How Does Cryptocurrency Have Value? Here's What We Know
Anyone who has been in crypto long enough will be familiar with the question: how does cryptocurrency have value? Or, more likely, why is Bitcoin valuable? It’s a difficult question to answer, as it’s evident that Bitcoin and other cryptocurrencies have value, but it can be tough to explain why.
In this article, we’ll explain why crypto is valuable, how you can easily explain that value to other people, and what signals you can use to gauge whether a cryptocurrency is fairly valued or not. We’ll start with the most popular coin of them all, Bitcoin.In this article
How Does Bitcoin Have Value?
There are a handful of reasons why Bitcoin has value.
1) Bitcoin cannot be seized. Citizens of countries like Argentina and Lebanon will be well aware of how the government can interfere with money stored in a person’s bank account. When you deposit cash in the bank, nobody tells you that you’re handing control of your money over to the bank and government.
Even in places like the United States, there is asset “forfeiture,” where the government can freeze a person’s bank account and debit cards at any time. Typically this happens to criminals; however, it has also happened to those who’ve committed no crime. Unlike banked money, Bitcoin cannot be frozen or stolen by the government.
2) Bitcoin is a way to send value around the world, from one Bitcoin Wallet to another. A great way to explain Bitcoin to a family member (especially someone older) is to say, Bitcoin is like a money order that you can send anywhere in the world. It will get there in around 10 minutes and it will only cost a few dollars or less to send.
Although Bitcoin is slower than other cryptocurrencies, it’s still exponentially faster than the existing financial system. Even sending money between two first world countries, like Sweden and the United States, can take five days and cost nearly 10% in fees. By comparison, Bitcoin is a much better option.
3) Bitcoin is a deflationary currency. Central banks around the world are printing money like it’s going out of style. Amidst the backdrop of monetary inflation, Bitcoin is a hard asset (like gold) with a set supply rate. No central banker or meddlesome economist can print more Bitcoin. Scarcity is a key piece of what makes a currency valuable, and Bitcoin is one of the scarcest assets on the planet.
The Journey Continues
These are just three of the more obvious examples of why Bitcoin has value. For those interested in going further down the rabbit hole, Robert Breedlove has done some excellent work explaining why Bitcoin is valuable. His articles are long and complex, but they have granted Breedlove a minor celebrity within the Bitcoin community.
How Does Ethereum Have Value?
Smart contracts are the primary reason that Ethereum has value. Bitcoin is extremely robust, and while it’s designed to resist attacks by nation-states, it’s limited in its functionality. Simple projects can be built on Bitcoin, like colored Bitcoins; however, complex transactions are impossible.
Ethereum is the opposite since it enables all sorts of complex financial transactions:
- Stablecoin loans collateralized by ETH and other assets like BAT and USDC
- High interest “bank accounts” where investors can earn ~5 to 10% a year (interest rates vary based on market conditions) by lending their stablecoins to traders
- No loss lotteries. A pool of people deposits a stablecoin, which is then lent out to earn interest. After a certain period, a winner is randomly selected. The winner collects all of the interest earned, while the stablecoins are returned to the lottery participants. A brand new form of lottery, with no losers but a winner!
- Synthetic tokens which track the price of existing assets like gold or the S&P 500 stock market index
- Complex financial contracts suitable for cross-border trade
The list goes on and what’s so exciting about Ethereum is that new projects are always coming online. This brings us to another reason that Ethereum has value: its developer pool. Ethereum has more developers working on it than any other cryptocurrency. That means that Ethereum is continuously being improved which contributes to its value.
Why is Crypto Valuable?
Why does cryptocurrency have value - that is, cryptos aside from Bitcoin and Ethereum?
This is a difficult question to answer. It’s akin to asking: why do commodities have value? Oil is valuable for a very different reason than copper or sheep’s wool.
A project like Monero or Grin is valuable because it promises anonymous transactions. Far from being the criminals’ tool, anonymous transactions are important because people should have the right to make purchases without others knowing about it.
XRP, Stellar, and Nano (among others) are valuable because they offer speedy transactions that settle in just a couple of seconds. It’s possible that one of these assets will become the cryptocurrency that people use when they buy a cup of coffee or other everyday purchases.
Bitcoin is valuable because it’s censorship-resistant and has the largest security network out of any cryptocurrency. When a person or organization wants to store their money on the safest network, they choose Bitcoin.
Ethereum, NEO, Cardano and Tezos have value because they enable smart contracts. Programmable money is a feature unique to blockchains, and the financial and business world hasn’t even begun to realize how valuable this could be.
A few other examples of why a cryptocurrency can have value.
- Blockchain voting
- Supply chain tracking
- Blockchain secured identities which cannot be hacked
- Decentralized exchanges
- Stablecoins based on any fiat currency in the world (e.g. USD, EUR, JPY, etc.)
Cryptocurrencies are valuable because they serve a role. Those who don’t serve a role or those who fail to gain adoption will eventually lose their value.
How is the Value of Cryptocurrency Determined?
This is the billion-dollar question and there is no good answer. We’re still in the early days of crypto and it’s difficult to assess what the fair market value for a project is.
Take oil, for example. When oil was first discovered, people realized that it had value since they could use it to warm their homes. Who could have predicted though that someday in the future, oil would be used to make plastic or propel jumbo jets around the world?
The commodity didn’t change, yet its value increased as people understood all of the ways in which it could be used.
The same is true for crypto. We don’t know yet all of the ways that cryptocurrency will be used. Will Bitcoin become the world’s reserve currency? Will an entirely new financial system with billions of users be built on Ethereum?
We don’t know yet, and so any framework that tries to determine the value of cryptocurrency is likely to break at some point.
That being said, there is one statistic that is good at predicting how valuable a project is. Cryptocurrencies are a network, like Facebook or email, and the more people that use the network, the more valuable it is.
Bitcoin and Ethereum are valuable because there are hundreds of thousands of active users (and millions of occasional users). The more people that use a cryptocurrency, the more valuable that coin is likely to be.
How Does the Value of Cryptocurrency Increase (How Does Cryptocurrency Gain Value)?
A big reason that a cryptocurrency goes up in value is that the project is being improved. For instance, Ethereum and Bitcoin both have thousands of developers working on the protocol, which naturally helps to make the coins more valuable.
Bitcoin is becoming more robust over time just as Ethereum is scaling so that it can handle more transactions per second.
The better the cryptocurrency, the more people want to hold it. As demand goes up, so does the price. Typically the cryptocurrencies with lackluster price movement, or even price depreciation, are the ones where the developer community is small or has abandoned the project altogether.
One of the easiest ways to keep track of Bitcoin’s value is with the Exodus crypto charts. The Exodus charts are modern and easy to read, even for beginners.
Besides Bitcoin, the Exodus charts are also available for dozens of other cryptocurrencies to always keep track of the coins you care about the most.
How Does Cryptocurrency Have Value: Conclusion
So the next time you hear someone asking how does cryptocurrency have value, you can inform them using the information in this article 🙂
Bitcoin and Ethereum have use cases like scarcity and programmable transactions respectively, while other cryptos like XRP and Nano offer lightning-fast and cheap transactions.
As more people use crypto over time, you can expect crypto to become more valuable, as has been the case in recent years.
All in all, crypto has many supporters as well as critics. While we at Exodus believe crypto to be a game-changing technology, only time will tell whether or not we’re right 😉
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.