Why and How do Cryptocurrencies Have Value?
To understand how objects can have value an understanding of basic economics is necessary.
Basic economics relates to how society views and uses its limited resources. Factors such as the production, availability, distribution, and consumption of these resources contribute to assigning a value to them.
When it comes to cryptocurrencies, the two most important factors are scarcity and utility.
With most cryptocurrencies, scarcity is implied by them having a finite supply. When a commodity has limited availability, and there is a high demand for it, it can cause the price of the commodity to rise.
However, it is important to realise that value does not equal price.
Supply and Demand
Price comes about as a direct result of the supply and demand of an item.
It is buyers and sellers who ultimately assign prices to items. How do they do this? Fundamentally, a price is based on what someone is willing to pay to obtain an item, and how much someone is willing to receive to give that item up.
Utility refers to the usefulness of an item and how the end users perceive it.
The array of utilities cryptocurrencies have is extensive. So much so, that many cryptocurrencies fall into the class of “utility tokens”.
Examples of the usefulness of different cryptocurrencies include the following:
- They are divisible and can be used as a means of payment
- They can provide access to network-specific products or services
- They’re verifiable on the blockchain and can’t be duplicated without the network being aware
- They can be a store of value as an alternative investment product
So, how do cryptocurrencies have value? The infographic below will summarise:
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Disclaimer: The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The opinions expressed by the author do not represent the opinion of BitPrime.
Image designed by the author. Please attribute credit if reproducing.
Last updated: 27/08/2018