Are cryptocurrencies overpriced? Some say yes, some say no.
But how can you tell if you’re in the right cryptocurrency at the right time?
How do you know if cryptocurrencies are overpriced or underpriced?
With this list of criteria, you can decide whether your cryptos are priced fairly or if it’s time to take profits and look into other coins with lower prices and bigger returns down the line.
The basics of cryptocurrency prices
The prices of cryptocurrency has skyrocketed in recent weeks.
Earlier this month, bitcoin was selling for $2,374 per coin and now it's up to $4,020.
And Ethereum had a similar meteoric rise. What is behind these sky-high valuations?
One theory is that cryptocurrencies are being used as a safe haven investment because national currencies like the Mexican peso and Russian ruble have plunged in value against the dollar.
I am not sure if the prices are over-inflated at this moment. It's possible that many people feel that there is limited time left to invest in them before some predicted bubble bursts or technological advancements make them obsolete.
How did cryptocurrencies become popular?
The idea of Bitcoin first came to fruition in 2008 when Satoshi Nakamoto introduced a groundbreaking paper that described a currency that did not need any banks and could be used anonymously.
With nothing more than an idea, this seemingly harmless invention would soon catch the attention of some individuals who would use it for their own means.
The cryptocurrency industry as we know it today had really only taken off around 2010 with many people beginning to show interest in a system where there is no central bank to control everything and your transactions are kept private.
However, this industry is still very new and lacks government regulations which has led many people to question its safety and affordability.
Is cryptocurrency overpriced?
After careful consideration, there is no clear answer as to whether or not cryptocurrencies are overvalued.
Investors should make their own assessment, but many disagree on what an overinflated price looks like.
It's important to remember that valuing something is a personal choice and everyone has different factors for determining what would be overinflated.
There will always be some price at which someone decides that cryptocurrencies have gone up too much, but we can't predict if this point is closer to the current levels or is ahead on the future horizon.
It may even be possible that some event in the next year tips prices into a new direction- perhaps higher, but also possibly lower than before.
That's one risk of investing in cryptocurrencies: high volatility and no guarantees about future prices.
Determining pricing based on market valuation
We should take a look at some factors that go into determining the price of a cryptocurrency. Factors that influence the price will vary, but two of them include: demand and supply.
The supply side is how many tokens exist and how easy they are to come by; similarly, on the demand side, we examine what people want to buy with these tokens and how much they are willing to pay for it.
For example, if you produce 5 barrels every day and there's 100 people in your town who need oil for their cars, then it would be appropriate for you to set your price at $3 per gallon--if there were only 1 person who needed oil for their car, you might charge more than $10 per gallon.
Determining price by fundamentals
There is no clear answer as to whether or not the prices are overpriced, but there are a few indicators to look for when determining if they may be.
First off, the number of people using cryptocurrency has steadily increased since its creation in 2008, with a growing list of retailers and even some countries (Canada) accepting it for legal tender.
That may mean that demand is increasing and driving up prices. Other drivers for its price could be fear from high-profile cybersecurity breaches that have hurt these companies like Bitfinex and Coincheck.
Conclusion and possible outcomes
Based on my research and experience, I have come to the conclusion that the price of cryptocurrency is overpriced.
Not only does it put off potential investors by driving away any potential liquidity for exchanges and marketplaces, but it also does not accurately represent or account for what a coin can do or who is behind it.
Cryptocurrencies in their current state are too volatile and dependant on hype to be taken seriously as investments.
They don't need to be as expensive as they are, nor should they all have inflated prices just because some coins might seem like they are worth it at face value.
For those in countries where their national currency depreciates, this gives them a chance at investing in something safe with very low risk.