Why do cryptocurrencies have value?

The price volatility of cryptocurrencies like Bitcoin has changed drastically since the first
Bitcoin was mined in 2009. Over the next decade, the price of Bitcoin has risen and fallen for
many reasons, but why how does a “virtual currency” like Bitcoin have value?

Fiat Currencies

The Dollar. The Rupee. The Pound. All of these are fiat currencies that central banks in different
countries control. In the past countries like the United States relied on the Gold Standard,
meaning the value of the dollar was backed by the value of gold. Present day, most currencies are
not supported by commodities and instead rely on a system of trust in the central bank and
government.

This idea of trust is reciprocated in cryptocurrencies. If the trust in a cryptocurrency grows, the
demand from users for that currency also grows, increasing the value.

Pinpointing Demand For Crypto

There are a variety of different ways where cryptocurrencies actually get demand, most
connected to the utility of a certain coin or its role in Defi (Decentralized Finance)

Transparency, Security, and Privacy

All transactions that take place on the blockchain are broadcasted publicly for other users on the
blockchain to see and verify. Since miners work on validating all transactions using a Proof of
Work algorithm, it ensures that no malicious transactions are made. Malicious attacks can only if
a user owns 51% of the mining power, allowing them to override other miners and validate false
transactions. However, the energy, power, and scale needed to do this on blockchains like Bitcoin
are not feasible.
As more users join the blockchain, it continues to build trust for the cryptocurrency as users are
willing to put their money into that specific coin.

Speed, Cost, and Anonymity

Cryptocurrencies have no public connection to personal information like names, addresses, or
location. Through just public and private keys, users can send large quantities of money without

questioning from authorities like a bank or the government. These transfers can happen
instantaneously with minimal fees.
Users who participate in illegal or illicit activities find utility in cryptocurrencies because of this
anonymity. By holding more money in crypto wallets, these users demand these
cryptocurrencies giving them value.

Scarcity

Specifically for Bitcoin, only 21 million will ever be mined on the Blockchain. Every 4 years the
amount of Bitcoin received for mining a new block will be cut in half until 2140 when the last
Bitcoin will be mined.
Like any other commodity, cryptocurrencies rely on the law of supply and demand; with the
dwindling supply of Bitcoin, but constant demand for the cryptocurrency, Bitcoin’s value
continues to grow.

Utility in Decentralization

Crypto has grown in its applications for retail transactions, especially in countries like Venezuela
with high inflation and devalued currencies.
Cryptocurrencies have become a way to have stability in many failing economies like Venezuela
and countries under duress like Ukraine. Paying in cash isn’t feasible with the constantly
changing exchange rate and holding cryptocurrencies counteracts the loss of purchasing power
from inflation. Additionally, cryptocurrencies are a gateway to sending back remittances without
relying on the centralized banking system.
Now in big cities in Venezuela, it’s even possible to shop in the street with a digital wallet using
currencies like Bitcoin, Ether, and Dash.
Citizens in these countries see value in cryptocurrencies in the utility they provide for retail
transactions.

Closing Thoughts

Although there are many other forms of utility that we didn’t touch on in this article, it all
connects back to the demand for the coin and the users’ trust in the system. To launch a
cryptocurrency of your own please reach out to our Agira Tech team for a demo.