How is crypto created and priced? A question may quite naturally come to your mind regarding the creation and pricing of crypto coins knowing the fact that these currencies are decentralized and are not issued by the central banks or the governments.
Also, it being a digital medium means that there is no printing or minting of crypto coins.
But, with thousands of different types of crypto coins available out there, you may naturally wonder where actually all these currencies come from and who determines the value of them.
Fortunately, you are in the right place since this article will enlighten you about it.
Though crypto coins, being digital currencies, do not need printing or minting, the good thing is that you can use it just like any other regular currency.
This is possible because crypto coins are created by a completely different process altogether. Typically, crypto coins are created by a code.
In most cases, new crypto coins are created when validators confirm a transaction. This process is called crypto mining.
However, with all that said, not all types of crypto coins can be mined like Bitcoin and Ethereum to create new coins.
In such cases, the new coins are created in some other ways. Some tokens may be created when holders of the coins are rewarded with coins as interest.
It can also be created during the launch of developer rewards.
Therefore, as you can see crypto creation is a complex process to understand which is why you will need to look into it very closely and differently.
How is Crypto Created and Priced?
Usually, cryptocurrencies can be divided largely into two distinct groups namely, coins and tokens.
Both these differ from one another and come with different potential advantages for diverse kinds of businesses.
Usually, a crypto coin is an application of cryptocurrencies.
It runs on its unique blockchain to record all the transactions. Some examples of crypto coins are:
- Dogecoin and others.
These coins are considered to be crypto assets and people can use them to exchange or invest in.
However, if anyone wants to create a new coin altogether, then a new blockchain needs to be created.
On the other hand, a crypto token functions on top of the existing blockchain infrastructure.
These tokens are mostly used as smart contracts.
This allows the people to use these tokens for services and objects as well, both physical and digital.
Security Token offering is what the companies mainly want to issue which startups as well as several other projects can use to raise funds.
Ideally, every crypto coin is software whether it is created by mining or not.
This means that irrespective of the origination process, a crypto coin is typically a code or a software program that determines each and every function related with the crypto coin. This includes:
- The way in which the data is stored
- The maximum supply of the coins that is to be produced
- The distribution process and amount of the mining rewards and
- How exactly transactions are recorded in the blockchain.
However, this code is public in most of the cases and the software involved for the creation of the crypto coin is decentralized just as the crypto coin itself.
It is this decentralized and public software that is hosted on the computers of the individuals participating in the network.
This means that it is spread all over the world and is not confined to a central server.
Usually, a crypto coin or token signifies that specific part of the code or software which the end-users see as a string of numbers that are stored on the blockchain.
The crypto coins are usually generated by algorithms. In turn, these algorithms rely heavily on cryptography.
This is why it is called cryptocurrency. Actually, at the heart of all different types of crypto coins there are:
- Algorithms and
Here, blockchain is most important. It is the special kind of a secure database where all the transactions are stored.
This chain allows the users to use the crypto coin as money. Therefore, this blockchain acts as the ledger where the transactions are coded.
And, since it is distributed all across the network, it is also called as Distributed Ledger technology or DLT.
In simple terms, it is like the checkbook of your bank account.
Once you enter anything into it, no one can make changes in it without meeting particular conditions.
Therefore, in the blockchain no one can ever change any entry made into it because the public records of all transactions are visible to everyone.
As you may know that the cryptocurrencies come with its three most significant defining features such as:
- Transparency and
It is the blockchain technology that allows the crypto coins to achieve these.
This is why it is usually said that cryptocurrency and blockchain technology complement each other.
Creation of Crypto Coins
The most common process of creating crypto coins is through ‘mining’ them. The best example of it could be Bitcoin.
This process involves a large amount of power, expensive computing equipment and very robust and durable software.
In this process, the crypto transactions are confirmed by the crypto miners and new units of crypto coins are created.
The crypto miner here acts as a node on the blockchain where the crypto transactions take place.
Every time such transactions are made, the miner attempts to decrypt the block that contains all relevant info of the transaction.
