the token should more or less track the price of the underlying asset. However, as previously discussed, Cryptocurrencies are not a claim on any asset, nor are they backed by an entity. Is there a way to calculate a fair value for them?
For Investing in Cryptocurrency, there are 3 most important questions to consider:
- What is the current price of the crypto asset?
- What causes prices to change?
- What should the price be?
Determining the price of the asset for Investing in Cryptocurrency
The current price of any asset is determined by the market. Crypto assets trade on one or more exchanges, and both prices and liquidity can differ between exchanges. Exchanges that report the most trade volume provide a good measure of the price, as they are the most active and should have the most liquidity. Other exchanges may have higher or lower prices. Coinmarketcap.com is one of many websites that provide data about the current price of tokens and which exchanges they trade on.
If you click on the name of a token and then click on ‘Markets,’ you can see where that token trades and how much volume the exchange says it has traded. Note that some exchanges have been caught faking trade volume in order to generate business, and I am not confident this practice has been eliminated… beware!
Factors influencing the price changes during Investing in Cryptocurrency
The prices of Cryptocurrencies and tokens behave like any other financial asset, driven by buyers and sellers who make trading decisions based on various factors:
- The sentiment (how traders feel about the asset)
- Gossip and chatter on forums and social media sites
- Technical successes (e.g., when blockchains successfully implement technical upgrades that make them more useful, or when an ICO makes progress on its roadmap)
- Technical failures (e.g., if transactions slow down or a weakness is found in the way the blockchain operates)
- Celebrity endorsements (e.g., Paris Hilton’s endorsement of Lydian Coin in Sept 2017, or John MacAfee’s occasional promotional tweets)
- Founders getting arrested (e.g., when the founders of Central token were arrested in the USA, and the price of the tokens fell by 60%)
- Orchestrated Pump & Dumps where people coordinate to all buy a coin together to make the price go up and persuade others to buy it at a higher price, then sell the coins to unsuspecting new buyers
In the next tutorial session, we continue our discussion of Investing in Cryptocurrency while considering a few more additional factors that can be equally important to consider for Cryptocurrency.
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