Wednesday, June 29, 2022

Why Does Cryptocurrency Have Value

The Fall Of The Gold Standard

What Gives Cryptocurrency Value and How Does it Gain Value?

With World War I, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.

At the same time, a desire to return to the idyllic years of the gold standard remained strong among nations. As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and U.S. dollar became the global reserve currencies. Smaller countries began holding more of these currencies instead of gold. The result was an accentuated consolidation of gold into the hands of a few large nations.

Then, in 1934, the U.S. government revalued gold from $20.67/oz to $35/oz, raising the amount of paper money it took to buy one ounce to help improve its economy. As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation.

What Gives Crypto Its Value

Where does crypto get its value? Where does anything get its value?

Its really quite simple: If enough people agree that something is valuable, it becomes valuable. That was how ancient currencies like gold or even cowrie shells derived their value, and this applies to the value of artwork. It doesnt matter why people desire something, only that the desire exists in high enough volumes. This is the point at which economic value is generated.

The given price of an underlying asset will depend on the characteristics of the market and, just like many central bank currencies, each token in the crypto space has different characteristics to prevent depreciation and help retain its value in the market.

The characteristics of a good currency are:

  • Fungibility one unit of a currency is identical to another unit
  • Durability its not physically perishable and can be used in the future
  • Portability Its easy to move around, even in large quantities
  • Recognizability people recognize and accept it, and less effort is required to decide its value
  • Stability its value does not change significantly compared to the goods and services for which it is being exchanged
  • Crypto tokens also have a lot in common with company shares, or equity. In the stock market, a companys worth is called market capitalization, which is calculated by multiplying the companys stock price by the number of shares held by all shareholders.

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    How Can You Mine Cryptocurrency

    Mining is how new units of cryptocurrency are released into the world, generally in exchange for validating transactions. While its theoretically possible for the average person to mine cryptocurrency, its increasingly difficult in proof of work systems, like Bitcoin.

    As the Bitcoin network grows, it gets more complicated, and more processing power is required, says Spencer Montgomery, founder of Uinta Crypto Consulting. The average consumer used to be able to do this, but now its just too expensive. There are too many people who have optimized their equipment and technology to outcompete.

    And remember: Proof of work cryptocurrencies require huge amounts of energy to mine. Its estimated that 0.21% of all of the worlds electricity goes to powering Bitcoin farms. Thats roughly the same amount of power Switzerland uses in a year. Its estimated most Bitcoin miners end up using 60% to 80% of what they earn from mining to cover electricity costs.

    While its impractical for the average person to earn crypto by mining in a proof of work system, the proof of stake model requires less in the way of high-powered computing as validators are chosen at random based on the amount they stake. It does, however, require that you already own a cryptocurrency to participate.

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    What About Bitcoin And Taxes

    Bitcoin is not a fiat currency with legal tender status in any jurisdiction, but often tax liability accrues regardless of the medium used. There is a wide variety of legislation in many different jurisdictions which could cause income, sales, payroll, capital gains, or some other form of tax liability to arise with Bitcoin.

    What About Bitcoin And Consumer Protection

    Why Cryptocurrency Has Value

    Bitcoin is freeing people to transact on their own terms. Each user can send and receive payments in a similar way to cash but they can also take part in more complex contracts. Multiple signatures allow a transaction to be accepted by the network only if a certain number of a defined group of persons agree to sign the transaction. This allows innovative dispute mediation services to be developed in the future. Such services could allow a third party to approve or reject a transaction in case of disagreement between the other parties without having control on their money. As opposed to cash and other payment methods, Bitcoin always leaves a public proof that a transaction did take place, which can potentially be used in a recourse against businesses with fraudulent practices.

    It is also worth noting that while merchants usually depend on their public reputation to remain in business and pay their employees, they don’t have access to the same level of information when dealing with new consumers. The way Bitcoin works allows both individuals and businesses to be protected against fraudulent chargebacks while giving the choice to the consumer to ask for more protection when they are not willing to trust a particular merchant.

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    The Gold Standard: A History

    “We have gold because we cannot trust governments,” President Herbert Hoover famously said in 1933 in his statement to Franklin D. Roosevelt. This statement foresaw one of the most draconian events in U.S. financial history: the Emergency Banking Act, which forced all Americans to convert their gold coins, bullion, and certificates into U.S. dollars. While the legislation successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, people who are forever confident in gold’s stability as a source of wealth.

