What Gives Crypto Its Value?
Where does crypto get its value? Where does anything get its value?
It’s really quite simple: If enough people agree that something is valuable, it becomes valuable. That was how ancient currencies like gold or even cowrie shells derived their value, and this applies to the value of artwork. It doesn’t matter why people desire something, only that the desire exists in high enough volumes. This is the point at which economic value is generated.
The given price of an underlying asset will depend on the characteristics of the market and, just like many central bank currencies, each token in the crypto space has different characteristics to prevent depreciation and help retain its value in the market.
The characteristics of a good currency are:
- Fungibility – one unit of a currency is identical to another unit (BTC is a better standardized currency than cows.)
- Durability – it’s not physically perishable and can be used in the future (Euros are a better currency than perishable flowers.)
- Portability – It’s easy to move around, even in large quantities (A CBDC is a better currency than cumbersome gold bars.)
- Recognizability – people recognize and accept it, and less effort is required to decide its value (U.S. dollars are more easily traded than Guinean francs.)
- Stability – its value does not change significantly compared to the goods and services for which it is being exchanged (USDT is a more stable currency than BTC.)
Crypto tokens also have a lot in common with company shares, or equity. In the stock market, a company’s worth is called market capitalization, which is calculated by multiplying the company’s stock price by the number of shares held by all shareholders.
Once listed on an exchange, the price of a share is determined by market forces, including demand and supply. When a stock is sold, the buyer and seller exchange ownership of the share, and the price at which that exchange occurs becomes the new market price. Stocks in higher demand will command higher prices, and stocks in lower demand will drive prices down.
The same applies to cryptocurrency. Once listed on an exchange, cryptocurrencies in high demand tend to surge, pushing prices up, whereas price movements of cryptocurrencies in low demand are often minimal.
There is one key difference between shares and cryptocurrencies. A company’s management team always has the authority to issue more shares, thus inducing dilution. This, in turn, lowers the ownership percentage of existing stockholders in the company.
However, for cryptocurrencies, most tokens have a maximum supply; once this supply is exhausted, no new coins or tokens will be mined or produced. Bitcoin, for example, has a maximum supply of 21 million coins, meaning no one can mine, create, print or issue more than 21 million bitcoins. There may be additional forks of the Bitcoin blockchain, such as Bitcoin Cash (BCH), but never more bitcoin currency.
Like shares, most crypto tokens also have utility that give holders access to specific services or platforms (a share gives the holder the right to receive a dividend). As long as a crypto token is useful to someone, it can be described as having utility, and therefore possesses value.
The value of cryptocurrencies can be affected by their supply and demand on exchanges. However, their usefulness or utility in decentralized finance (DeFi) protocols or decentralized apps (dapp) can also affect their value.
For example, owning a $100 Amazon gift card is usually deemed more useful than owning a $100 voucher for a mom-and-pop shop. The Amazon gift card is seen to offer a wider variety of available purchases, given the millions of items listed on its marketplace.
The same idea applies to a token like ether (ETH), which is essential when making transactions on the Ethereum network. When you access dapps like UniSwap, the fees are paid in ETH, which increases the value of ETH because of its utility functions.
A token can be utilized in many ways, all of which contribute to its value. Non-fungible tokens (NFT) are a good example because they continue to provide new methods and features for investors to extract value from their holdings. Understanding the interplay between the currency-like characteristics and equity-like characteristics of crypto is vital to appreciating where it gets its value.