How Does Cryptocurrency Have Value, and Why Should I Care?

Some people describe advantages of cryptocurrencies and say that they are better than traditional money. They talk about how crypto is changing the global financial services space and offering financial freedom to everyone through decentralization. At the same time, there are many skeptics who believe that “there is no value in these currencies, except that people believe they have value”. So who is right here?

Why Cryptocurrencies Can Be More Efficient Money

Cryptocurrencies are digital assets stored on a blockchain (a continuous sequential chain of blocks containing information). These currencies combine the science of cryptography and new ways of storing data, allowing users to make fast and transparent transactions. Every person who has access to the blockchain can see what is happening with it, all transactions are recorded and can never be deleted. The next block is written into the chain only after the previous one. This is one of the main features of the blockchain.

This makes transactions with cryptocurrencies totally safe. No one can tinker with the blockchain, switch or delete some information on it (for this they would have to gain access to all the computers in the world that store this chain of blocks). No hacker is able to get inside the chain. The only thing left for them is to try to trick individual users into giving them access to their accounts, wallets on the blockchain. But no system can ever be insured against such an exploit.

Due to the inherent transparency and simplicity of transactions on the blockchain, decentralized cryptocurrencies can do absolutely everything regular fiat money can. At the same time, they are not subject to control by any one organization or state. The blockchain they are built on is available to everyone, and everyone has equal conditions for its use, originally laid down by the creators.

As a result, cryptocurrencies have no boundaries. They are completely universal. They cost the same in the US, in South America, in China, and are available wherever there is Internet. This makes them very attractive, for example, to third world countries which have no confidence in their own currencies. No wonder El Salvador made Bitcoin its national currency in 2021, and in 2022 the Central African Republic followed suit. Even considering the volatility of the cryptocurrencies exchange rate, it is still better than the native currency, which is always depreciating, causing terrible inflation.

For the same reason, cryptocurrencies are very popular, for example, in Turkey: the country’s own currency, the lira, has been depreciating against the dollar for fifteen years in a row. Over the past year, the lira has fallen in price by half. In such a situation, it is much more profitable to keep your money in Bitcoin or Ethereum, which are most often strengthening even against the dollar. At the same time, users can still easily transact with each other — directly or through one of the thousands of available crypto exchanges. It is enough to know the wallet address to which you need to send tokens.

In short, cryptocurrencies have all the characteristic important features of money. They are:

• Fungible (Interchangeable)
• Non-consumable
• Durable
• Portable
• Secure (Cannot be counterfeited)
• Highly Divisible
• Scarce (Have Predictable Supply)
• Easily Transactable.

In general, cryptocurrencies give users exactly what they would want from money: the ability to safely store it for an arbitrarily long time, the ability to maintain value (or even increase it), and the ability to make transactions, that is, to act as a medium of exchange. That is why these “digital money” are in demand all over the world.

How Cryptocurrency Acquires Its Value

Cryptocurrency, like any other currency in the world, must more or less effectively hold its value — otherwise it will be difficult for it to function as a convenient medium of exchange. But where does the value of a cryptocurrency come from and how can it store it?

Both Bitcoin and the second most popular cryptocurrency Ethereum, like most other currencies, get their value based on the ratio of supply and demand. How much you are willing to pay for one token is how much it costs. The more Bitcoin enters the free market, the cheaper it is. We can say that the real value of Bitcoin and other cryptocurrencies is gained on the exchanges where they are traded.

In the case of national currencies, their value is monitored and controlled by the state (and the stronger the state, the stronger and more reliable the currency will be). With crypto tokens, they are monitored by the decentralized community — their collective holders. Many services, exchanges and platforms are built on top of blockchains (especially on Ethereum, Solana and Polkadot). There are CeFi, DeFi, and Pay-to-Earn gaming platforms. All of them influence the demand-supply cycle of tokens, create demand for cryptocurrencies, and as a result are functioning as market makers of various sizes.

