A look at the factors that give cryptocurrencies their value, including utility, scarcity, and perception.
Checkout this video:
Cryptocurrency Basics
Cryptocurrency is a digital or virtual currency that uses cryptography for security. A defining feature of cryptocurrencies is that they are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
What is cryptocurrency?
Cryptocurrency is a digital or virtual asset designed to work as a medium of exchange. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
How do cryptocurrencies work?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, which means they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009.
Cryptocurrencies are built on blockchain technology, a decentralized ledger that records transactions securely, chronologically, and publicly. Cryptocurrency transactions do not need to be approved by a bank or other financial middleman; they are instead verified by a network of computers on the blockchain.
When someone sends cryptocurrency to another person, they initiate a transaction. That transaction is then verified by computers on the network called miners, which confirm the transaction by solving complex mathematical problems. Once the transaction is verified, it is recorded on the blockchain and cannot be altered retroactively without changing all subsequent blocks, which requires consensus from the network majority.
Why Do Cryptocurrencies Have Value?
Cryptocurrencies have value for a variety of reasons. They’re scarce, durable, portable, divisible, and recognizable. Cryptocurrencies also have utility. They can be used to purchase goods and services, and they can be used to power applications. Lastly, cryptocurrencies are fungible, meaning that one unit of a cryptocurrency is interchangeable with another unit of the same cryptocurrency.
Cryptocurrencies as a Store of Value
While there are many potential explanations for why cryptocurrencies have value, one of the most commons is that they act as a store of value. A store of value is an asset that maintains its purchasing power over time. In other words, it takes less of the store of value to purchase a good or service today than it will in the future. This is opposed to items which depreciate in value, such as a car or a television. Cryptocurrencies have the potential to act as a store of value because they are decentralized, scarce, and secure.
Decentralization: One of the most appealing aspects of cryptocurrencies is that they are not subject to government meddling or manipulation. Cryptocurrencies are not physical assets like gold or land, so they cannot be seized by governments tyrannically. This makes them attractive to individuals and groups who distrust government control over their money.
Scarcity: There are only a limited number of each cryptocurrency in existence. For example, there will only ever be 21 million Bitcoin mined. This gives each Bitcoin wallet owner a stake in the cryptocurrency and creates an incentive for them to hold on to it long-term.
Security: Cryptocurrencies are often stored in wallets which use strong cryptography to secure the private keys needed to access them. This makes it extremely difficult for hackers to steal cryptocurrency from an individual’s digital wallet.
Cryptocurrencies as a Medium of Exchange
Cryptocurrencies have become a popular way to conduct transactions online. Bitcoin, the first and most well-known cryptocurrency, was created in 2009 as a way to make online transactions more secure. Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
Bitcoin and other cryptocurrencies are used as a medium of exchange, a unit of account, or a store of value. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods or services. Bitcoin, the first and most well-known cryptocurrency, was created in 2009 as a way to make online transactions more secure. Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
Bitcoin and other cryptocurrencies are used as a medium of exchange, a unit of account, or a store of value. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods or services.
Cryptocurrencies as a Unit of Account
In order for cryptocurrencies to be used as a unit of account, they need to be scarfable. That is, they need to be divisible into small units without losing their value. For example, one Bitcoin can be divided into 100 million satoshis. So, if you want to buy a cup of coffee for $2.50, you can send 2,500,000 satoshis to the merchant. The term “scarf” comes from the fact that cryptocurrencies are digital and can therefore be divided infinitely.
However, cryptocurrencies are not just divisible; they are also fungible. This means that each unit of a cryptocurrency is interchangeable with another unit of the same cryptocurrency. For example, two Bitcoin are worth the same as one Bitcoin and 10 Bitcoin. This is unlike fiat currencies, where different bills or coins can have different values (e.g., a $10 bill is worth more than two $5 bills).
How Does Crypto Get Its Value?
Crypto gets its value in a few ways. First, because people are willing to accept it as payment for goods and services. Second, because people are willing to buy it in hopes that it will increase in value.
The Law of Supply and Demand
Cryptocurrency gets its value from the law of supply and demand. Like any other asset, cryptocurrency is worth whatever someone is willing to pay for it. The price of cryptocurrency is determined by how much people are willing to buy and sell it for.
The law of supply and demand is a basic economic principle that drives the price of assets. The law says that when there is more demand for an asset than there is supply, the price of the asset will go up. When there is more supply than there is demand, the price will go down.
Cryptocurrency is unique because it has a limited supply. There will only ever be 21 million Bitcoin in existence, for example. This limited supply means that as demand for Bitcoin grows, the price will go up.
The law of supply and demand also applies to other assets besides cryptocurrency. Stocks, real estate, and even collectibles like art and cars are all bought and sold according to the law of supply and demand.
The Role of miners
Cryptocurrency gets its value from a number of different sources. The most obvious is the effort that goes into “mining” it, or the process of verifying and committing transactions to the blockchain ledger. Miners are compensated with cryptocurrency for their efforts, and this creates an incentive for people to mine.
Another source of value is the utility that a particular cryptocurrency offers. For example, Ethereum is intended to be a platform for decentralized applications, and this gives it a use case that other cryptocurrencies don’t have. This utility can make a currency more valuable.
Finally, many cryptocurrencies have active communities of users and developers which add to their overall value. The more people using and supporting a currency, the more valuable it is likely to be.
The Role of investors
As with any asset, cryptocurrency gets its value from the market. In other words, from the collective investment, speculation, and use of the currency by everyone involved.
For a new currency like Bitcoin or Ethereum, a key part of getting people to invest is generating media hype. This gets people talking and interested in the project, which in turn draws in more investors. The more investors there are, the higher the price goes. It’s a feedback loop that can quickly propel a currency’s price upwards.
Of course, not all investors are in it for the long haul. Some people speculate on cryptocurrency prices, buying and selling currency in an attempt to make a quick profit. This can create volatility in prices, as investors buy up currency when prices are low and then sell when they rise.
