What Gives Crypto Value?
Cryptocurrencies have become a hot topic in the past few years. But what exactly are they and what gives them value? In this blog post, we’ll explore those questions and more.
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Cryptocurrencies have enjoyed some success; Bitcoin is now the largest cryptocurrency, with a market cap of over US$70 billion. But why does Bitcoin have value at all? Cryptocurrency is often compared to fiat currency, but there are key differences between the two. Here’s a look at what gives cryptocurrencies their value.
What Gives Crypto Value?
Cryptocurrencies derive their value from various sources. Some of these include the following: the functionality of the coin, the team behind the coin, the community backing the coin, the media attention the coin is receiving, and the adoption of the coin.
The Utility Argument
At its core, the utility argument for crypto value is simple. People use cryptocurrencies like Bitcoin because they offer unique features and benefits that traditional fiat currencies do not. For example, Bitcoin is borderless and permissionless, meaning that anyone can send or receive it without needing permission from a financial institution or government. Bitcoin is also censorship-resistant, meaning that no one can prevent you from sending or receiving it.
These features make Bitcoin and other cryptocurrencies useful for a variety of applications, such as international money transfers, payments for goods and services, and as a store of value. The more people that use cryptocurrencies for these applications, the greater the demand for them, and the higher their price will be.
The Store of Value Argument
It’s often said that cryptocurrency is valuable because it is a “store of value”. In other words, people are willing to buy crypto because they believe that it will hold its value or appreciate in the future.
There are a few different reasons why people might believe this. First, crypto is Scarce – there will only ever be 21 million Bitcoin, for example. This makes it similar to precious metals like gold, which have historically been used as a store of value.
Second, crypto is Decentralized – it is not subject to the whims of governments or central banks. This makes it different from fiat currencies, which can often be subject to inflationary pressures.
Third, crypto is Borderless – it can be used by anyone, anywhere in the world. This makes it convenient for international transactions and easier to transport than physical assets like gold.
Ultimately, whether or not crypto succeeds as a store of value will come down to whether or not people are actually willing to use it as such. So far, there are signs that this is happening – for example, Bitcoin is often used as a way to send money overseas, and some investors have started buying crypto as a way to hedge against inflation. However, only time will tell if crypto can truly become a “store of value” in the long term.
The Network Effect Argument
A lot of people see cryptocurrencies as a bubble that is about to burst. They see the run-up in prices as irrational and based on nothing but speculation. However, there is an argument to be made that cryptocurrencies actually have real value. This argument centers on the network effect.
The network effect is a well-known economic principle that states that a good or service becomes more valuable as more people use it. For example, Facebook is more valuable to me because all of my friends are on it. I am more likely to use Facebook than some other social network because that is where all of my friends are. The same goes for email, phone calls, and text messages. I am more likely to use services that are compatible with the services that everyone else uses.
Cryptocurrencies have the potential to become like this. They could become the standard way of conducting transactions online. If this happens, then they will become more valuable because more people will want to use them. This could create a self-reinforcing cycle where the value of cryptocurrencies goes up, which leads to more people using them, which leads to the value going up even further.
So what gives crypto value? In a nutshell, it comes down to three things:
1. The functionality of the underlying blockchain technology
2. The demand for the crypto coin or token
3. The limited supply of the crypto coin or token