Why Does Cryptocurrency Have Value?

Cryptocurrencies are still a relatively new tech innovation. There is a lot about them that most people still don’t understand. For people who aren’t familiar with economics and financial theory, the question of why cryptocurrencies have value is an interesting one. Here’s a brief rundown of where that value comes from.

Exchanges And Stores

When digital currencies first started to gain prominence, many people were skeptical about the long-term prospects. In a widely-shared blog post at the time, one economist argued that in order for a digital currency to be successful, it would need to be able to act as a medium of exchange as well as a stable store of value. Unfortunately, as most people now know, Bitcoin is anything but stable.

For any currency to be an effective means of storing value, it needs to be stable. In other words, to function as a proper currency, people need to be able to agree on how much Bitcoin is worth. If the value of the currency is unstable and constantly fluctuating, then it will be hard to keep up with the most current figure.

Scarcity

Another factor that determines the value of a currency is its scarcity. If the supply of a currency is too large, it can lead to a spike in the price of goods. On the other hand, a supply that is too small leads to a range of economic problems of its own.

With regular fiat currencies, central banks can control the scarcity of money by adjusting the amount of it that they print. The supply of Bitcoin is controlled by the network protocol, which ensures that new Bitcoins are created at a pre-set rate.

Utility

For a currency to have value, holders of the currency need to be able to spend it. This is where Bitcoin is currently struggling. While it is possible to spend Bitcoin to buy everyday goods and services, and it is becoming easier to do so all the time, spending Bitcoin is nowhere near as easy as spending fiat currency.

Is It Worth Investing In?

Most people are aware that there is a lot of money to be made in bitcoin trading, but it is important to understand why traders see value in the crypto. Investors can either purchase Bitcoin in the hopes that it will increase in value over time, or they can trade it for other cryptos on a cryptocurrency exchange. Making a profit from trading is a risky undertaking, especially given how quickly the value of a cryptocurrency can change.

There are a large number of challenges facing cryptocurrencies, and it is hard to envisage them overtaking fiat currencies anytime soon. Although there have been localized examples of people using cryptocurrencies in the same way they spend fiat currency, the unreliability of existing cryptocurrencies as stores of value is holding them back. However, as long as cryptocurrencies have utility and are considered to have value by traders, then they will be worth something.


Photo: Pexels

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