Ever wondered why Bitcoin (BTC) is worth what it is or why Ethereum's (ETH) value fluctuates? Understanding what gives cryptocurrencies their value is crucial for anyone navigating the digital asset space.
In this guide, we'll explore the factors that determine a token's value and what sets valuable cryptocurrencies apart from the rest.
What Determines a Token’s Value?
The Basics of Currency Valuation
Currencies, whether fiat or digital, derive their value through a mix of utility, scarcity, and collective agreement. For instance, the Philippine Peso (PHP) is tied to global exchange rates, enabling international trade. Historically, currencies like the US Dollar were pegged to gold under the Bretton Woods Agreement, ensuring stability by backing them with tangible assets.
Although the gold standard ended in 1971, fiat currencies today maintain value primarily through trust and widespread acceptance.
The Bretton Woods Agreement collapsed in 1971 when the US Government tried to devalue the US Dollar to Gold, which caused a bank run on Fort Knox, where the US Gold was kept. Everyone wanted to exchange their US Dollar back for gold but at Fort Knox, there wasn’t enough gold, which ultimately led the US government to unpeg the US Dollar from gold.
The Core Concept: Perceived Value
A currency—or any asset—has value because people collectively agree it does. This applies to everything from traditional currencies to artwork, non-fungible tokens (NFTs), and cryptocurrencies.
Economic Principles Behind Token Value
Supply and Demand
As with any economic model, token prices are influenced by market dynamics. Limited supply often leads to increased value, as seen with Bitcoin's capped supply of 21 million coins.
Utility
Tokens with specific use cases often hold greater value. For example:
- DeFi Tokens: Enable liquidity provision or staking.
- Utility Tokens: Provide discounts, rebates, or access to exclusive services. Ethereum, for instance, powers smart contracts and decentralized applications (DApps), increasing its demand and value.
Intrinsic Value
Cryptocurrencies like Bitcoin also have intrinsic value tied to mining costs. The average cost to mine one Bitcoin globally is approximately $35,404.03, factoring in energy and hardware expenses. Scarcity further boosts its value, much like gold.
Characteristics of a Strong Currency
There are many different currencies in the world and in 2008, Satoshi Nakamoto
introduced Bitcoin to the world which changed the way the world saw money. A robust currency—digital or otherwise—shares these five traits:
Fungibility
One unit is interchangeable with another. For example, 100 pesos will be equal to 100 pesos regardless of the combination of notes. In another example, BTC is a better currency than cows, because 1 BTC is 1 BTC but every cow is unique and different.
Durability
Currencies must withstand repeated use. Bitcoin, stored digitally, offers durability compared to physical goods like tulips historically used as currency.
Portability
Cryptocurrencies excel here, allowing seamless transfers across borders without the need for physical transport. Currencies should be easy to move around because we wouldn’t want to be carrying gold bars around because it will get tiring after a while.
Recognizability
The more recognizable and widely accepted a currency is, the more valuable it becomes. Bitcoin is accepted on numerous platforms compared to less-known tokens. In an other example, the US Dollar is a better currency than the Venezuelan Bolivars.
Stability
Stability ensures a currency retains value over time. We want a currency that doesn’t change its value significantly compared to the goods and services that is it exchanged for. In this case, USDC is a much better currency than BTC.
Digital assets can be useful as a currency and in specific cases, some digital assets function better than traditional currencies. Some of these digital assets have a utility that unlocks certain services, platforms, or memberships, like owning and staking $LOOKS token on their website giving you a profit share of the marketplace sales, or owning tokens that give you discounts and rebates off your trading fees can make these tokens more valuable than traditional currencies.
What Makes Cryptocurrencies Valuable?
Widespread Adoption
The more a cryptocurrency is integrated into platforms, exchanges, and real-world use cases, the more valuable it becomes. For instance, ETH is widely used for transaction fees in decentralized finance (DeFi) protocols like SushiSwap.
Utility in DeFi
Cryptocurrencies with utility in staking, yield farming, or governance gain additional value. For example:
- $LOOKS Token: Offers profit-sharing on the LooksRare NFT marketplace.
- Staking Rewards: Tokens like ETH can generate returns for validators, adding financial incentive.
Scarcity and Max Supply
Limited supply ensures scarcity, a key driver of value. Unlike fiat currencies subject to inflation through overprinting, cryptocurrencies often have a hard cap coded into their blockchain.
Intrinsic Value and Practical Examples
Comparing Utility
Consider a scenario where you win a prize:
- P50,000 in an Amazon Gift Card: Usable widely with various options.
- P50,000 in a local store voucher: Limited in use.
In crypto, tokens with broader utility (like ETH) are inherently more valuable than those with niche applications.
Start Your Crypto Journey with Coins.ph
Coins.ph is your gateway to the world of cryptocurrencies. As a Bangko Sentral ng Pilipinas (BSP)-regulated platform, Coins.ph makes it easy to convert PHP into BTC, ETH, and other digital assets.
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