Many people wonder what gives cryptocurrency its value. And if you ponder the question even a little, you will see that it’s a very interesting question. Cryptocurrency is an investable asset that is traded on public exchanges just like stocks, commodities and forex, to name a few.
As for stocks, its value is derived from the company’s share of profits it represents. With reference to commodities like crude oil, its value is gained from the fact that we use it to create energy. In the case of forex, it obtains its value from the economy it represents and the state the economy is in.
But what about cryptocurrency? Being an owner of a bitcoin does not entitle you to the money generated from cryptocurrency mining. It does not represent a country, an economy, a sector or anything else of that nature. So what gives cryptocurrency its value?
What Gives Cryptocurrency its Value
Let’s go over some of the key factors that collectively work to give cryptocurrency the value it has.
Cryptocurrencies’ value is determined based on market forces. Market forces represent buyers and sellers and the forces they create in the market through their actions in the market. As you may have learned in basic Econ 101, when supply is inelastic, meaning it cannot respond to changes in demand, prices increase when demand increase.
If supply could be adjusted to meet the overall supply, the price would remain constant. However, if demand stays constant while supply increases, prices decrease as there are fewer sellers competing with each other to gain the business of fewer buyers. This is why competition is considered as a good thing for consumers. Producers will profit the bare minimum to attract a greater number of consumers.
Bitcoin and all other cryptocurrencies are priced based on market forces, and thus their value is derived based on the market forces. If more people want bitcoin, a single unit of bitcoin will cost more to represent the greater demand for bitcoins. Hence, a single unit of bitcoin will purchase a greater value of goods and services.
Just like commodities cryptocurrencies are limited by design. Take the example of corn. Corn is limited to the amount of arable land dedicated to farming corn. So in any given agricultural cycle, there is a limited amount of corn that can be grown. That amount which is the total supply of the crop is measured against the demand for corn, and that’s how it gets its value or price.
Let’s look at bitcoin, the most well-known cryptocurrency. The total number of bitcoins that can ever exist is limited to 21 million. This limitation was created particularly to create scarcity and as a result its value.
Furthermore, bitcoins are slowly created through a process called bitcoin mining. The amount of bitcoins that can be created in a given period of time is also limited. This means you can’t just invest more and create more bitcoins. Investing more will only allow you to increase the share of the total bitcoin that can be created in a given period of time.
Hence, the supply of bitcoin is controlled by design. It cannot be tinkered with retroactively or otherwise. This means if more people want to buy bitcoins in a given period of time, the supply of bitcoin will not increase to satiate the increase in demand. This will result in the price of bitcoin to increase to reflect the underlying value of bitcoin.
Since bitcoin is not backed by any intrinsic asset or any legitimizing authority like a government, the value of a bitcoin and its legitimacy is derived solely from the perception of its users. The statement might sound a bit outrageous to some, but honestly, it is no different from the US dollar.
The US dollar, the preeminent global reserve currency, is not backed by anything of value such as gold. After Reagan’s administration, the value of a dollar is determined primarily by market forces and the strength of the American economy.
Similarly, cryptocurrencies’ derive its value from the perceived value created by its existence and users. If the number of bitcoin users increases, so will its value.
Benefits Inherent to Cryptocurrencies
Cryptocurrencies do create value aside from its intrinsic value. For example, cryptocurrencies are increasingly adopted in failed economies such as Venezuela, where the government’s failed policies have led to an oil-rich country on the precipice of oblivion.
You can use bitcoin to facilitate cross-border transactions within a few hours or even minutes for other cryptocurrencies. Your cryptocurrency accounts cannot be frozen by a governing authority. Ethereum can be used to create and process self-verifying and self-executing digital contracts. The list goes on.
All of these things add value to our modern economies and to our lives by turning needlessly complex processes simpler.
Supply and Halving
Just as demand influences the price of cryptocurrencies, so does halving events. Remember we discussed earlier, that the total amount of bitcoin is limited to a predetermined amount and the total supply is also limited to a predetermined amount. Well, there is more to it.
In order to continuously and steadily reduce the total supply of bitcoins, every four years the total amount of bitcoins created is halved. This is referred to as a halving event in the cryptosphere.
A halving event literally halves the total supply of bitcoins. This dramatically alters the balance in the cryptocurrency financial markets. However, it is important to remember that halving events are not magical events where the price of cryptocurrencies is doubled in seconds.
The 2016 halving event did not see an immediate change in the price of bitcoins. However, it did result in a sustained bull market where the price of bitcoins went from $650 to around $20,000. Before the 2016 halving, we saw another halving event in 2012 when bitcoin was trading for $92, as you might know, that bull market ended after bitcoin peaked at $1,000.
Crypto Investing Pro
As you can see, there is quite a bit of nuance involved in the underlying factors that give cryptocurrencies its value. If you want to learn more about how cryptocurrencies work and how to leverage them for future gains, you should consider checking out Crypto Investing Pro.
Crypto Investing Pro is an educational program designed specially to help new entrants to the cryptocurrency markets understand how the cryptosphere works. But more importantly, it helps novices understand and avoid the pitfalls most inexperienced folks experience.
It is an excellent way to learn about cryptocurrencies in a structured environment. This way you won’t have to stumble around the internet figuring out what to learn next. The structure will take you through a progression that will teach you the basics and slowly take you to more advanced and complex concepts.
Financial markets are a complex microcosm of the world we’ve created over the previous two centuries. The world we live in is based on free-market economies and the free flow of trade, ideas, capital, and people. It might not be perfect, but is a wonderful superstructure we’ve created collectively to better our lives and the lives of our future generations.
Cryptocurrency perfectly fits into this narrative. It essentially works on the foundations of new-media and effectively creates, something called, new-finance where the individual is in control instead of large multinational corporations. Yes, cryptocurrencies are still in an experimental phase. But that’s why it’s so amazing and fun, and you should definitely be a part of this revolutionary force.