The Value of Cryptocurrency

The value of cryptocurrency is arguably similar to that of precious metals. Both are limited in quantity and have select use cases. Precious metals such as; gold is used in industrial applications, in comparison Bitcoin’s underlying technology, the blockchain has some applications across the financial services industries. Bitcoin's digital provenance means that it might even serve as a medium for retail transactions one day.

In comparison to cryptocurrency a traditional currency which is also known as a fait currency has six key attributes that make it valuable these are; scarcity, divisibility, acceptability, portability, durability, and resistance to counterfeiting (uniformity). These qualities enable a currency to find widespread use in an economy. They also limit monetary inflation and ensure that the currencies are secure and safe to use.

Traditional currency is valuable if it works as a store of value or, in other words, if it can reliably maintain its relative value over time. Throughout history, many societies used commodities or precious metals as methods of payment because they were considered to have a relatively stable value.

Instead of carrying around cumbersome quantities of cocoa beans, gold, or other early forms of money, societies eventually turned to minted currency as an alternative. The first such currencies used metals like gold, silver, and bronze, which had long shelf lives and little risk of depreciation.

Originally, the value of traditional currencies came from intrinsic physical properties. For example, gold's value comes from the costs of extraction and certain qualitative factors, such as luster and purity content.

Currencies have value because they can function as a store of value and a unit of exchange. They also demonstrate six key attributes to enable their use in an economy.

Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most robust and least susceptible to loss of value over time. The value of fiat currencies is a function of their demand and supply. For example; the U.S. dollar is considered valuable because the world's biggest economy uses it and it dominates the flow of payments in international trade.

Any discussion about the value of Bitcoin must address the nature of currency. Gold was useful as currency due to its inherent physical attributes, but it was also cumbersome. Paper money was an improvement, but it requires manufacturing and storage and lacks the mobility of digital currencies. The digital evolution of money has moved away from physical attributes, and towards more functional characteristics.

Cryptocurrency does not have the backing of government authorities; it also doesn’t have a system of intermediary banks to propagate its use. A decentralized network consisting of independent nodes is responsible for approving consensus-based transactions in the Bitcoin network. There is no fiat authority in the form of a government or other monetary authority to act as a counterparty to risk and make lenders whole, so to speak, if a transaction goes crooked.

The cryptocurrency does display some attributes of a fiat currency system, however. It is scarce, it and cannot be counterfeited. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend This refers to a situation in which a user "spends" or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.

One of the features that makes cryptocurrency valuable is its scarcity. As the supply diminishes, demand for cryptocurrency has increased. Investors are fighting for a piece of the ever-increasing profit pie that results from trading its limited supply.

Like gold, cryptocurrency also has limited supply. Bitcoins operates via blockchain technology which is tested and used as a payment system. Blockchain is efficient as it can used across borders to speed up drive down costs. Some countries, such as; El Salvador, are predicting that Bitcoin's technology will evolve sufficiently to become a medium for daily transactions. In September 2021 El Salvador became the first country to make Bitcoin a legal tender. In April 2022, The Central African Republic became the second country to adopt Bitcoin as it’s official currency.

Another reason why crypto has value is due to the marginal cost of producing one bitcoin. Mining for bitcoins involves a huge amount of electricity, and this means that this a costly process for the miners. In economic theory, in a competitive market among producers all making the same product, the selling price of that product will venture towards its marginal cost of production. All in all, the price of a bitcoin tends to follow the cost of production.

The Challenges of Valuing Bitcoin

One of the biggest challenges associated with cryptocurrency is trying to assess its value. A cryptocurrencies store of value will depend on how well it works as a medium of exchange. If a cryptocurrency fails to achieve success as a medium of exchange, it will not be useful as a store of value.

Throughout much of its history, speculative interest has been the primary driver of value for Bitcoin and other types of crypto. Bitcoin has exhibited the characteristics of a bubble with drastic price run-ups and a craze of media attention. This is likely to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.

Difficulties surrounding cryptocurrency storage and exchange spaces also challenge Bitcoin's utility and transferability. In recent years, hacks, thefts, and fraud have plagued digital currency.

Why Do Some People Believe Cryptos Are Worthless?

Similar to any other asset the price that people are willing to pay for crypto is a socially-agreed upon level based on supply and demand. Because crypto is virtual, only existing within computer networks, some people have a hard time grasping that Bitcoins are scarce and that they have a cost of production. Because of this unwillingness to accept that digital traces can hold value in this way, they remain convinced that Bitcoins are worthless. People who understand the Bitcoin system believe it is valuable.

Are Cryptocurrencies Fairly Valued?

The market price of Bitcoin is extremely volatile and often experiences to large price swings. This means that the market price at any given time may vary wildly from its fair or intrinsic value. However, over time, oversold markets tend to rebound and overbought markets cool off. This means that it is impossible to say at any given moment whether cryptocurrency is fairly valued without the benefit of hindsight.

The Value of Cryptocurrency