Blog Crypto How Does Cryptocurrency Gain Value? (It’s Complicated)

How Does Cryptocurrency Gain Value? (It’s Complicated)

date March 22, 2022 time 5 min read 1847 views

We’d all jump at the chance to have a way to know exactly which cryptocurrencies are going to see a significant price boost and when. It’s not quite that simple—but how does cryptocurrency gain value? That’s a complex question to answer, but let’s take a look at the factors behind the value of both traditional and digital currencies.

You probably don’t need us to tell you that crypto is pretty valuable these days—you only need to head to Twitter to see people discussing it or trying to find the best cryptocurrency to invest in 2022, or switch on the television to see celebrities raving about their NFTs on talk shows. The real question is: How does cryptocurrency gain value? If you’ve ever found yourself struggling to answer that very query, don’t worry.

Ever wondered: How do cryptocurrencies gain value? First, you need to understand why traditional currencies are valuable.
Ever wondered: How do cryptocurrencies gain value? First, you need to understand why traditional currencies are valuable. (Source: Unsplash)

There’s a lot of uncertainty here, so it’s not exactly like we can give you a magic formula to predict the future value of any cryptocurrency, or even bitcoin predictions for 2022. The volatility of the crypto market can vouch for that. However, there are factors that can drive the price of cryptocurrencies up or down. We’ll reveal them in this blog, so stick around.

Valuing traditional currencies 

Before we get into how crypto gains value, let’s look at how and why fiat currencies (traditional currencies like USD or EUR) are considered “valuable” so we can make a fair comparison. Once you start thinking about it, this is a pretty interesting question—we all take for granted that the US dollar has value, but how many people would be able to explain why?

Characteristics of money

According to monetary theory, there is an answer. A currency should meet the following six criteria: 

  1. Durability: The quality of holding value over the long term.
  2. Portability: The ability to transport a currency.
  3. Divisibility: The ability to split a currency easily into smaller units.
  4. Uniformity: The consistency of the value of each unit.
  5. Scarcity: A limited supply of a currency.
  6. Acceptability: The general acceptance of a currency.

How traditional currencies measure up 

It’s clear to see that traditional currencies meet some of these criteria. For instance, the US dollar is clearly divisible, because we can break each dollar into 99 cents. Other criteria are a little more uncertain—the scarcity of the US dollar could change depending on government policy. 

Ultimately, most of the elements behind the value of currencies come down to two things: The practicality of using a currency as a medium of exchange, and whether the world as a whole perceives a currency as having value. 

Because the majority of our institutions and structures rely on fiat currencies, they automatically have inherent value to us. And because everyone else feels the same about this, they retain that value. Yet ultimately, everything comes down to public opinion and social norms.

If the world suddenly lost faith in the US government and our financial systems, the US dollar could theoretically lose its value overnight.

No wonder so many people want to buy gold. But how does any of this apply to the crypto world?

Valuing cryptocurrencies

Now, back to the initial question: How does cryptocurrency gain value? 

The first clue to answering that question is figuring out how far cryptocurrencies comply with the conditions of money outlined above. This gets rather complicated considering there are so many cryptocurrencies, each with different features and considerations, so let’s use the example of bitcoin.

Bitcoin vs characteristics of money

Bitcoin is highly portable since we can store it in a crypto wallet and access from anywhere. As for divisibility and uniformity, it’s easy enough to split bitcoin into smaller units consistently. We even have names for the smaller units, like the satoshi. Bitcoin definitely meets the criteria of scarcity, too—there’s a fixed supply of 21 million bitcoins (although there’s some speculation this could change in the future).

Bitcoin is an interesting case study for understanding the value of cryptocurrencies.
Bitcoin is an interesting case study for understanding the value of cryptocurrencies. (Source: Unsplash)

That leaves durability and acceptability, which is where we start to run into trouble. Bitcoin is famously volatile, so you could argue that it doesn’t do a good job of maintaining its value consistently. You could agree to sell your house for 5 BTC one day and find that the real value of that amount had dropped considerably by the time you handed over the keys, meaning there are many more types of risks involved in using bitcoin as your currency of choice. 

And while some people do accept bitcoin as a payment method (e.g., you can use it at Starbucks and Home Deposit), the average person wouldn’t be very impressed if you offered to pay them in bitcoin.

Just as fiat currency primarily has value because people believe it’s valuable, the same thing ultimately applies to crypto. Do we the people think it’s valuable? Is it too late to invest in bitcoin? And what might change that fact?

How do cryptocurrencies gain value?

Hopefully, you can now start to understand the complexity of even considering something to be a “currency,” never mind determining whether it’s a valuable currency. But now there’s another major question to answer. What drives crypto prices up or down over time?

When it comes to what drives crypto prices up, it’s partly the behavior of the masses.
When it comes to what drives crypto prices up, it’s partly the behavior of the masses. (Source: Unsplash)

For this one, it’s back to economics 101—the answer is basically “supply and demand.” When enough people want to own a cryptocurrency, demand increases. Assuming supply remains the same, that results in higher prices since more people will be competing over owning limited units.

But exactly why do people want to own a given cryptocurrency in the first place?

That partly depends on who you ask.

Inherent value vs speculation 

Proponents of cryptocurrencies would argue cryptocurrencies have inherent value because of the technology behind them. Bitcoin has some great features that traditional currencies lack; above all, decentralization and anonymity, both of which ensure the underlying system can work without middlemen. 

Other cryptocurrencies also have “valuable” use cases. For instance, monero coin has groundbreaking privacy features and solana coin can execute smart contracts.

However, critics would say that bitcoin only has speculative value. In other words, people are buying bitcoin not because they think it makes a good alternative currency, but because they believe other people will want to buy it, allowing them to earn interest on bitcoin. This perspective sees crypto as a bubble that will eventually burst once everyone realizes that others don’t view bitcoin as valuable. 

The number of people buying bitcoin because they see it is a promising technology versus the numbers selling it because they think the bubble is about to burst is a huge part of what drives supply and demand.

The conclusion

So, how does cryptocurrency gain value? Is it down to the madness of crowds, or because they fulfill the criteria of money and will someday surpass fiat currency as the world’s dominant payment method?

There’s some truth to both of these answers, but it goes without saying that public opinion is a big part of the puzzle.

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