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

GBTC share is trading at 36% below bitcoin spot price

Grayscale Bitcoin Trust share has widened its discount relative to the underlying cryptocurrency held in the fund, the highest margin ever since its debut in 2013. Digital Currency Group’s flagship GBTC shares traded at a discount of 35.8% to net asset value (NAV) today.

Digital Assets

Crypto lender Nexo investigated by 8 US state regulators

State securities regulators in New York, California, Kentucky, Maryland, Oklahoma, South Carolina, Washington and Vermont are investigating crypto lender Nexo for allegedly failing to register its Earn Interest Product.

Metaverse Gaming NFT

Astar Network’s ad features 329 top brands to support Web3 in Japan

Blockchain innovation hub Astar Network is making strides in promoting the Web3 adoption worldwide. In yet another milestone, the smart contracts platform has run a national newspaper ad in Japan that set a new global record with participation from 329 blue-chip firms.

Digital Assets

Pyth Network welcomes onchain data from crypto market maker Auros

“By sharing our high-frequency trading data with a truly onchain decentralized network, we aim to foster innovation that will lead to better financial solutions for all participants.”

Digital Assets

Tokeny integrates Ownera to boost liquidity of tokenized assets

“The adoption of FinP2P will result in higher liquidity and better access to capital and assets by providing regulated firms with one secure point of connection to multiple digital asset networks across the globe.”

Digital Assets

BingX launches subsidy vouchers to cover user losses in copy trading

“With the introduction of copy trade subsidy vouchers, new users can easily try out trading strategies without incurring losses.”

Digital Assets

Talos expands sales team: Frank van Zegveld, Matt Houston, Hillary Conley

“The extensive leadership and industry expertise of these new hires will enable us to build long-lasting relationships as we continue to build out our global presence in EMEA and beyond.”

Executive Moves

FX and CFD broker Emporium Capital hires industry veteran Robert Woolfe as COO

His past experience within the FX and CFD industry includes top roles at Capital Index, London Capital Group, GKFX, ETX Capital, and IG.  “I’m delighted to be part of the Emporium Capital team and spearheading the brokerages global expansion plans”, he said about the appointment.

Retail FX

Hantec Markets wins six categories at Global Retail Forex Awards 2022

Hantec Markets has recently rebranded with a new website and a renewed growth strategy that features the #TimeToStrike hashtag to signify a time of renewed growth for the broker.

<