Here, the miners compete among each other to be the first one to decrypt the block.
In return, they are rewarded with new coins for their participation in the verification process.
When a crypto miner decrypts a block containing the information about the transactions, they serve a few specific purposes such as:
- Authenticating the transaction
- Providing the information about who sent the coins
- Informing how many coins are sent
- Telling who is/are the recipient/recipients and
- Providing the information about the date and time when the transaction took place.
Once all such information is provided and the decryption is completed, it is accepted by the nodes on the blockchain, well, by the majority of them.
This proves that the said crypto transaction is authentic and it is only after that the new block is added to the blockchain and a new crypto coin is said to be created.
Here, the verification process is very important and plays a crucial role in the creation of a new crypto coin.
While verifying a crypto transaction, the miners do it not based on trust like it is done in fiat currencies.
Instead, such verifications are done by the miners based on either one of two techniques namely, Proof of Work or PoW and Proof of Stake or PoS.
The above verification process is called the Proof of Work verification technique.
Ideally, most of the crypto transactions are verified via the PoW verification technique. This is however a resource intensive technique.
This means that it needs a lot of computational power to carry on.
This is the main reason that individual miners often find this process to be extremely expensive.
In order to save on the cost of mining crypto coins, these individual miners often join pools so that they can use the computing power required collectively.
Also, the PoS technique was developed to reduce the need of power for verifying crypto transactions.
In this method, the users need to prove that they have skin in the game.
This will allow them to compete for rewards and check the crypto transactions made.
In order to be allowed to verify crypto transactions made on the blockchain, the users usually have to lock up or ‘stake’ their own existing crypto coins in a communal vault.
The more the amount staked the more transactions a user is allowed to verify. This in turn increases the prospects of earning higher rewards.
Also, the algorithm plays a vital role in the crypto creation process.
It is this algorithm that is responsible for fueling the crypto factory and is written to reward the crypto miners that add transactions to a blockchain with new crypto tokens.
This is the reward they get for providing the critical maintenance to the blockchain. This is how new crypto coins are created by mining.
Anyone can be a crypto miner technically, but it is not feasible or fruitful for most. This is because:
- It is complicated
- It is highly competitive
- It consumes a lot of energy and
- It is extremely expensive.
Add to that, there are high chances of failing in the endeavor because you will need to be the first person to solve a mathematical puzzle which is very complex, mind you.
As said earlier, crypto mining is the primary process followed for creating new crypto coins, but there may be some that are not done in this way.
Usually, these are those particular types of crypto coins that were not designed to replace traditional money like the Dollar and were not meant to be used as a medium of exchange.
Usually, these crypto coins that are un-mineable and un-spendable are generated to reward the early investors in a new crypto coin during its launch. This is called an Initial Coin Offering or ICO.
There is also another way in which new crypto coins can be created. This is done through a variation in a blockchain.
This new coin created is called the hard fork.
This usually happens due to the significant changes made in the blockchain protocols so much that it creates a unique and new branch on the chain.
This new coin is not compatible with the old chain.
The best example of a hard fork is Bitcoin Cash which forked from the Bitcoin blockchain.
Understanding Crypto Mining Rewards Mechanism
The rewards offered for crypto mining follows a specific reward mechanism.
This reward is usually a fraction of the new coins offered.
This means that the crypto miners are rewarded with the same type of crypto coin that they wish to mine.
This means: BTC for decrypting Bitcoin block and ETH for decrypting Ethereum block.
However, the share of the rewards earned gets reduced when the miners decide to pool in their resources, which, however, increases the chances of success significantly and also reduces the cost of operation significantly.
Pricing Crypto Coins
It may be a bit more difficult for you to understand how crypto coins are priced if it is explained to you all in technical terms.
The best way to go about it is to understand pricing of cryptocurrencies with one of the most common and popular coins, Bitcoin.
Just like any other commodities available in the market for sale, the price of Bitcoin is also based on the market dynamics.
It is determined on the basic principle of Economics – the interrelation of demand and supply.
