Cryptocurrencies and what gives them value: a brief introduction to the mechanisms of a new type of technology

Asset or currency? This question is very closely related to how cryptocurrencies maintain their value.

The United States officially announced that cryptocurrencies should be considered an asset rather than a currency. However, not all countries agree on this. Some countries equate them with paper money, others compare digital currencies more like physical assets. However, it is undisputed that cryptocurrencies have real value, but why? 

Suppose you try over Bitvavo or find out the course of the Bitcoin via another user-friendly crypto exchange. You'll find out pretty quickly that the price of BTC hasn't fallen below $ 2017 since 1.000 and has not fallen below $ 2018 since 5.000. Since its inception, the BTC has achieved a sustainable increase in its value. That alone makes Bitcoin a profitable asset - especially for those who have been with it from the start. A look at other crypto currencies reveals that they are not worth nearly as much as Bitcoin, but that these too remain quite stable in their respective market values. Very few of the better known cryptocurrencies lose their market value completely.

However, the fact that cryptocurrencies' coins and tokens are usually not based on physical assets begs the question of where do they get their value from and how do they hold it?

The basics

A direct look at Bitcoin, the earliest model of conventional cryptocurrencies, shows that the practical applications of the economic multiplication table are in full swing. Bitcoin derives its value largely from the concept of "Artificial scarcity". A concept closely related to the theory of supply and demand and the value base for most types of paper currency, including the US dollar.

Artificial scarcity essentially creates value based on the fact that people want something and few are able to get it. What is wanted does not necessarily have to be underpinned or covered by a really useful asset. As you will recall, the US dollar has not been based on a gold value since the 1970s, but it still has social value. This is because a large number of people believe that the dollar, or even the bitcoin, has value. They trade things for him and they want to own him. This gives the currencies a value and drives their price development.

The artificial scarcity means here above all that the supply of any object is limited against its demand. The aim is that there is always more demand than supply. Classic assets like gold and diamonds work the same way. Sometimes this relationship between supply and demand is due to the fact that the resource being traded is finite (as in the case of gold and bitcoins). Others insist that only certain quantities of an infinite resource are created or released at any given time (as with diamonds and the dollar). 

The technologies

Another driving force behind the value of cryptocurrencies is the technology that underlies a coin or token. The decentralized blockchain accounting system, which makes cryptocurrencies so unique, offers an almost infinite number of application possibilities. For example, Ethereum, Cardano and VeChain Thor use the principles of blockchain technology to create other types of extremely useful technology. 

These tokens derive a significant portion of their value from the masses' desire to access their specific technologies - much like Apple's stock value, which soared after the introduction of the iPhone. Apple stock represents a stake in a portion of highly sought-after and promising technology that is difficult to find elsewhere.

The consensus mechanism

The way in which a certain cryptocurrency reaches consensus has a not insignificant impact on its value. Consensus is understood to mean the protocols that a cryptocurrency uses to validate its transactions. In the case of the proof of work consensus mechanism or proof of work (as used in Bitcoin), the validation protocol can be very energy-intensive - i.e. it requires a lot of computing power. This makes bitcoins very expensive to validate, which in turn is part of the value.

There are other types of validation that are not quite as energy intensive. For example, the Proof of Stake consensus mechanism. Although the validation of transactions requires much less energy here, these types of consensus protocols often require a larger network with more nodes (shareholders) over which the tokens are distributed. This is because the shareholders are bidding for their right to validation, with their chances increasing, for example, by owning more tokens. This also makes the tokens more desirable and increases their value. 

Adoption

Perhaps the most obvious factor that contributes to the value of a cryptocurrency is the use of it - the adoption of a currency is also used here. The more people use a certain coin or token or interact with it in any way, the more likely it is that its value will increase permanently.

This not only applies to traders on the crypto exchanges, but also to traders, end users and developers! Anything that improves the accessibility or usability of a particular cryptocurrency will increase its value. So if you see great potential in a certain cryptocurrency, you should not only buy and own it, but also advertise and interact with it. Ultimately, you, the user, have possibly the greatest influence on the value of a cryptocurrency! 

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Callie Machalat

Callie Machalat from Bitcoin-News.one understands the information needs of the crypto community members, traders, researchers and developers looking for reliable information to understand and participate in the crypto revolution.

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