It might be helpful to think that currencies like Polkadot or Solana have value in exactly the same way as stocks issued by companies. These projects are worth billions because they have the potential to become the backbone of Web3, they provide massive value. They can store a whole new Internet, tens of thousands of applications running and transacting on their platform. Therefore their “stocks” cost quite a penny. Just as a hip new startup in Silicon Valley can become a unicorn and be valued at more than $1 billion in the third year of its development, so a promising crypto project like Polkadot can be valued at $7 billion, especially since it has been developing for 7 years.

Only in this case, the value of cryptocurrencies is potentially higher than that of stocks, because they not only can be traded, but also have some utility in the project they are associated with. For example, they can be used to pay transaction fees in Ethereum network (with ETH token) or fees on Binance exchange (with BNB token). Or they can be used to support the projects people believe in (like with DOT tokens in the Polkadot ecosystem).

It is also worth mentioning stable cryptocurrencies — stablecoins. Their peculiarity is that they always, regardless of the situation, cost exactly 1 dollar (or 1 euro, for example). At the same time, data about them is also stored on the blockchain, and transactions are carried out in the same way and according to the same laws as for other cryptocurrencies.

Stablecoins maintain their value most often because of the collateral that backs them: when someone buys a stablecoin, they pay a dollar, which is saved and held by the project until someone else comes to sell this stablecoin — for which they will be given this dollar. Stablecoins are backed by various traditional assets such as money, stocks or other collateral, which allows them not to lose value. At the same time, their lack of volatility often makes them an easier medium of exchange than ETH and BTC, whose price is constantly (and will always be) changing.

Inherent Transparency: A Huge Advantage of Cryptocurrencies

As already mentioned, everything is recorded, stored and publicly available on the blockchain. This technology is truly amazing. Everyone can see what transactions took place, where and from whom the tokens were sent. Transaction history cannot be faked.

It’s like going to your local bank and asking them to show you their complete ledger — all the deposits ever opened, loans made, any transactions that have taken place. Ever since the bank first opened its doors.

This incredible transparency eliminates any trust issues. What’s more, users do not have to entrust their money to any organization to serve as an intermediary in transactions. It is not necessary to create an account in some bank, and then hope this bank doesn’t add some hidden fees while you’re not looking. Users can fully control their crypto coins, and at the same time trade them online by buying goods or services.

The transparency of everything that happens to money is one of the main innovations of cryptocurrencies. You see which wallet has how much money, who does he send money to, and where is he receiving it from. This is a new world — where big corporations cannot get away with just printing money for themselves, hiding their assets or engaging in other types of secretive fraud.

Cryptocurrencies Provide Opportunities and Are Inexpensive to Use

The most popular fintech apps like PayPal, Venmo, Robinhood and the like have made it easy to get many financial services. But this is still the stone age: users have to rely on intermediaries, pay them commissions for each transaction, hope that the operation is not canceled, their account is not blocked, and the service isn’t going bust.

Foreign transaction fees range from 1 percent to 4 percent of each transaction. And then those to whom you transferred the money also pay a commission when withdrawing funds or when paying for some other services. And so on, and so on, in a big circle. As a result, it is estimated that around the world almost 7% of the money every year is spent on transaction fees. When the cost of exchanging money becomes such an obstacle to the free circulation of currency, no one wins. Except, of course, for a few huge intermediaries, earning billions simply for their existence.

Banks and fintech applications also can’t help the world’s nearly 1.7 billion unbanked people. These people don’t have time or money to travel to another country to set up an account with a more or less reliable bank. Such people can now only be helped by decentralized cryptocurrencies, which are available to everyone who has the Internet. At the same time, these people get all the same opportunities as those who use banking services. They can store and send money, invest in various projects, and also implement their own ideas by raising tokens through crowdfunding on launchpads, such as Polkapad.

Today, cryptocurrencies offer the most efficient, simple, direct and inexpensive form of transactions. Allowing people to transfer money between anyone, anywhere, regardless of their status and financial situation. This is why they have value.