What Determines the Value of Cryptocurrency?

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Cryptocurrency: A Quick Overview

Cryptocurrency is an internet-based medium of exchange that conducts financial transactions using cryptographic processes. Blockchain technology is used by cryptocurrencies to provide decentralization, transparency, and immutability.

The most essential attribute of a cryptocurrency is that it is not governed by a single entity: the blockchain’s decentralized nature makes cryptocurrencies potentially impervious to government control and meddling.

Private and public keys can be used to send cryptocurrency directly between two parties. Users can avoid the high fees charged by traditional financial institutions by transferring funds with minimum processing expenses.
Cryptocurrencies have become a worldwide phenomenon that most people are aware of.

Nowadays, it’s difficult to find a major bank, a large accounting firm, a well-known software company, or a government that hasn’t studied cryptocurrencies, published a paper on the subject, or launched a so-called blockchain project.

“Virtual currencies, maybe most notably Bitcoin, have piqued the interest of some, instilled dread in others, and perplexed the rest of us,” says Senator Thomas Carper of the United States of America.

However, behind the hype and press releases, the vast majority of individuals — including bankers, consultants, scientists, and engineers — have only a rudimentary understanding of cryptocurrencies. They frequently struggle to grasp even the most basic concepts.

Understanding Cryptocurrencies

Cryptocurrencies were created as a byproduct of another invention, which few people are aware of. Satoshi Nakamoto, the anonymous creator of Bitcoin, the world’s first and most valuable cryptocurrency, never meant to create a currency.

Satoshi said he built “A Peer-to-Peer Electronic Cash System” when he announced Bitcoin in late 2008. His purpose was to produce something; many people had failed to do so before the advent of digital money.

The most significant aspect of Satoshi’s invention was his discovery of a mechanism to create a decentralized digital cash system. Many attempts to establish digital money were made in the 1990s, but they all failed.

Satoshi attempted to create a digital monetary system without a central entity after watching all previous centralized attempts fail. Like a file-sharing peer-to-peer network.

Cryptocurrency was born as a result of this choice. They are the missing piece Satoshi discovered in order to create digital money. The reason behind this is a little technical and complicated, but once you understand it, you’ll know a lot more about cryptocurrencies than the average person. So, to make it as simple as possible, here’s what we’ll do.

A payment network containing accounts, balances, and transactions is required to materialize digital cash. That is simple to comprehend. Preventing so-called double spending, in which one entity spends the same amount twice, is a fundamental problem that any payment network must address.

This is usually done via a central server that keeps track of the balances.
You don’t have this server in a decentralized network. As a result, you’ll need every single network entity to complete this task. Every peer in the network should have a list of all transactions so that future transactions may be checked to see whether they are valid or if they are an attempt to double spend.

But how can these organizations come to an agreement on these records?
Everything is broken if the network’s peers disagree about a single minor balance. They want a complete agreement. Typically, a central authority is used to declare the correct state of balances. But, without a centralized authority, how can you reach a consensus?

Nobody was aware of Satoshi’s existence until he appeared out of nowhere. Nobody thought it was conceivable in the first place. Satoshi demonstrated it to be true. His significant contribution was the ability to achieve consensus without the use of a centralized authority. Cryptocurrencies are a part of this solution — the part that made it exciting, engaging, and allowed it to spread around the globe.

Cryptocurrencies vs Fiat currencies?

When you strip away all of the hype around cryptocurrencies and boil it down to its most basic components, you’ll see that it’s nothing more than a set of limited entries in a database that no one can alter without meeting certain criteria.

This may appear mundane, but believe it or not, this is exactly how a currency might be defined. Deposit the funds in your bank account: What is it if it isn’t only database entries that can only be altered under certain circumstances? You can even bring physical coins and bills with you: What are they, if not restricted, entries in a public physical database that can only be modified if you match the state of the coins and notes that you physically own? A confirmed entry in some form of database of accounts, balances, and transactions is what money is all about.

To give a proper definition, cryptocurrency is an internet-based means of exchange that conducts financial transactions using cryptographic processes. Blockchain technology is used by cryptocurrencies to provide decentralization, transparency, and immutability.

