While it’s easy not to think about how our fiat currencies are valued. But when you hear that Bitcoin has an all time high value of US$64,941 (Apr 2021), it may be hard to understand how it has gotten this valuation. So how do cryptocurrencies determine their value when they aren’t tied to anything physical?
Most currencies have value because they can be used to store value and have a unit of exchange that is agreed upon. There are six key attributes that most successful currencies follow, including cryptocurrencies.
- Scarcity – supply and demand, fiat currencies have governments to manage value and inflation by printing more money or removing some from circulation, but many cryptos have flexible issuance rates
- Divisibility – broken down in to incremental units that is sufficiently divisible to accurately reflect the value of every good or service available
- Utility – currencies are easily transferred between participants – for fiat currencies this means they must be transferable within a countries economy or other via exchange, for cryptos it means that it is decentralised and trustless meaning no party participating needs to rely on trust for the system to work properly
- Transportability – easily exchanged through an economy, cryptos have exchanges, wallets and other tools that can transfer currencies within minutes with low costs, unlike many fiat exchanges
- Durability – coins or notes are made out of suitable material that will not be easily damaged, and wont degrade over time – cryptos are virtual so must be easily stored and cannot be destroyed in the same way a fiat currency could be – but they can be lost
- Counterfeitability – must be difficult to counterfeit in order to remain effective, due to the blockchain ledger, crytos are extremely hard to counterfeit and would require confusing all participants in the network or attempting a 51% attack
One thing that crypto have that traditional currencies vastly lack is: transparency. You’d never truly be able to see how the bank handles your money or values you as a customer. But cryptos whole system is meant to be transparent and shared and eliminates any issues of trust and reciprocity – meaning the user is in complete control of their money and how they manage it.
While cryptocurrencies values might appear volatile, there are ways in which they are attempting to manage this as they become more recognised by the public. Ether, for example, ties its value to not just the market (like Bitcoin) but its usefulness to both the Decentralised Finance (DeFi) and Centralised Finance (CeFi) movements, and as a technology it has other meaningful uses like Smart Contract platforms built on the eth blockchain. Or Stablecoins like Tether, which is linked to the value of the USD.
But like most new technology, there are still difficulties that cryptos face when it comes to their valuation. While cryptos have gained popularity, acceptance and use over the years it doesnt mean that they are guaranteed to be successful. They also hinge on the idea of “how much adoption will they achieve in the mainstream?”. So currently their limited usage outside of the internet it makes it hard to predict how they will unfold in the future. Although they represent the future of money – with fast transfers, low exchange rates, it needs to find its way to be more predictable which sounds like the opposite of what it was designed to do, but with values that can jump 100x in days, it can make it hard for people to see it more than something closer to a stock than a currency.