Have you ever found yourself puzzled by the craze over cryptocurrency? Indeed, cryptocurrency has grown beyond its buzzword status. The market activity surrounding cryptocurrency and blockchain represents the increased interest of investors. In more ways than one, cryptocurrency has materialized into something of legitimate value.
Cryptocurrency is not just an alternative form of currency. It has also become the focal point of much investment activity. Despite its market volatility, cryptocurrency in all its forms continues to gain value.
As an onlooker, you may be wondering how this is even possible. More specifically, the question about how an intangible online currency is analogous to real money must have crossed your mind.
In this article, we will attempt to answer this question and more. So, keep reading to learn how something like Bitcoin, Ethereum, or Dogecoin translates to real money in a bank account!
Back To Basics: Value 101
Value, the way we understand it in finance, is a fundamental concept in economics. It represents a socially ascribed worth of a certain good or commodity. The perceived worth of a certain good, commodity, or service is determined by several factors.
Since we are discussing the value of a new and asset-independent commodity like cryptocurrency, we will focus on three:
The value of something can increase if it is finite or non-renewable. Or, rather than being impossible to renew, a commodity that is hard to replenish may have a high cost or value. The perfect example of such a commodity is oil and diamonds.
Neither are easy to replenish or acquire. This is partly the reason why both have high market value. Another example of value based on scarcity can be seen in how the prices of classic cars shoot up. Being manufactured a long time ago, only a few classic models exist, and this finitude drives the price higher.
Capacity For Use
Utility is another driving factor for the value of a commodity. For something to be deemed valuable, it has to be usable to a certain extent.
Indeed, utility can be said to be a trait possessed by nearly every commodity. However, there are market factors that can magnify its ability to determine a commodity’s value. One factor is whether or not it addresses a certain problem.
The more usable a commodity is for solving a problem, the higher its value goes. To illustrate, oil fulfills the energy needs of many countries. For this reason, the price of oil is consistently high in most cases.
By default, commodities are not intrinsically valuable. Rather, value is assigned to commodities based on the two factors just mentioned. In some cases, an object does not need to be useful to be valuable. Likewise, there may be a constant supply of a certain good or service, but it still retains value.
Ultimately, value is something people perceive. While the two above-mentioned factors certainly drive value in most cases, value still rests on public perception. The perfect example of this is when people invest money in toys. There may be a lot available, but the toys are still valuable.
Lacking any significant function, toys and other collectibles still retain a degree of value. Of course, it may still be argued that scarcity comes into play.
Why Is Cryptocurrency Valuable?
Nobody will deny that there are investors who deem cryptocurrency valuable. Cryptocurrency continues to gain value by meeting every or some of the value drivers mentioned in the earlier section.
Let us go over how cryptocurrency is deemed valuable by applying the concepts of the earlier section.
Cryptocurrency Is Finite.
To understand how cryptocurrency comes to existence, we need to quickly go over how transactions using them are recorded. Every transaction made using cryptocurrency (more on this later) is recorded on a decentralized ledger or online record. This decentralized record of cryptocurrency transactions is the blockchain.
The blockchain consists of several computers that record the transaction. Each time a transaction is recorded, it adds to other recorded transactions. As you might imagine, there are many transactions, and all these need to be verified.
A person who successfully verifies a transaction, or “mines,” receives a unit of cryptocurrency as a sort of reward. This is how cryptocurrency comes into existence.
It is important to consider that mining cryptocurrency is no easy feat. For this reason, getting it is as difficult as looking for gold. In addition, the blockchain sets a limit to the amount of cryptocurrency it can give miners.
As a result, there is an amount cap to how much cryptocurrency is available. For example, at the time of writing, there are 21 million tokens of Bitcoin in existence. Hence, if a person were to buy all Bitcoin tokens, he or she can only get 21 million and not more.
The limit to the amount and the difficulty in mining cause cryptocurrency supply to be finite. However, demand continues to exist and increase.
Cryptocurrency Is an Alternative Form of Currency.
Cryptocurrency did not grow in popularity and consequent demand overnight. It was the result of communities who touted its superiority over the currency we use today.
Cryptocurrency as real tender is possible through the blockchain. For many, transacting with ordinary legal tender using third-party payment platforms or services like banks and online services is:
- Expensive due to transaction fees
- Slow, in some cases due to delays and cross-platform lag time
- Susceptible to hacks
Blockchain ensures secure transactions by serving as a record on separate computers. With each transaction verified by various terminals, no fraudulent entry or transaction occurs. In a way, using cryptocurrency as a tender with blockchain is like handing a person money without the middleman.
Other than security, cryptocurrency is a more efficient way of transacting. Without a third-party service or party, transactions are faster. Also, cryptocurrency transactions do not incur the transaction fees seen in platforms like PayPal or Skrill, to name a few. In Canada alone, Ethereum enjoys widespread use in provinces like British Columbia and its home province, Ontario.
In short, cryptocurrency as an alternative form of payment solves many problems we have with real money today. For this reason, cryptocurrency is slowly getting institutional backing and is worthy of trade and investment.
Cryptocurrency Is Being Traded as a Commodity.
Barring factors like scarcity and usefulness, value comes right down to public reception and perception. The existence of a market where cryptocurrencies are traded represents the reception of the public towards cryptocurrency.
Cryptocurrency is not only-heavily invested in. Cryptocurrencies like Bitcoin have existed for more than a decade and have thus received institutional support.
In Canada, a growing number of financial institutions are offering services for Ethereum trading and selling. Cryptocurrency has grown so much in legitimacy that there are laws governing its sale and taxation.
As a highly traded-commodity, cryptocurrency’s value cannot be denied. And, once again, this statement succinctly sums up the concept of value:
If there are people who believe in a commodity’s value, then that commodity is, by definition, valuable.
Cryptocurrency gains and has value by ticking all of the boxes of what constitutes worth.
By being finite in quantity, cryptocurrency has a limited supply. Its demand continues to rise owing to its perceived superiority to legal tender like cash.
It enjoys widespread use and addresses many of the many pain points of people through blockchain technology. By being more secure and efficient, cryptocurrency has caught the attention of financial institutions willing to contribute to its legitimacy.
As the crypto community grows, more investment goes into this new commodity. Within certain circles of influence, cryptocurrency has grown into a tradable commodity that generates profits just as much as oil does.
The future looks bright for cryptocurrency. If you still have doubts about its value, always remember that as long as people continue to invest and believe in the value of cryptocurrency, it is valuable.