As with any other type of currency, cryptocurrencies derive their value from the collective belief of a community that has agreed among themselves to legitimize it as a medium of exchange. In the same way that metal and paper were assigned values to turn them into money, cryptocurrencies are electronic bits of code that were also assigned values so they can function as money.
Why does crypto have value?
Cryptocurrency may be the next logical phase in the progression of our financial system. But how can something that you can’t hold, see or touch have any value at all?
After all, you can store fiat money in piggy banks, wallets, or purses. You can use it to buy groceries and pay for utilities. We can invest fiat in a bank or use it to pay for insurance premiums.
But with crypto, all you really have are numbers on a screen.
The answer to the question is really quite simple. Cryptocurrency has value because there are enough people who are willing to transact with one another using crypto. Cryptocurrency has value precisely because there is a huge global network who recognizes its value.
When we think about it, it’s actually the same thing with fiat currencies. Dollars and pesos only have value because governments and citizens agree that they aren’t just ordinary bits of paper or metal. In its most basic sense, money is a “store of value” that we hold temporarily to exchange later for commodities that have actual value.
For instance, food has value since it provides us the nutrients and sustenance to carry on with everyday life. Movies have value too since they are a source of entertainment and recreation and make life interesting. But the farmer who grows food can’t always trade his crops to buy a movie ticket, nor can the filmmaker pay for his groceries with copies of his latest film.
What they need is a more convenient and dependable medium for exchange–something that comes in standardized units and that can be used at any time–even when the farmer doesn’t feel like watching a movie or even when the filmmaker isn’t hungry. In essence, money serves as this central tool for bartering with a huge range of diverse commodities.
In the past, people decided to assign value to metals like gold and silver to trade with. But when carrying huge bags of metal became too inconvenient, people started using paper money instead which was easier to store and transport. Nowadays, most of the modern world already prefers the convenience of cashless transactions and this is where crypto comes in as our most technologically advanced version of digital money to date.
Supply and demand
Another important thing to note about crypto is its relation to the basic law of economics surrounding supply and demand. Like any other asset such as stocks or shares, its value is influenced by market forces.
The more popular a certain cryptocurrency becomes, the more demand for it rises and the more its supply dwindles. Popular cryptocurrencies like Bitcoin only have a finite amount of coins available for public use which is why its value has steadily skyrocketed over time. But during times of economic uncertainty, people tend to sell their holdings, increasing the supply available and causing prices to go down.
Demand for certain cryptocurrencies is also determined by their utility. Some tokens used in play-to-earn games (P2E) for example, like Axie Infinity Shards (AXS) and Smooth Love Potion (SLP) see their prices go up whenever there is a new update in the game, giving the tokens more utility and also attracting more new players which further reduces supply.
To sum it up, though most of the world still subscribes to fiat-based financial systems, the range of networks and industries adopting crypto transactions are continually growing, and so too is the value of cryptocurrencies. With cryptocurrency offering people a more efficient, transparent, and incorruptible alternative to our traditional forms of exchange, it should come to no surprise why more and more people think it's something worth investing in.
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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.
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