What is the source of Cryptocurrency’s value?

The goal of bitcoin developers is to completely replace fiat money with digital assets. Every e-currency is the outcome of a mix of cryptography science and blockchain technology.

The combination enables for decentralized, rapid, and low-cost transactions, exchanges, and conversions.

Blockchain is a cyber public ledger that records and collects data on completed transfers in a complicated way that makes hacking or tricking the system difficult.

Because of their technological and economic elements, all cryptocurrencies are valued. People tend to focus on one aspect over the other, yet both technology and economics are important variables in determining cryptocurrency pricing.

In the crypto space, there appear to be two types of investors: those who believe in the potential of blockchain, the technology that underpins cryptocurrencies, and those who only speculate on a crypto asset’s maximum future value based on current external factors and the crypto’s intrinsic properties.

Those who believe in the potential and utility of blockchain technology will focus on initiatives that appeal to them. Some investors, for example, believe in Ripple’s (XRP) potential to mediate international payments between banks, where they may use the XRP token as a quick and low-cost means of exchange rather than relying on several middlemen to link dissimilar financial networks.

Since the release of Ethereum in 2015, a slew of blockchains have emerged that claim to solve a slew of issues that plague centralized financial systems — institutions that have existed for thousands of years.

Others, on the other hand, believe that risking one’s riches on a scarce and subjectively prized asset is worthwhile. Bitcoin is a well-known example. The underlying code of Bitcoin prevents the creation of more than 21 million bitcoins. New bitcoins are created by rewarding miners who have the most processing power among all other miners in a 10-minute competition. Every four years, the value of this award is halved, making bitcoin extremely scarce in the future, especially as demand grows.

Investing in cryptocurrency is similar to investing in real estate.
Most people think of cryptocurrencies as having qualities akin to gold. Many cryptos were designed with a finite supply cap in mind, allowing them to be utilized as a hedge against monetary inflation.

Gold is also fungible, which means that one gram of gold is worth the same as another gram of gold of equal weight — a quality that cryptos share.
However, I prefer to conceive of crypto assets as land or property, and people appreciate crypto assets similarly to how they value real estate. Land prices are largely consistent within a location, despite the fact that it is non-fungible.

Not all locations have the same pricing, and not all crypto assets are worth the same amount. Because of the better utility of the property, land in a specific location may be more attractive (i.e. located strategically near city centers and public transport hubs).

Others, meanwhile, focus solely on the scarcity of land in a given place, purchasing land plots only to sell them to the highest bidder. This type of landowner may be simply interested in retaining property until a future capital gain can be realized.

Cryptocurrency intrinsic value

To begin, what is intrinsic value? Intrinsic value, on the other hand, is described as an object’s worth obtained from itself, regardless of external circumstances. Although worth is always subjective to the eye of the beholder, it is difficult to deny that everything that has a favorable influence and a variety of utility has a higher value.

Gold, for example, has intrinsic worth since it can be used to manufacture jewelry and metal alloys for computer components. Water has intrinsic worth since it may be ingested for survival, irrigated, disposed of, and even used for transportation and electricity.

Is there an intrinsic value to cryptocurrencies?

In various forms, all cryptocurrencies have intrinsic value. The capacity to be censorship-resistant gives Bitcoin and its forks (i.e. Litecoin, Bitcoin Cash, Bitcoin Gold, Dash) and other cryptocurrencies that are largely used as a means of trade real value. These and other inherent values exist in Ethereum, Cardano, and Polkadot. Many DeFi services, including as loans, trade, private banking, and even gambling, can be implemented on any of these blockchains.

Fiat currencies, such as the US dollar, have inherent worth as well, though not in the same way as cryptocurrencies. Governments declare fiat currencies to be legal tender, making them valuable. Fiat currencies serve no other purpose besides serving as a means of exchange.

What determines the intrinsic value of bitcoin, and why is it more valuable than fiat currency?

The intrinsic worth of fiat currencies is rooted in their usage as legal tender, which means that they are the exclusive means of payment for taxes. While this isn’t true of all cryptocurrencies, the majority of them do provide something that fiat currencies don’t: real scarcity.

