Cryptocurrencies, like any other asset, derive their value from market forces and utility. But what makes a currency valuable, and how do cryptocurrencies stack up in terms of their characteristics?
The Characteristics of a Good Currency
Fungibility, durability, portability, recognizability, and stability are the key characteristics of a good currency. Cryptocurrencies, such as Bitcoin, are more fungible and standardized than cows. They are more durable than perishable flowers and more portable than cumbersome gold bars. People recognize and accept them more easily than Guinean francs, and some cryptocurrencies, like USDT, are more stable than others, such as BTC.
Crypto Tokens as Company Shares
Crypto tokens also have similarities with company shares. Just like market capitalization for stocks, the value of a cryptocurrency is determined by multiplying its price by the number of tokens held by all holders. When a cryptocurrency is listed on an exchange, the price is determined by market forces such as demand and supply. Cryptocurrencies in high demand tend to surge, pushing prices up, whereas price movements of cryptocurrencies in low demand are often minimal.
The Key Difference
One key difference between shares and cryptocurrencies is that a company’s management team always has the authority to issue more shares, inducing dilution. In contrast, most cryptocurrencies have a maximum supply, and no new coins or tokens will be produced once this supply is exhausted. Bitcoin, for example, has a maximum supply of 21 million coins, and no one can mine or issue more than 21 million Bitcoins.
Utility as a Driver of Value
Like shares, most crypto tokens also have utility that give holders access to specific services or platforms. As long as a crypto token is useful, it possesses value. For example, owning an Amazon gift card is usually deemed more useful than owning a voucher for a mom-and-pop shop. Similarly, owning ether (ETH) is essential when making transactions on the Ethereum network, making it more valuable because of its utility functions.
Non-fungible tokens (NFT) are another example of how cryptocurrencies can provide new methods and features for investors to extract value from their holdings. The interplay between currency-like characteristics and equity-like characteristics of crypto is essential to appreciate where cryptocurrencies get their value.
In conclusion, cryptocurrencies derive their value from a combination of market forces and utility. While the characteristics of a good currency apply to cryptocurrencies, their similarities with company shares and their unique characteristics make them a valuable asset class. The more useful a cryptocurrency is, the more valuable it becomes, and this is the driving force behind their adoption and growing popularity.