Along with that, the expectation of the future prices also plays a significant role in it.
As for the supply of Bitcoin, it is growing continually but at a much slower rate.
This is because there is an artificial limit placed on the number of the coins by the creator which a user can mine.
It is also due to the fact that mining Bitcoin is resource intensive and very expensive.
On the other hand, if you consider the demand for Bitcoin, it is however much more volatile.
It grew exponentially as the stories of the early investors making a fortune with it spread all over the world.
This has resulted in an increase in the expectation of the people which, in turn, affects its price.
While buying Bitcoin, the buyers will be willing to pay more for it now if they feel that the price is expected to rise in the future.
On the other hand, people will sell more Bitcoin now when the price is high if they feel that it will be less than that in the future.
This means that they will accept a lower price while selling Bitcoin if they feel that it will be lower than what it is now in the future.
And, the individual influencers also play a huge role in the pricing of a crypto coin.
A simple tweet or comment on Facebook by them can result in historic price swings, up or down, for a crypto coin.
Now, you should know about the other factors that influence the price of a crypto coin. These are:
- The cost of production through mining process
- The rewards offered to the miners for verifying crypto transactions on a blockchain
- The regulations on its use and sale
- The number of competing crypto coins
- The state of internal governance of a crypto coin and
- The events happening and news development.
Now, a few of these factors are explained for you below.
When it comes to pricing a crypto coin on the basis of its cost of production, it is usually done considering the marginal cost of production.
This is calculated as the sum of the direct fixed costs which includes electricity and the mining infrastructure as well as the indirect cost which is the difficulty level of the algorithm.
Since there are thousands of other tokens in the crypto market, the competition between them affects the price.
This is because there is no single coin that dominates the market anymore which was the case with Bitcoin before.
As and when worthy competitors of Bitcoin were launched, the dominance of Bitcoin dwindled.
For example, the 80% of overall market cap of Bitcoin in 2017 waned over time and reached up to 50% till the end of 2021, and is expected to fall further in the following years.
Also, the increase in the awareness of people regarding the capabilities of alternative coins and Decentralized Finance or DeFi tokens has also affected the prices of crypto coins.
This has attracted more investors towards this asset class.
As of now the regulations on the use and sale of crypto coins isn’t that strict and therefore the prices are high.
This results in more volatility and less liquidity.
However, when the regulations will be in favor of this ecosystem, crypto coins will become a legit asset class for making an investment.
This will affect its liquidity, supply, and demand, and therefore, affect its price.
News developments have a direct impact on the price of crypto coins because it is still a nascent ecosystem.
For example, news of upcoming hard fork or soft fork may change the perception of the crypto investors because it will change the number of coins in existence.
Also, the governance policies of crypto coins that are set by the group of core developers and includes protocol modifications impact the price.
This is because it changes the number of coins existing as well as the philosophical disagreements among the developers regarding the future direction of the coin that are monitored closely by them using different investor indicators.
The Supply Factor
As said earlier, the supply of a commodity has a direct effect on the price of it, and it is the same for crypto coins.
If it is scarce, it will be priced high, and if it is available easily, it will have a low price.
However, the supply of a crypto coin is never allowed to cross the limit set by the protocol of it.
This ensures that the coin is created at a flat rate, which however is planned to slow down over time.
Also, events such as Bitcoin halving, keeps the supply of coins in check.
This is an event that usually happens after four years.
In this process, the reward offered to the crypto miners is halved until the upper limit of coin supply is reached.
After that, the rewards are offered to them with some different mechanism.
Also, the reduction in supply is coupled with an increase in demand. This also acts as a fuel for crypto prices.
This means that prices of crypto coins will change during discontinuous periods of busts and booms, which is a common feature of this ecosystem.
Ideally, the oversold coins will have a high supply and therefore will be underpriced and all overbought coins will have a high demand and therefore will be expensive.
The creation and pricing of crypto coins are both complex processes and need some technical knowledge to understand. However, articles like this will be of great help if you want to know about it in a simple way.