Why do differences between cryptocurrencies matter to traders?
The differences between cryptocurrencies matter to traders because they give vital clues as to how supply and demand for each coin may change over time, in turn influencing market prices and how cryptocurrencies are traded.
Supply
Circulating supply and upper limit
The supply of coins plays an important role in setting market prices. All other things being equal, the scarcer the coin, the more valuable it should be. Bitcoin and bitcoin cash each have an upper limit of 21 million coins, while Litecoin and ripple have expanded maximum supplies of 84 million and 100 billion respectively. These coins will be deflationary once all the coins have been mined or released, while coins like ether – with no fixed limit – have the potential to be inflationary, depending on how much is ‘burnt’ or lost.
Cryptocurrency mining and release rates
The supply of coins changes over time as new coins are mined or released. Mining is the process by which ‘blocks’ of transactions are verified, and new coins released. Bitcoin is currently mined at a rate of 12.5 new coins for every verified block, with the reward halving roughly every four years (the final bitcoins will be mined around the year 2140). Ripple coins, on the other hand, were pre-mined by its founders and are currently being released at a rate of one billion per month.
Demand
Reputation
Despite having fewer applications than many of its newer competitors, Bitcoin’s value has soared over the last few years, and it remains the biggest cryptocurrency by market capitalisation. This suggests that reputation remains an important factor in cryptocurrency valuations. Press coverage is likely to be an important factor here, with negative press – for example following a major wallet hack – tending to have a negative impact on prices.
Decentralised applications
While bitcoin, bitcoin cash, and litecoin are standalone cryptocurrencies, ether and ripple exist as part of wider networks with expanded applications. If the popularity of these networks increases or they are adopted by mainstream businesses, demand for their underlying cryptocurrencies could surge.
Transaction speed and scalability
As adoption of cryptocurrencies accelerates, transaction speeds and their ability to handle a high volume of transactions is likely to come under increased scrutiny. Scalability could also be influenced by blockchain size and security, as these factors will affect the profitability of mining, speed of the associated network, and willingness of users to buy and use coins. Traders should therefore pay attention to software updates and forks to see how scaling technology evolves.
As an enthusiast deeply entrenched in the world of cryptocurrencies, I've had the privilege of navigating through the intricacies of this dynamic and evolving ecosystem. My expertise stems from an in-depth understanding of the technological, economic, and market intricacies that define the landscape of cryptocurrencies.
Now, let's delve into the key concepts presented in the article and explore why differences between cryptocurrencies matter to traders:
1. Supply:
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Circulating supply and upper limit: The concept of circulating supply and upper limit is crucial in determining a cryptocurrency's value. The scarcity of a coin, as indicated by its upper limit, often correlates with higher value. For instance, Bitcoin and bitcoin cash have a fixed upper limit of 21 million coins, while Litecoin and ripple have larger maximum supplies (84 million and 100 billion, respectively). This scarcity aspect contributes to the deflationary nature of some coins, such as Bitcoin, whereas others, like ether, lack a fixed limit and can be inflationary depending on factors like coin "burning."
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Cryptocurrency mining and release rates: The supply of coins evolves over time due to mining activities. Bitcoin, for example, undergoes a reward halving roughly every four years, affecting the rate at which new coins are introduced into circulation. On the contrary, some cryptocurrencies, like Ripple, were pre-mined, and new coins are released monthly at a predetermined rate. This dynamic nature of supply is a vital consideration for traders.
2. Demand:
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Reputation: Reputation plays a pivotal role in cryptocurrency valuations. Despite newer competitors offering more applications, Bitcoin's enduring reputation has contributed to its substantial market capitalization growth. Press coverage, especially negative incidents like major wallet hacks, can significantly impact a cryptocurrency's price. Traders need to stay attuned to the news and sentiments surrounding a cryptocurrency to gauge potential market movements.
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Decentralized applications: While Bitcoin, Bitcoin Cash, and Litecoin are standalone cryptocurrencies, others like ether and ripple are integral parts of larger networks with diverse applications. The demand for these cryptocurrencies is influenced by the success and adoption of the broader networks they are associated with. If decentralized applications gain popularity or mainstream businesses adopt these networks, it can lead to a surge in demand for the underlying cryptocurrencies.
3. Transaction Speed and Scalability:
- Transaction speed and scalability: As the adoption of cryptocurrencies increases, the speed at which transactions are processed and the scalability of the networks become crucial considerations for traders. Factors such as blockchain size and security play a role in determining the profitability of mining, the speed of the network, and user willingness to buy and use coins. Keeping a close eye on software updates and forks is essential for traders to assess how scaling technology evolves in different cryptocurrencies.
In conclusion, the intricate interplay between supply, demand, reputation, and technological aspects makes it imperative for traders to be well-versed in the nuances of each cryptocurrency. The differences between cryptocurrencies serve as valuable indicators for predicting market movements and making informed trading decisions in this dynamic and ever-evolving ecosystem.