The policies of central banks are complex. Attempts to balance a country’s economic production with its money supply can result in an overstock of money, leading to currency depreciation and inflation. Fiat currencies have an endless supply, but most cryptos have a supply cap.

As a result, cryptocurrencies have a higher value than fiat currency. The same reason that gold is more precious than water, despite the fact that life would be impossible without it. Cryptocurrencies are also the only assets with an increasing cost of creation, lowering the supply rate with time. When this component is combined with the network effect, the price of bitcoin and other cryptos appears to rise exponentially.

Why Cryptocurrency Value Is Surrounded By Skepticism

One of the most popular forms of cryptocurrency skepticism is the belief that the currencies are simply “made” and exist as nothing more than lines of code. Furthermore, several cryptocurrencies, such as Bitcoin and Ethereum, are open source in part or totally, making them completely replicable.

To make matters even more complicated, today’s fiat currencies are often backed by the power and authority of the government that owns the currency. From the beginning, cryptocurrency has been backed by nothing or a limited group of people or investors.

Although this has been a pattern for nearly a decade, the number of skeptics has diminished as the crypto market has gotten larger; what was once a small boutique industry now has a market capitalization of around 2 trillion dollars. This represents more than 12% of the total gold market capitalization ($11.2 trillion) and surpasses silver’s market capitalisation ($1.4 trillion).
The figures speak for themselves: crypto is taken very seriously.

The Characteristics That Determine Cryptocurrency Value

In ten years, cryptocurrency has gone from obscurity to astronomical value, with the amount varying depending on the asset. So, what are some of the characteristics of a cryptocurrency that allow it to sustain its value?

There are a variety of reasons why cryptocurrencies are valuable, however, they all fall under the following four categories:

• Utility: This is by far the most prevalent criterion for determining a coin’s worth — does it serve a purpose and can it be used for any useful purpose? If a coin has a method of existence by definition, it will generate value. This is evident in thousands of cryptocurrencies, which serve as a store of wealth, a payment mechanism, and a platform for smart contracts.

Coins produce value on a fundamental level because they work and can be exchanged on a peer-to-peer (P2P) network. Because crypto can usually function without the help of a custodian or a central authority, there’s a lot of value in not having to rely on extra points of contact, similar to when you could trade for farm animals or goods in the past. Smart contract-based coins, similar to mobile applications, can execute orders and services, making the utility even more valuable.

• Demand: If there is rivalry for ownership of a coin, it can retain its value utilizing the simple theory of supply and demand. Coins can gain value if there is a desire by a larger group, similar to how the latest iPhone gains value of over $1000. The more individuals who want something, the more value can be assigned to it. This value could become much higher if the coin’s supply is limited or diminishing over time.

• Scarcity: On the supply side of the equation, most coins can produce value dependent on the amount of supply they have. A coin’s supply is usually fixed, and access to it declines over time. This creates scarcity and combines two factors of value into one: coins retain worth due to a set supply (unlike currency, which can be produced to increase supply) and the availability of this supply is decreasing.

• Adaptability: This feature is a little more complicated because it varies each currency, but most currencies offer a mechanism to transition away from traditional finance while still providing built-in value. This value allows you to use crypto without the help of a bank, government, or anybody else (unless you choose to).

Some of these characteristics include the ability to be used as open-source; fungibility, which allows for trading and exchanging; portability, which allows for millions of dollars worth of crypto to be taken on a plane (or based on a mnemonic phrase you remember in your head); cryptography, which greatly increases security; the use of a blockchain network to produce decentralized finance; and divisibility into an eight decimal floating-point representation.

Considering the Value of a Currency

Many of the characteristics that help cryptocurrencies gain value are similar to those that help fiat currencies gain value, such as being in demand or having a use for the general population. Many of the attributes that give cryptocurrencies their value are features that fiat currencies lack: most cryptocurrencies are deflationary, flexible, and rare.

With this in mind, one could claim that the typical cryptocurrency is worth more than a fiat currency. At the very least, the recent rise in interest and pricing can be attributed in part to that notion, while also pointing to significant growth potential.

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What Determines the Value of Cryptocurrency? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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