Ever wondered what makes BTC worth what it is worth? or why Ethereum is worth so much right now? We deep dive into what makes these cryptos so valuable.
Currencies, in general, come in different colors and sizes but one thing in common with these currencies is how they get their value.
For example, the Philipino Peso has an exchange rate to the US Dollar and vice versa, so it makes trading and doing business aboard much easier than paying for goods and services with milk, eggs, or livestock.
Where does our currency get its value?
Back in 1944, under the Bretton Woods Agreement, gold was used as a peg to the US Dollar, US$35 per ounce of gold. The other currencies in the world were then pegged to the US Dollar. Pegging the US Dollar to Gold is to prevent the depreciation of the US Dollar during the promotional of International Growth.
The Bretton Woods Agreement collapsed in 1971 when the US Government tried to devalue the US Dollar to Gold, which caused a bank run on Fort Knox, where the US Gold was kept. Everyone wanted to exchange their US Dollar back for gold but at Fort Knox, there wasn’t enough gold, which ultimately led the US government to unpeg the US Dollar from gold.
Where does anything get its value from?
Most of the things we have do retain value only because a lot of people agree it has value. Even though the US Dollar is no longer pegged to the gold in Fort Knox, many countries’ currency is still pegged to the US Dollar because a lot of people agree that the US Dollar has value, so as long as enough people agree that something is valuable, it is valuable.
This is how primitive currencies like gold and silver dollars derived their value and it even applies to the value of an artwork or event NFTs. At the end of the day, It doesn’t matter why people like the item or the desire for them to own it, the important factor here is that the desire to own that item exists in high enough volumes to a point where economic value is generated.
From an economic perspective, as long as there are supply and demand forces, a price for the said item will have a price that people are willing to pay.
The price, however, will depend on the characteristics of the market. Just like any central bank currency, each token or coin has different characteristics that make them unique, it could be a deflationary model or the utility of the token or coin.
What makes a good form of currency?
There are many different currencies in the world and in 2008, Satoshi Nakamoto introduced Bitcoin to the world which changed the way the world saw money. But nonetheless, there are 5 main characteristics of a good currency.
Fungibility
We want our currency to be fungible, in this case, 100 pesos will be equal to 100 pesos regardless of the combination of notes. In another example, BTC is a better currency than cows, because 1 BTC is 1 BTC but every cow is unique and different.
Durable
Currencies should be durable enough to withstand repeated use as the currency will move through many hands and machines. In this case, US Dollar is a better currency than Tulips.
Portable
Currencies should be easy to move around because we wouldn’t want to be carrying gold bars around because it will get tiring after a while. In this case, a Central Bank Digital Currency (CBDC) will be a much better currency than Gold Bars and Silver Coins.
Recognizable
The ideal currency should be recognizable to others so that they can accept it and require little to no effort to decide its value. In this case, the US Dollar is a better currency than the Venezuelan Bolivars.
Stable
Probably the most important characteristic of a currency is its stability. We want a currency that doesn’t change its value significantly compared to the goods and services that is it exchanged for. In this case, USDC is a much better currency than BTC.
Digital assets can be useful as a currency and in specific cases, some digital assets function better than traditional currencies. Some of these digital assets have a utility that unlocks certain services, platforms, or memberships, like owning and staking $LOOKS token on their website giving you a profit share of the marketplace sales, or owning tokens that give you discounts and rebates off your trading fees can make these tokens more valuable than traditional currencies.
What makes cryptocurrency have value?
At this point in time, you must be wondering how to tell if a cryptocurrency has value since we need a large enough group of people to agree that it has value to make it valuable.
Intrinsic Value of Bitcoin
When we purchase goods or services, there is some form of intrinsic value pegged to the product. For example, a 2 piece Chickenjoy meal at Jollibee starts at P158. This is priced this way because of the cost of chicken, rice, drink, and manpower needed to cook and serve you that meal. Hence, we can assume that the intrinsic value of a 2pc Chickenjoy meal is P158.
Similar to bitcoin, mining takes up energy and you need to purchase a miner to start mining bitcoin. The miner and the resources needed to mine bitcoin across 198 cost comes to an average of $35,404.03 to mine 1 bitcoin but this value will change depending on the electricity tariffs, Bitcoin difficulty changes, and the cost of hardware. The cost of mining bitcoin is not the only factor that affects the intrinsic value of bitcoin, but also the next point, which is scarcity.
Scarcity of token
The scarcity of any asset can increase its intrinsic value. Gold, which is limited in supply commands a higher price than silver even though silver has more use cases. It is said that all of the gold in the world, mined and unmined, can get only 3 Olympic size swimming pools which are about 244,000 metric tons.
Bitcoin for example has a max supply of 21 million coins, this means no one will mine, create, print or issue more than 21 million Bitcoins.
As compared to fiat, the central bank can print money as and when they like, which in turn causes inflation because of the large influx of new fiat dollars that enter the economy.
Unlike fiat currencies, most cryptocurrencies have a max supply coded into the blockchain and once this supply is exhausted, no new coins or tokens will be mined or produced.
However, there may be additional forks of Bitcoin like Bitcoin Cash (BCH), Bitcoin Gold(BTG) and Bitcoin SV(BSV) but never anymore Bitcoin.
Cryptocurrencies for Store of Value and Utility
One of the functions of a currency that we covered is the ability to store value so that it can work efficiently as a medium of exchange.
The value of cryptocurrencies can be affected by their supply and demand on centralized exchanges, but the utility or usefulness of these tokens lies in the DeFi protocols or Dapps. Tokens with more usefulness or utility in the DeFi space can drastically affect the value of the token.
If you were to win a contest, chances are, you are will prefer to have the prize in fiat. But now imagine if you won P50,000 in Amazon gift card vs P50,000 in a voucher for a random store in El Nido. The P50,000 Amazon gift card will have more value as compared to the P50,000 for a random store in El Nido, even if both are P50,0000. The only difference is that Amazon offers a wider range of items and it’s accessible anywhere at any time.
In the crypto example, the more widely accepted a type of crypto is on different DeFi protocols and exchanges, the more valuable that type of crypto is, because there are many people that will purchase that crypto to use for their DeFi Yield Farming, supplying liquidity maybe even staking.
Ether (ETH) for example is a token that is widely accepted on many DeFi Protocols. By accessing Dapps like SushiSwap, users are able to swap ETH for other tokens, and fees on the protocols are all paid in ETH which increases its utility. With Proof-Of-Stake implemented for Ethereum, a user that runs validators with 32 ETH can approve blocks and transactions and in return get a reward.
There are many other factors that can give cryptocurrencies value and you can start with Coins Academy where we are building a library of content to help you understand Cryptocurrencies easier. Before you put any money into any investment, do understand that these investments do come with risk and you should always do your own research before putting any money in.
