What is it about crypto that makes it valuable? At the end of the day, it’s just code in a distributed ledger. Unlike gold, you can’t forge it into an impressive crown or use gold bars to dazzle others with your wealth. Yet crypto value still exists. This article explains why.
Supply and Demand
The price of crypto is driven by the same basic forces that drive all asset values – supply and demand. The rate of US Dollars, Euros, British Pounds and all the others are determined by the international foreign exchange markets. The crypto value of each coin is similarly determined by the swings of prices on crypto exchanges such as CEX.io.
Admittedly, it is hard to see any of the traditional markers of value that people are used to. Crypto does not have revenue growth, net profit or pay a dividend. The only thing that determines the price of crypto is what other people are prepared to pay for it – but it turns out, that is enough.
But, if we were to just leave it there by saying that “prices are driven by supply and demand”, then we still aren’t really much closer to knowing what makes the crypto value what it is. Why is there demand in the first place?
At this point, many experts will point to the scarcity factor as a way to explain crypto value. The supply schedule of Bitcoin is very limited – the core software protocol of Bitcoin ensures that only 21 million Bitcoins will ever be issued. Many of the other cryptocurrencies have similarly limited issuance schedules. Unlike fiat currency, there cannot be an infinite amount created, which is a big advantage of crypto over government-issued money. No central authority can arbitrarily decide to print more Bitcoin and thus devalue the savings of existing holders, as they can with fiat money.
This is indeed a very important property of crypto, but scarcity is not the full story. Just being scarce isn’t enough to make something valuable. Scarcity is a necessary condition of value, but is not (by itself) a sufficient condition. For example, there are certain rare metals which, although uncommon, we don’t really pay much attention to. They have no special utility, so we largely ignore them.
Gold is different. Why? Gold is not only rare, but is also universally considered very beautiful. Additionally, gold has impressive physical properties – it is highly durable and fungible, and is an excellent conductor of heat and electricity. Gold can be melted down and and re-formed but never loses its luster. These properties help explain why gold is a signifier of wealth, power and prestige, and why human civilizations have used gold as money for thousands of years.
So what is the special utility of this computer code that grants crypto value? What can you do with cryptocurrency that you can’t do with anything else?
Special Utility – The Reason For Crypto Value
In the modern world, much commerce takes place digitally – oftentimes across borders. For all of gold’s advantages, physical gold ingots do a terrible job of facilitating small payments. It is also difficult to transport internationally. Gold is great as a store of value, but is poor as a means of payment.
Crypto’s special utility is that it combines some of the best aspects of rare, valuable commodities like gold (very limited issuance, privacy) with the best aspects of fiat money (digital, highly divisible, transportable electronically over long distances).
Bitcoin’s anonymous founder, Satoshi Nakamoto, was fond of comparing Bitcoin to physical commodities. Exhibit this passage from a forum post in August 2010.
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
- boring grey in colour
- not a good conductor of electricity
- not particularly strong, but not ductile or easily malleable either
- not useful for any practical or ornamental purpose
- And one special, magical property: can be transported over a communication channel
As Taylor Pearson pointed out in his article Why Is Bitcoin Valuable?,
“Transactions on the Bitcoin network are unstoppable. If I have an Internet connection and agree to pay the network’s fee, nothing can stop me from sending Bitcoin to anyone I want.”
This, then, is the real unique thing that gives crypto value. It can facilitate payments for people who need an electronic, censorship-resistant way to do so – for those who don’t have access to the banking system, or want their activities to be hidden, crypto value most assuredly exists.