    Gold has a history like that of no other asset class in that it has a unique influence on its own supply and demand. Gold bugs still cling to a past when gold was king, but gold’s past also includes a fall that must be understood to properly assess its future.

    What Are The Disadvantages Of Bitcoin

    • Degree of acceptance – Many people are still unaware of Bitcoin. Every day, more businesses accept bitcoins because they want the advantages of doing so, but the list remains small and still needs to grow in order to benefit from network effects.
    • Volatility – The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small compared to what they could be. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up currency, so it is truly difficult to imagine how it will play out.
    • Ongoing development – Bitcoin software is still in beta with many incomplete features in active development. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still in the process of maturing.

    Read Also: How To Cash Out Your Bitcoin

    Two Primary Paths For Using Crypto

    The first question to ask when considering using crypto in your companys operations is: Do we hold crypto on our balance sheet or simply adopt crypto-enabled payments? To determine the right path for your business, you need to make a careful determination of the best fit for your business objectives. Consider the potential benefits, drawbacks, costs, risks, system requirements, and more. The following sections will provide some broad considerations around two different paths as your company embarks on its crypto journey.

    Enabling payments: Hands-off

    Some companies use crypto just to facilitate payments. One avenue to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a hands-off approach that keeps crypto off the books.

    Enabling crypto payments, such as bitcoin, without bringing it onto the companys balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.

    Inflation Of Fiat Currencies

    Why Does Bitcoin Have ANY Value?

    If the price of a fiat currency falls, then the price of Bitcoin would go up with respect to that currency. This is because you will be able to get more of that currency with your Bitcoins. This phenomenon can be seen today, since the FED, the ECB and other central banks have been printing more and more money and keeping interest rates artificially low.

    Figure 1: Sketch of the differences in the price development of a cryptocurrency and the US Dollar

    Read Also: What Crypto Should I Invest In

    Cryptocurrency Supply And Demand

    The value of anything is determined by supply and demand. If demand increases faster than supply, the price goes up. For example, if there’s a drought, the price of grain and produce increases if demand doesn’t change. The same supply and demand principle applies to cryptocurrencies.

    The supply of a cryptocurrency is always known. Some, such as Bitcoin, have a fixed maximum supply. Others, like Ether , have no cap on supply. Some cryptocurrencies have mechanisms that “burn” existing tokens to prevent the circulating supply from growing too large and slowing inflation. Burning a token means sending them to an unrecoverable address on the blockchain.

    The monetary policy of each cryptocurrency is different. Bitcoin supply increases by a fixed amount with each new block mined on the blockchain. Ethereum offers a fixed reward per block mined, but it also pays out for including “uncle blocks” in the new block, which helps facilitate the efficiency of the blockchain. As a result, the supply increase isn’t as fixed. Some cryptocurrency supplies are dictated entirely by the team in charge of a project, which can opt to release more of a token to the public or burn tokens to manage the money supply.

    Bitcoins Value In Systems Of Trust

    Trust is an essential part of any valuable item or commodity. Losing trust in a central bank is disastrous for a nation’s currency. Likewise, to use international money transfers, we have to trust the financial institutions involved. There is more inbuilt trust in Bitcoin’s operations than other systems and assets we use daily.

    However, Bitcoin users don’t need to trust each other. They only need to trust Bitcoin’s technology, which has proven to be very reliable and secure and the source code is open for anyone to see. Proof of Work is a transparent mechanism that anyone can verify and check themselves. Its easy to see the value here in generating consensus that is almost always error-free.

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    Identify Your Companys Path And Develop A Road Map

    Crypto is viewed by some as a critical part of the evolution of finance. When your company chooses to engage with crypto, that triggers changes across the organization, as well as changes in mindset.

    As with any technology change or upgrade, there is a need for an implementation plan. That plan should include, but is not limited to, these types of questions:

    • What is the overall strategy?
    • What are the short-term and long-term objectives?
    • What partners, internal and external, does the company need to involve? Can leaders identify effective champions for the effort across the enterprise, in all relevant departments?
    • Will the decisions and actions the company takes now allow for flexibility and scaling of efforts later?
    • How can the company integrate the security needs of operating in the digital asset ecosystem with existing security and cyber efforts in the company?
    • How does the company implement the introduction of crypto? Does it begin with a payments-only, hands-off approach? Or does it engage hands-on?
    • What resources will the company need above and beyond those it currently has? What new expertise might it need?
    • What will the implementation road map look like?
    • How will the company evaluate progress as it implements? Does the company have the necessary processes in place to monitor the execution of transactions and vendor performance?
    • What does the final state before launch look like?

