What Gives Cryptocurrency its Value?
Cryptocurrency has skyrocketed in popularity since its inception less than 10 years ago. Because it exists digitally, cryptocurrency can be sent and received by anyone with access to the internet—a fact that has caught the attention of investors and non-investors alike.
But the question on everyone’s mind remains the same: What gives cryptocurrency its value? If you aren’t sure yet whether or not you should invest in cryptocurrency, here are some of the most common ways that it gains value and why each method matters.
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Decentralized systems are not controlled by any central authority, government or banks. Decentralization ensures that no one person or company can take control of digital currency.
This means that cryptocurrency is immune to political and social manipulation, making it a safe haven for storing wealth.
Decentralization also allows digital currencies to be accessible to everyone and anyone in different regions of the world at any time. No need for international money transfer services – just use crypto instead!
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One of cryptocurrency’s biggest selling points is that it’s encrypted and secured by layers of cryptography.
Hackers trying to crack these codes would have a virtually impossible time getting in.
The most significant cryptocurrencies are built on an open source network,
with many developers contributing to their code base. While not all these developers will be white-hat (honestly, how many can you name?), they do help secure coins as they are designed to.
And if someone does manage to break into your wallet or exchange account, there’s no way for them to run off with your money.
You’re always in control of your funds when you use cryptocurrency.
This helps give value to currencies such as bitcoin, which can often fluctuate wildly in value from day to day.
The Gold Standard
Bitcoin is built on blockchain technology, which is also used by other cryptocurrencies such as Ethereum and Litecoin. As you may know, blockchain is an open ledger that records every single transaction involving cryptocurrency.
But how do people decide if they want to buy Bitcoin or Ethereum or Litecoin? What makes these three currencies different from each other, and why would someone want to use one over another? Ultimately, cryptocurrencies gain value in two ways:
their utility and their demand. If a currency can be used for purchases—if it has utility—
then it can start gaining demand. This creates a positive feedback loop of more users wanting to use a currency, making it more valuable and driving up prices. So what gives cryptocurrency its value? The same things that give any other currency value: Utility + Demand = Price (USD)
Supply & Demand
The more people there are who want a certain digital currency, like bitcoin, and need it to buy things or transfer money, the higher its value goes. Conversely,
if fewer people want bitcoin, then fewer businesses will accept it as payment and those who do will demand more bitcoin in exchange for their goods or services.
It’s simple supply and demand at work here—the same principles apply to traditional fiat currencies too.
However, because of its decentralized nature, cryptocurrency is still largely unregulated by governments (for now).
This means that unlike your local currency, which can lose value due to inflation caused by overprinting, cryptocurrency has no central authority that controls its production.
Instead, new units of cryptocurrencies are create through a process called mining.
This involves using high-powered computers to solve complex math problems and earn rewards in return.
As more miners join a network and compete with each other for rewards, they increase its security by making it harder for any one person or entity to control it all.
As you can see from above, there’s no single reason why someone would choose one type of digital coin over another; rather, much depends on personal preference when it comes to deciding between one crypto versus another.
Utility & Use Case
When thinking about whether or not a cryptocurrency will increase in value, it’s helpful to consider why people buy it. Why do investors choose to purchase Bitcoin instead of USD? What are they looking to get from a coin and how do they plan to use it in their own lives?
Consider these questions when considering which cryptocurrencies you think may appreciate in value over time.
There are many coins that have a specific purpose for existing that give them intrinsic value,
Some coins exist simply because someone thought it would be fun to create them—
which is all well and good until you realize there are now hundreds of such currencies with no real reason for existing except for speculation.
If you want to invest in cryptocurrency but don’t know where to start, consider choosing a coin based on what problem it solves rather than on how much money you think it might make.
This way, at least your investment has some sort of purpose!
Team & Advisors
The value of a currency depends on who you ask, and it’s important to remember that cryptocurrency is a brand-new asset class. That said, there are fundamental principles and features that give digital currencies their value, which include
1. Security: There is no central authority in charge of Bitcoin; instead,
transactions are verified by network nodes through cryptography (hence cryptocurrency).
This means no one can tamper with or censor transactions and no one can freeze your account or block payments from going through.
2. Decentralization: Because cryptocurrencies aren’t tied to any
bank or government entity, they cannot be shut down by governments or financial institutions.
3. Transparency: All transactions on a blockchain are public, so anyone can see exactly how much money has been sent from where and when.
4. Anonymity: While transaction data is public, names of users remain anonymous—though some people use fake names for extra privacy.
5 . Irreversible Transactions: Once funds have been sent using cryptocurrency,
there’s no way to get them back unless someone else agrees to send them back to you—which isn’t likely if you just sent them some money!
Real World Adoption
No digital currency has gained widespread acceptance as a medium of exchange,
so there’s no guarantee that any of them will. That said, it’s important to understand why a digital currency gains value
—and what gives it staying power. Because if you don’t understand these underlying principles,
you may mistakenly think some of these digital currencies are
more valuable than others… and make investment decisions based on that assumption.
It’s also important to know how a currency is value because it helps us
understand how much demand there is for that particular cryptocurrency.
As an example, if people expect a cryptocurrency’s price to fall,
they’ll sell their holdings now rather than wait until later when they hope they can buy back in at lower prices.
But sometimes people hold onto their coins even though
they expect their prices to drop because they believe in future growth or have other reasons for not selling right away (more on that below).
So understanding why cryptocurrencies gain value can help us determine which ones have staying power over time—
and which ones may not be worth your money at all. To get a better idea of how cryptocurrencies gain value,
let’s take a look at each step in their creation process: Mining :
Before digital currencies were invented, miners use computers to solve complex math problems.
in return for finding solutions faster than anyone else, they got paid with newly created bitcoins.
Today mining is done by high-power computers instead of humans . When new blocks are create
miners verify them by solving a complex mathematical puzzle that takes significant computational power .
If successful, miners add those new blocks to existing chains (called blockchains) and receive additional bitcoin rewards.
Miners play an integral role in creating blockchain networks and validating transactions; however ,
many people today purchase bitcoins without ever engaging in mining activity directly.