A Lesson From Traditional Economics and Novel Technology

Asset or Currency? Why some have trouble defining cryptocurrencies may be linked to how they earn their value.

The United States has officially announced that cryptocurrencies will be viewed as an asset- not a currency. Other countries aren’t so sure, with some playing the rules they would to fiat, and others applying rules that would more closely equate the digital currencies with physical assets. What’s indisputable, however, is that cryptocurrencies have real value, but why?

Say you jump onto https://bitvavo.com/en, or any other new user-friendly crypto exchange, and seek to find out the current price of bitcoin. You’ll notice that in the since 2017, the price per BTC hasn’t dipped far below $1,000, and since 2018, the coin hasn’t seen sustained values much below $5,000. Which makes bitcoin a pretty profitable asset. If you were to take a look at other cryptocurrencies, you’ll notice that while they may not be worth nearly as much as bitcoin, their respective market values still hold pretty stable as well, with few of the most recognizable ever crashing out completely.

But- as these coins and tokens aren’t generally based on physical assets, where do they get these resilient values from?

Classic Economics

Looking directly at bitcoin, the earliest model of conventional cryptocurrency- you can see the practical applications of Economics 101 in full swing. That’s because bitcoin largely gains its value from the concept of “Artificial Scarcity”, a concept closely related to the Supply and Demand theory, as well as to the basis of value for most types of fiat- USD included.

Artificial scarcity essentially creates a value based on people wanting something, and only a few being able to get it. It doesn’t necessarily have to be backed by a genuinely useful asset. As you should remember, the US Dollar hasn’t been based on a gold value since the 1970s, yet it still has social value. This is because mass groups believe the dollar, or bitcoin, has value. They trade things for it. They want to own it. This in and of itself drives a value.

With artificial scarcity, that just means that the supply of any item is limited against its demand, aiming for there always to be more demand for the item than there is supply. Classically high-value assets like Gold and Diamonds work in the same way. Sometimes this supply-demand ratio is because the resource being traded is finite (in the cases of gold and bitcoin), and others because only certain amounts of an infinite resource are created or released at any given time (such as diamonds and dollars).

Technology

Another driver of cryptocurrency values is the technology that may underlie a given token or coin. Blockchain, the distributed public ledger system that keeps bitcoin decentralized and makes the crypto so unique, has near-infinite technological applications. Different crypto tokens, like Ethereum’s Ether, Cardano, and VeChain Thor use blockchain technology principles to create other types of extremely useful technology.

These tokens gain a substantial part of their value from the desire for access to their specific types of tech. Much like how stock value in Apple skyrocketed following the advent of the iPhone. This is because Apple stock represented a piece of highly sought after technology that few could reliably find elsewhere.

Consensus Mechanism

The way in which any given cryptocurrency network reaches consensus has quite a bit of influence on how much value that given token holds. Consensus is the protocols that any given cryptocurrency network uses to validate their transactions. In proof of work consensus mechanisms (like those used in bitcoin), the validation protocol can be pretty energy-intensive, causing bitcoin to become more expensive to validate, which makes it more expensive to own.

Other types of validation exist that aren’t quite as energy-intensive, proof of stake mechanisms are one example. While it requires much less energy to validate transactions, these types of consensus protocols often require a larger network with more nodes and distributed tokens. That’s because VA locators (those chosen to carry out validation of transactions) effectively “bid” for their right to validate using the tokens of that particular network. This can serve to make tokens more desirable, which can also contribute to price increases.

Adoption

Perhaps the most obvious contributing factor to a cryptocurrencies value is its adoption. The more people that use or interact with any given token or coin- the more than token or coin is bound to be worth.

This doesn’t just apply to traders, but also to merchants, or general users and developers! Anything that increases the access to or usability of any given crypto is bound to increase the value of it. So if you really want to see a crypto soar, the best thing to do is to buy it, advocate it, and interact with it. Because as it turns out- users may be the biggest influencer on value crypto has!

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