Assessing the value of a cryptocurrency requires knowing where to look. Here are a few ways.
Every year on January 3rd, Bitcoin celebrates its official birthday, celebrating the event by Satoshi Nakamoto making the Genesis Block live. No official value was given on a per Bitcoin basis immediately – it was essentially worth nothing at the time of launch. One year later, the first recorded instance of Bitcoin being used in a transaction happened – the infamous pizza guy Laszlo Hanyecz exchanging 10,000 BTC for two pizzas.
Bitcoin was officially given a rule of tangible value.
But what gives Bitcoin continuous value? What gives any cryptocurrency its value in general? How is value determined and sustained? Let’s dive into some valuation concepts and apply them to cryptocurrency to discover how and why crypto gains real, tangible value.
Skepticism Surrounding Crypto Value
One of the most common forms of skepticism surrounding cryptocurrency is the idea that the coins are just “created” and exist as only lines of code. Furthermore, many cryptocurrencies like Bitcoin and Etheruem are either partially or entirely open source and thus able to be replicated completely. To make the concept of valuation even more complex, typically currencies like fiat today are backed by the power and authority of the government that owns that currency. Crypto from its birth point is backed by nothing or by a small group of people or investors.
Although this has been a pattern for nearly a decade, the group of skeptics has shrunk significantly as the crypto market has grown bigger; what was once considered a small boutique market has now amassed nearly $1.5 trillion in market capitalization. This is more than 12% of the overall gold market capitalization ($11.2 trillion) and surpasses that of silver ($1.4 trillion).
The numbers tell the story: crypto is taken very seriously.
The Attributes That Give Cryptocurrency Value
Crypto has gone from minuscule value to gargantuan worth in 10 years, and by how much just depends on the individual asset. So what are some components of a cryptocurrency that makes it retain value?
There are many reasons why cryptocurrencies have value, but all of them can be placed under the umbrella of four different attributes:
- Utility: This is by far the most common attribute to determine the value of a coin — does it have a purpose and can it be used in any valuable way. If by definition a coin can have a means of existence, then it will generate value. We see this in thousands of cryptocurrencies ranging from a store of value, to being used as a cash system, to providing smart contracts. On a foundational level, coins generate value because they work and can be exchanged on a peer to peer (P2P) network. Because crypto can typically work without a custodian or central authority, there is tremendous value in not relying on additional points of contact, much like in years past when you could barter for farm animals or valuables. Smart contract-based coins can execute commands and services, much like a mobile application, making the utility even more valuable.
- Demand: By using the simple rule of supply and demand, coins can retain value if there is competition for its ownership. Must like the latest iPhone gains value of over $1000, coins can gain value if there is a desire by a larger group. The more people want to obtain something, the more value can be evaluated. This value can increase even more if the supply of the coin is limited or decreasing overtime.
- Scarcity: On the other side of supply and demand, most coins are able to generate value based on the amount of supply it has. Typically a coin has a fixed supply that decreases in access overtime. This leads to scarcity and gives two elements of value in one — coins retain value because there is a fixed supply (unlike fiat which can be printed to boost supply) and because the availability of this supply is also being reduced.
- Adaptability: This attribute is a little more convoluted as it depends on the coin, but most coins provide a way to adapt away from the traditional finance world which provides built-in value. This value lets you use crypto without a bank, government, or permission from someone else (unless you choose to). Some of these elements include having the ability to be used as open source; having fungibility so that trading and exchanging can take place; portability so millions of dollars worth of crypto can be taken on a plane (or based on a mnemonic phrase you remember in your head); the use of cryptography which highly increases its security; the use of a blockchain network to produce decentralized finance; and its divisibility into a floating-point representation of eight decimal points.
Reflecting on a Currency Value
Many of these attributes that help create value for cryptocurrencies are similar to those for fiat currencies, such as being in demand or having a utility for public interest. However, many other characteristics that give cryptocurrencies value are elements that fiats don’t have: most cryptocurrencies are deflationary, versatile, and scarce.
With that in mind, one might then argue that the average cryptocurrency could have more value than a fiat currency. At least the boom in interest and surge in prices over the past year can be, in part, attributed to that perception while also pointing to the real growth opportunities.