What Gives Cryptocurrency Value? – Guest Editorial

Amie Parnaby

Cryptocurrency has no centralised authority, is not backed by any state or government, and has no underlying asset on which to base its value. So what makes Bitcoin worth more than $8000 and Ethereum more than $700?

By Amie Parnaby, Leverate

People make the markets (yes, even ‘Market-makers’ are still people at the end of the day) and that is no different with cryptocurrency. The value of each coin or token derives its value from what we think it is worth.

Supply and Demand (and a bit of scarcity value too)

With 2017 seeing a Bitcoin increase in price from $1000 to $20000, it signifies a greater uptake in the cryptocurrency markets that could have been foreseen. In this sense, Bitcoin has taken the lead in playing the three primary requirements for value.

Bitcoin has already announced that there will be a maximum of 21 million Bitcoins in circulation, and there are currently 17.035 million in circulation now. They have definitely cornered the market in scarcity. Demand has exceeded supply and pushed the price higher. No one wants to be left behind if Bitcoin (or derivative) is the currency of the future.

Bitcoin has an additional benefit that has further increased its demand. It has been considered a “gatekeeper” coin for a while because for many ICOs and other altcoin exchanges you couldn’t use fiat currency, you had to already have cryptocurrency to take part. As the first and the biggest so far, Bitcoin is the one that all exchanges accepted for early on. It is beginning to change, more exchanges are including some of the major fiat currencies against smaller coins, and you don’t necessarily need Bitcoin; Ethereum, Litecoin, Bitcoin Cash and a few others are now almost as readily usable as a primary exchange token.

Is this perhaps the reason it isn’t reaching the astronomical heights it achieved at the end of 2017?

Functionality or Utility

What use is a substitute for fiat money if it isn’t fit for purpose? This is where the fight between fiat currency and cryptocurrency begins. For fiat currency this is the simple part, they are established. Everyone accepts fiat money. It’s the only currency they have ever known.

From a crypto point of view, this is difficult. People won’t use and invest in crypto if it doesn’t meet their currency needs, vendors won’t accept cryptocurrency if enough people don’t use it. It has been likened to a “Chicken/egg” situation.

It also works the other way around, with more transactions being made over the internet (online retail is a good example) and across the world, it makes sense to have a digital currency exchange for goods. Stripping away bank charges, currency exchange charges and commissions will make the process significantly quicker and cheaper.

As more people begin to use cryptocurrency, even if it’s only online to start with, the belief in the value of the currency promotes usage. The higher utilisation of the cryptocurrency will encourage greater trust in its inherent value.

Concept Model

The concept of a cryptocurrency should be something that brings inherent value. Bitcoin began it, by creating a decentralised peer-2-peer electronic cash system (something that people had been trying for years). It was the answer to banks having all of the control and a response to the global financial crisis in 2008.

Ethereum came a few years later (2016), using opensource code to create a blockchain/decentralised ledger system that could be used by anyone and customised to fit any industry where the blockchain environment would be of benefit. Hence why there are so many of the new coins running on a derivative of the Ethereum blockchain.

Since then there have been hundreds of cryptocurrencies/tokens created (at the last count it was over 1600) all with their individually distinct branch and bringing value to something previously unconnected with finances and decentralised ledger technology (DLT).

I draw your attention to GanjaCoin MRJA (aimed at making legal marijuana dispensaries accessible for digital payment), Dentacoin DCN (a system meant to improve record keeping between dentists and patients in addition to the coin being used to pay for dental treatment) and a very Lovecraft-ian Cthulu Offerings OFF (the coins are a sacrifice to Cthulu). There is even Hussy.io. I don’t think I need to explain that one.

Infrastructure and Community

Bitcoin is still one of the biggest and (according to Bitnodes.earn.com on Friday 18th May 2018) there are 10,190 reachable nodes spread across the globe with significant concentrations in the USA and Europe. That is a major infrastructure. Over 10,000 machines, running the Bitcoin software across the world in every time zone. And every one of those nodes is mining Bitcoins. Ethereum has even more at over 16,000 (ethernodes.org).

Now, these are just the nodes that server farms and individual techie types have set up, interest and demand for only these two cryptocurrencies have spread well beyond the supply of the coins created on the nodes. Hey Presto! Community.

No one is going to buy a coin that no one else knows about. Of course, there is rarity value, and with small volumes and a low market cap, there is the definite rarity. However, if no one knows about it, no one wants to trade for it, no one wants to accept it as payment, and the investment never achieves anything. You merely end up with a stash of worthless currency that no one else wants. Like buying a beautiful antique as an investment, only to find it was made with ivory and you can’t sell it.

Is that it?

Yes. That is it. You could ask what gives fiat currency value. Fiat currency has value because the government says it has value. There is no other real value for a scrap of paper with $5 written on it. The paper itself is not worth $5, nor is it worth $100 with a change in the design.

Fiat money is accepted by the government and subsequently by its banks to store, distribute and invest– Infrastructure

Fiat money is available and accessible in digital form as well as physical, its value is not an IOU for an underlying asset (such as it was under the gold standard) and can be sent great distances without having to post a heavy gold coin or even a carved rock with a hole in it. – Concept

Fiat money is accepted for everything from buying groceries and paying taxes to charitable donations and paying for your web access – Functionality & Utility.

So what gives cryptocurrency value? The investors and traders themselves by investing in it, believing that it is fit for purpose (just like thinking your country will always honour the currency it creates), and by using it.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

Read this next

Digital Assets

Crypto exchange Bittrex exits US market amid regulatory woes

Bittrex said on Friday it plans to wind down operations in the United States and voluntarily liquidate because of the uncertain regulatory environment surrounding their business.

Institutional FX

Tradeweb completes integration of Nasdaq’s US fixed income platform

Tradeweb Markets has completed the technology integration of Nasdaq’s US fixed income electronic trading platform, formerly known as eSpeed, which it acquired two years ago in a $190 million, all-cash transaction.

Digital Assets

FTX Europe to allow client withdrawals via new website

The Cypriot unit of failed cryptocurrency exchange FTX has launched a new website that it says would allow customers to withdraw deposits of fiat currency and crypto assets after months of suspension.

Retail FX

Liquidators apply to cancel SVS Securities’ FCA license

An update published today by Leonard Curtis said the UK high court of justice has approve their application to bring the special administration of the failed wealth manager SVS Securities to an end.

Digital Assets

Japan forms government panel to pilot digital yen

Japan’s Finance Ministry has created an advisory panel to look at the feasibility of issuing a central bank digital currency, otherwise known as “CBDC”.

Digital Assets

USDC sees massive $10.4 billion outflows in March

Cryptocurrency traders have withdrawn more than $10 billion from the world’s second largest stablecoin, USDC, in less than three weeks even as concerns over the fallout from the Silicon Valley collapse have receded.

Interviews

OSTTRA’s Joanna Davies goes beyond 30-30-30 data standard at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Joanna Davies about OSTTRA.

Interviews

CloudMargin’s Stuart Connolly on how to manage collateral amid high rates at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Stuart Connolly about CloudMargin’s SaaS platform, said to be the only cloud-native collateral and margin management system in the industry, at a time of stress due to rising interest rates.

Interviews

Baton Systems’ Alex Knight on solving post-trade with DLT at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Alex Knight about Baton Systems’ about rising settlement fails, collateral management, and the profile of DLT beyond cryptocurrencies.

<