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Cryptocurrencies are a form of digital currency that has exploded in popularity over the past few years and are still a relatively recent phenomenon. As such, they are currently making waves in the financial world.
However, this has resulted in many questioning what they are and what value they provide. Bitcoin and Ethereum are two of the leading cryptocurrencies that investors and traders will often deal with, as they are worth more than most of those available to buy.
Why Does Cryptocurrency Have Value?
Despite some coins being worth thousands of dollars, understanding their actual value can be very confusing, and this is one of the questions that many are still grappling with. Unlike traditional currencies, also known as fiat currencies, they lack centrality and government backing, leading to some questioning their worth and inherent value.
This article will explore the various factors that contribute to the value of cryptocurrencies, which we hope will help shed some light on what can be a complex topic.
1. Limited Supply
Why does cryptocurrency have value? The answer is as a result of limited supply.
Demand is often known to influence the price of something, and the supply of said item often feeds this. In the world of cryptocurrencies, they’ll usually be circulated with a limited amount available to purchase, which creates a sense of scarcity.
For Bitcoin, we know that only 21 million were ever created, and this is due to a limit set in place by its creator. As we can see with real-world assets such as gold or other precious metals, this will significantly impact prices as everybody scrambles for a piece of the pie.
Why does cryptocurrency have value? Decentralization is the answer. Decentralization is a central selling factor for many of these crypto trading coins — especially for those with a general lack of trust for those in positions of power or influence.
Traditional currencies are controlled by central banks and governmental agencies, which can leave them at risk of being influenced by both internal and external stakeholders. On the flip side, cryptocurrencies are managed by the blockchain — a decentralized ledger added to by those with a stake, adding accountability, independence, and trust.
While in the early days, many cryptocurrency coins had no real-world applications and therefore had little value, this is no longer the case, and their value is based on much more than speculation alone.
Bitcoin can be used for direct payments between users, known as peer-to-peer transactions, allowing us to send and receive money no matter where we are without relying on banks or other financial institutions.
Other coins, such as Ethereum, can utilize smart contracts, which can take the hassle out of what could otherwise be a lengthy process that often relies on mutual trust and understanding.
4. Trust in Technology
On trust, we can see that the more use a particular cryptocurrency coin has, the higher it will be valued by those wanting to use it.
The technology behind cryptocurrency helps back this up and provides peace of mind to those wanting to use it more often, adding transparency and security to digital transactions. This is all thanks to the blockchain’s power and immunity to bad-faith forces that many want to cause damage or commit financial crimes.
This serves as the foundation for almost all coins and underpins what the movement is all about — accountable, decentralized financial tools.
5. Global Reach
Why does cryptocurrency have value? Their global reach makes them valuable. The globality of cryptocurrencies helps them stand out online, being almost unrivaled when connecting people on all edges of the planet.
As long as you have a reliable internet connection, you should be able to interact, no matter where you are located. This opens the financial world to people who would have otherwise been considered off-limits for many financial institutions and banking providers.
Cryptocurrencies make cross-border transactions simple and hassle-free while also simplifying international trade for businesses.
6. Network Effect
Why does cryptocurrency have value? The network effect of cryptocurrencies makes them highly valuable.
This one is hard to explain with words, but it is something you’ve undoubtedly experienced for yourself. In simple terms, the more people use something, the higher its value, even if it offers little output.
This idea is especially true for cryptocurrencies, particularly those relatively new or with limited real-world applications.
As more people and businesses use them, they prove they can add value in one way or another, increasing the price and value and attracting more people. This can contribute to a self-sufficient cycle of interest and investment, building trust in the coin’s longevity.
Hype and speculation are huge factors that can contribute to the value assigned to a specific cryptocurrency.
While this won’t bring peace of mind to the investors, it is often justified for one reason or another, and this can continue indefinitely, especially if it has the backing of influence people with a vested interest in the price continuing to increase — check out Elon Musk and Dogecoin as an example of this.
This will increase the price and the returns for early investors and attract more traditional traders, adding a sense of prestige and respect to the coin.
8. Protect Against Inflation
Because cryptocurrency coins are decentralized and not owned by any one state or institution, they are shielded from the everyday factors that can increase or decrease the value of a traditional currency.
Investing in so-called “stablecoins” is a good vehicle for protecting one’s wealth without worrying about your assets going south because of a real-world event. While there is still a risk of that happening, they’re far less susceptible to economic disasters.
9. Market Sentiment
One of the few things that can significantly influence the value or price of a specific cryptocurrency coin is other traders, as well as the population at large.
Positive or encouraging news can result in people buying in large quantities, increasing the price, while bad news will often see people dumping their assets, driving the price down. The media, who have long been skeptical of these decentralized coins, can enhance this.
Awareness of this volatility is vital, and you should always watch for anything that could influence the market.
10. Regulatory Environment
Why does cryptocurrency have value? Lack of regulatory environment.
For those who distrust power and government, the lack of such regulation is a crucial reason to invest. Many believe that this is why some cryptocurrencies have such a high value.
While some regulations help build trust and provide accountability, many are interested in these cryptocurrency coins because they take away the formality associated with traditional banking. That being said, as more countries and their governments look to enter the world of digital currencies, we could see more rules become set in stone.
Regulations are often designed to work for the long term, and when countries want to adopt such currencies into the existing economic system, they tend to plan for a long lifespan for this resource.
Cryptocurrencies have value for many reasons, ranging from supply and scarcity to the lack of regulations currently in place. These factors can influence the value of cryptocurrencies in different ways but are often seen as positives that primarily benefit those with an active investment.
There has been much debate about the actual value cryptocurrencies hold, especially in the real world, but it looks as though this will become more apparent with time. We can see that digital coins are becoming more popular, and more mainstream institutions accept their use.
I am Adeyemi Adetilewa, an SEO Specialist helping online businesses grow through content creation and proven SEO strategies. Proficient in WordPress CMS, Technical Site Audits, Search Engine Optimization, Keyword Research, and Technical Writing (Portfolio).
Founder and Editor-In-Chief of Ideas Plus Business Magazine, an online business resource for entrepreneurs. I help brands share unique and impactful stories through the use of public relations, advertising, and online marketing. My work has been featured in the Huffington Post, Thrive Global, Addicted2Success, Hackernoon, The Good Men Project, and other publications.