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    How Do I Buy Cryptocurrency

    Why does Cryptocurrency have Value?

    While some cryptocurrencies, including bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.

    To buy cryptocurrencies, youll need a wallet, an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as bitcoin or Ethereum. Here’s more on how to invest in bitcoin.

    Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as eToro, Tradestation and Sofi Active Investing. Robinhood offers free cryptocurrency trades .

    Also Check: Where Is The Nearest Bitcoin Machine

    How Is Bitcoin Valued

        Bitcoin is a major digital currency or cryptocurrency. Unlike the dollar, euro, pound, yen, peso, and other government-backed currencies, cryptocurrencies are not officially supported by any central bank or government. The currency has traditionally traded in an open marketplace similar to the stock market, where buyers and sellers can exchange their local money for bitcoin or vice versa.

        While some cryptocurrency exchanges host trading platforms that have slight variations in prices, the overall market price of bitcoin is the latest price at which a transaction occurred. However, bitcoin value is much different and depends on the investorsome say that the intrinsic value of bitcoin is much higher than market value others claim bitcoin might not be worthless.

        Learn more about how bitcoins price is set, how to interpret its value, and how you can get in on the latest bitcoin action.

        How Does Bitcoin Work

        From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. This is how Bitcoin works for most users.

        Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain”. This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining”. To learn more about Bitcoin, you can consult the dedicated page and the original paper.

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        Can Bitcoin Scale To Become A Major Payment Network

        The Bitcoin network can already process a much higher number of transactions per second than it does today. It is, however, not entirely ready to scale to the level of major credit card networks. Work is underway to lift current limitations, and future requirements are well known. Since inception, every aspect of the Bitcoin network has been in a continuous process of maturation, optimization, and specialization, and it should be expected to remain that way for some years to come. As traffic grows, more Bitcoin users may use lightweight clients, and full network nodes may become a more specialized service. For more details, see the Scalability page on the Wiki.

        What Does Synchronizing Mean And Why Does It Take So Long

        Why Do Bitcoin & Cryptocurrency Have Value? (7 Reasons)

        Long synchronization time is only required with full node clients like Bitcoin Core. Technically speaking, synchronizing is the process of downloading and verifying all previous Bitcoin transactions on the network. For some Bitcoin clients to calculate the spendable balance of your Bitcoin wallet and make new transactions, it needs to be aware of all previous transactions. This step can be resource intensive and requires sufficient bandwidth and storage to accommodate the full size of the block chain. For Bitcoin to remain secure, enough people should keep using full node clients because they perform the task of validating and relaying transactions.

        Read Also: Why Should I Invest In Cryptocurrency

        Where Is The Safest Place To Buy Bitcoin

        The 10 Best Places to Buy Bitcoin in 2021

      • eToro. Best for: Beginners.
      • Coinbase. Best for: Keeping your money safe.
      • CoinBurp. Best for: Speed and simplicity.
      • Capital.com. Capital.com is another online CFD and stock broker designed specifically for experienced investors.
      • Binance. Best for: Currency choice.
      • Robinhood.
      • Bitpanda.
      • Is Bitcoin Useful For Illegal Activities

        Bitcoin is money, and money has always been used both for legal and illegal purposes. Cash, credit cards and current banking systems widely surpass Bitcoin in terms of their use to finance crime. Bitcoin can bring significant innovation in payment systems and the benefits of such innovation are often considered to be far beyond their potential drawbacks.

        Bitcoin is designed to be a huge step forward in making money more secure and could also act as a significant protection against many forms of financial crime. For instance, bitcoins are completely impossible to counterfeit. Users are in full control of their payments and cannot receive unapproved charges such as with credit card fraud. Bitcoin transactions are irreversible and immune to fraudulent chargebacks. Bitcoin allows money to be secured against theft and loss using very strong and useful mechanisms such as backups, encryption, and multiple signatures.

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