Since cryptocurrencies aren't backed by governments or centralized exchanges like fiat is (yet), these decentralized exchange-based currencies derive their value from a list of sources that include (but are not limited to):
1. Supply and Demand
Just as with any other commodity, the value of cryptocurrencies depends on supply and demand. This means a currency's price increases if its demand increases faster than its total supply. Some cryptocurrencies "burn" their tokens to combat this inflation.
Demand can increase when a new product, service, or project that provides real utility comes to light and gets people excited. Moreover, a broader acceptance of cryptocurrencies, leading to a wider audience getting involved in new tokens and projects, effectively causes a spike in demand and the stifling of supply.
2. Cost of Production
Newly created crypto tokens go through a mining process, which involves a person using a computer to verify the next block on a blockchain. In most cases, verifying these blocks requires a lot of computing power and the help of expensive equipment such as Bitcoin Rigs that draw a large amount of electricity.
As mining costs increase, so does the value of the cryptocurrency that gets mined. Since miners won't work on crypto that doesn't offset their initial investments, the price will have to go up as long as there is demand for the blockchain.
3. Availability on Exchanges
Mainstream cryptocurrencies such as Bitcoin and Ethereum (ETH) are on most, if not all, decentralized exchanges (DEXs). Like their centralized counterparts, cryptocurrency exchanges allow users to see which currency pairs are currently open for trade. When a lesser-known cryptocurrency starts to gain traction and adoption from more decentralized exchanges, it can quickly increase the number of investors willing to buy it, thus, increasing its demand.
You can already find thousands of different cryptocurrencies across the internet, with new projects, tokens, and currencies launched daily. It causes constant value shifts, where investors often pull their funding to re-invest into other, more promising endeavors.
Cryptocurrency networks and ecosystems all abide by their own unique set of rules. Some tokens, called governance tokens, empower their users and the community behind them to have a say in the project and vote on what developers should work on next. This causes a rise in the perceived value of a project.
One can argue that the value of Bitcoin is much like how we see the value of gold and other commodities in the real world. With Bitcoin and Ethereum being such vital players in the cryptospace, large-scale companies and eCommerce websites have already started to accept these currencies as payment methods.
The Six Vital Attributes to Identify any Cryptocurrency
These key attributes allow a currency to be accepted and used by the masses as an agreed-upon economy or way of executing transactions. They also limit inflation and ensure that the currencies are safe and secure for public use. Throughout history, people have used precious metals and commodities as payment methods due to their relatively stable value. We try to emulate this stability in all our modern currencies.
Instead of carrying bags of coffee beans or corn to trade for livestock, societies eventually turned to minted currency as a more accessible alternative. Then fiat currencies like the Dollar and the Euro came along and made it much easier to assign a specific value to things. It is widely believed that the next natural step in this evolution is the rise of cryptocurrencies. They provide us with a decentralized means to execute payments, transactions, trades, and so much more, granting utility like never before.
Today, most global currencies are fiat, with most governments believing that fiat money is less susceptible to losing its value over time. However, this point of view is rapidly changing.
How does Bitcoin Work?
Bitcoin and other cryptocurrencies don't rely on government authorities or a centralized banking system to control or monitor them. They are completely decentralized and autonomous. This means that a decentralized network consisting of independent nodes responsible for approving consensus-based transactions forms the fundamentals of Bitcoin.
The Challenge of Valuing Bitcoin
Bitcoin's value depends on how well it works as a medium of exchange. If Bitcoin doesn't succeed as a medium for people engaging with the cryptocurrency, it won't be helpful as a store of value. Since Bitcoin and other cryptocurrencies are virtual and only exist within computer networks, some people have difficulty grasping their scarcity and cost of production.
Speculative interest has been a primary driver of Bitcoin's value appreciation. Although the future of Bitcoin is uncertain, its value will likely continue to stabilize as it receives more mainstream adoption.
There will always be resistance from traditionalists who cannot see the value assigned to a digital currency free from governmental control. However, the economics behind cryptocurrencies work far more intuitively than most people realize. As long as crypto has utility tied to it, public demand will ensure its growth.
*All blogs are opinion pieces and do not necessarily reflect the views of PyxelChain™ Technology Corporation