What Gives Cryptocurrency Value? – Guest Editorial
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.
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