The cryptocurrency was designed as a medium of exchange alternative to traditional fiat money. Discussions of crypto value must consider the factors that make digital currency useful. Gold was valuable as a currency because of its inherent physical properties, but it was also unwieldy. Paper money was an improvement over gold, but it had to be manufactured and stored and did not have the portability of digital currencies. Let us look at what makes digital currencies so useful.
Why Traditional Currencies Have Value
For a currency to function as a store of value, it must be able to maintain its relative value over time. A commodity or precious metal is an effective store of value because its intrinsic value is relatively stable. The first forms of currency were made of metals such as gold and bronze, which had a long shelf life and a low risk of depreciation. Rather than carry around large amounts of cocoa beans, gold, or other forms of money flow, society chose to mint a currency as an alternative.
What constitutes the value of a currency is a subject of debate. Initially, the value of money was derived from its intrinsic properties. The value of gold, for example, derives partly from its physical scarcity and partly from other properties, such as its luster and resistance to tarnishing. In the modern era, paper money often takes the form of fiat currencies, which do not have much inherent scarcity.
Many countries have moved from the gold standard to fiat money to address concerns about gold reserves. Nowadays, fiat currency is not backed by a tangible asset. Its issuance is based on the reputation of a government or other institution. The value of fiat currencies depends on supply and demand or confidence in their use. For instance, the U.S. dollar is considered valuable because it dominates the flow of payments in international trade.
The useful currency should serve as a medium of exchange and can be exchanged for goods and services. The four most essential properties of money are durability, divisibility, portability, and noncounterfeitability. Let’s explore each of these properties in greater detail.
The first property of money is that it retains the same form and content over a long period. Durability is crucial for money to perform its proper functions. It goes beyond physical form to include social and institutional sustainability. Commodities with great durability tend to store value effectively, making them ideal as a medium of exchange and a store of value.
In the past, gold, silver, copper, and nickel were used as currency because these metals were durable. Today’s same amount of gold is the same amount of gold in a thousand years or next week. The durability of modern money, especially paper money and bank balances, is influenced by social and physical factors. The ability of fiat currency to function as money depends on the strength of the social institutions that support it, especially banks and governments.
The second property of money is divisibility, which means that it can be divided into smaller parts without losing its value. The smaller the denominations, the better. Divisibility makes money useful for buying different kinds of goods and services at many prices. For an item to serve as an acceptable medium of exchange, it must have parts that can be used to buy everything from houses to chewing gums.
Take the U.S. dollar, for example. It exists in increments of one penny and multiples that are equal to the value of almost all goods and services available in the U.S. economy. If U.S. money consisted only of $100 gold coins, people would have trouble buying gum, soft drinks, or gasoline.
Money should have the ability to be easily moved from one place to another to complete a transaction. When people go to the market, they usually have money to make a purchase. The fact that gold, silver, copper, and nickel coins can be carried around easily has made them useful forms of money. But in the 20th century, paper money became more popular because it was lighter and easier to carry around.
The fourth property of money is that it cannot be easily reproduced. If it were easy to recreate, it would not work as a suitable medium of exchange because people would accept the copy instead of the original. Governments are entrusted with preventing the unlimited duplication of money. Such a task is one of the main reasons why governments exist. The economy needs governments to regulate the total amount of money in circulation. By controlling the issuance of money, governments control the total amount of money in circulation, which helps give money exchange value.
Governments try to keep counterfeiters at bay with tamper-proof methods, but criminals are usually always one step ahead of them. Governments have minted coins, used special security inks, and taken other measures to ward off counterfeiters. In the 1990s, to counteract advances made in computer technology, the United States redesigned paper money, adding watermarks, microscopic printing, and magnetic stripes.
What gives cryptocurrency value?
Let’s explain it using the leading cryptocurrency — Bitcoin. BTC is durable and divisible into small units called satoshis. In addition, you only need to have a smartphone with your wallet to make instant transactions. Crypto debit cards allow you to pay in stores and restaurants just like other bank cards.
Just as Bitcoin has some fiat currency system characteristics, it also has unique features. BTC is a decentralized digital currency that is not backed by a government. So no centralized entity acts as a counterparty in financial transactions. Unlike fiat currency systems, Bitcoin is scarce and cannot be counterfeited.
The only way to create a counterfeit Bitcoin is to spend the amount twice. If you want to spend the same BTC in two different situations, you should create two different records. For example, a 51% attack is a network disruption where one user (or multiple users) controls more than 50% of the computing power that manages the distributed transaction ledger of the blockchain. However, this is very unlikely, as it would require a large amount of computing power, which is practically impossible in real life.
Several factors contribute to the value of a cryptocurrency, such as increasing demand, the size of the network, adoption, production costs, etc.
You can determine if a cryptocurrency’s price is fair by examining the number of network nodes, wallets, and market capitalization and comparing these numbers to similar statistics for other cryptocurrencies. The number of network nodes and wallets of a cryptocurrency indicates community support. This is particularly useful in determining the currency’s chances of overcoming crises.
The relationship between supply and demand
The supply and demand of digital currencies affect their value. Since most cryptocurrencies have a limited supply, growing popularity increases prices. For example, if many people try to buy Bitcoins, but there are not many sellers, the price will increase and vice versa. However, when a cryptocurrency faces scandals like major hacks, its demand can drop quickly, as many people want to get out of their positions before losses mount.
The value of a cryptocurrency can skyrocket when it becomes mainstream. For digital assets to become popular, they need to be accepted by traders in everyday situations. If a currency is useful in day-to-day transactions, like existing fiat currencies, it will likely play an important role.
The price of cryptocurrencies is also influenced by scarcity. For instance, the total supply of Bitcoin is limited, so an increase in demand positively affects the asset price.
A coin’s production costs also determine its value. For example, Bitcoin has high production costs and relies heavily on electricity to create new coins. These include specialized hardware such as CPUs/GPUs and servers and cooling systems for this hardware. Furthermore, Bitcoin uses a type of Proof of Work consensus, so significant additional energy costs are required to run these systems. Other cryptocurrencies use different types of consensus, such as Proof of Stake. In this case, users invest their money to support the network.
Once cryptocurrencies become mainstream, the government will almost certainly regulate them. This could lead to digital money becoming more centralized, greatly affecting the cryptocurrency’s price. Some say that transactions will be restricted and controlled due to regulations, lack of security, and governments’ efforts to ban or restrict digital assets. For example, Russia and China have targeted exchanges and trading activities, negatively impacting cryptocurrency prices.
The long-term value of a digital currency, such as Bitcoin, depends on many factors, including whether the currency succeeds in gaining widespread popular acceptance. The crucial factor will be accepting blockchain technology and digital assets crypto by governments and central banks. Last but not least, security and ease of use are key components that will facilitate the adoption of digital assets for everyday use.
All these factors make the price of a cryptocurrency hard to predict, but they also make this kind of digital currency especially interesting to traders and investors. You can easily track the value of digital assets in our mobile apps, available for Android and iOS. PointPay blockchain-based bank allows our users to buy or sell cryptocurrency via a broad range of payment providers, store assets in the secure wallet or trade them on the crypto exchange.
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