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As more institutions accept crypto as a form of payment, the value goes up.
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  • Cryptocurrency is considered valuable in that demand exceeds supply.
  • Many investors believe crypto has the potential to be more useful than fiat currencies because it's decentralized and wouldn't be subject to inflation and other government or political pressures.
  • Currently, crypto acts more like an asset class than a currency. 
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Bitcoin is considered by many to be the first cryptocurrency, and since its mysterious origin in 2009, its value has skyrocketed. 

In the decade since Bitcoin's arrival, other cryptocurrencies, like ethereum and Tether, have also gained mainstream attention and grown in price. Still, crypto isn't a tangible thing and it's not tied to companies like stocks, so it begs the question: Why does crypto have any value at all?  

What makes crypto valuable?

In a very basic sense, cryptocurrency is valuable because people value it. "It comes from shared belief, from consensus," says Brock Pierce, chairman of the Bitcoin Foundation and co-founder of EOS Alliance,, Blockchain Capital, Tether, and Mastercoin. "People have a difficult time wrapping their heads around cryptocurrency because it doesn't fit into any of the conventional buckets." 

Though the word "currency" is in the name, at the moment, most crypto works much more like an asset. "At some point for most crypto, you're converting it back to a fiat currency," says Dr. Aleksandar (Sasha) Tomic, associate dean for strategy, innovation, and technology, and program director for the master of science in applied economics program at Boston College. 

However, Dr. Tomic explains that the true value of crypto, the underlying factor driving crypto's relevance, is the possibility to use it as a currency the same way you'd use a fiat currency like the US dollar or Euro. 

Being decentralized, crypto offers certain advantages that government-backed currencies don't. Take this example from Dr. Tomic's life: He lived in the Balkans in the '90s when there were heavy economic sanctions imposed on Serbian-led Yugoslavia, similar to those currently placed on Russia. "The local currency very quickly goes out of style, so to speak," Dr. Tomic explains. "Especially because there is high inflation." Crypto, being decentralized, is less impacted by inflation, other government intervention, or political pressures. 

"The fundamental value of cryptocurrency is in the ability to trade in that currency," Dr. Tomic says. Right now, crypto as a currency is exotic, and it's generally unusual to pay for something with bitcoin or one of the other currencies. "But if it becomes widespread," Dr. Tomic says, "That is the true promise of crypto, of it not just being yet another asset." The possibility that crypto could be used just as easily as any other currency is what makes crypto desirable. And since it's desirable, it's valuable. 

With that in mind, it's easier to see why people would want to get their hands on some of the digital tokens. Once that desire is in place, there are various principles that dictate how much cryptocurrency is worth on a given day:

1. Supply and demand

A key principle in microeconomics, the law of supply and demand shows the relationship between buyers and sellers. In simple terms, this means that the price of an item increases when the availability of the item decreases. Conversely, the item's price decreases when there is plenty of the item to go around. Essentially, when things are rare and wanted by many people, the value of the items goes up. 

Many cryptocurrencies, like bitcoin, have a limited supply. This factor is a primary reason the price of bitcoin continues to go up. As more and more people want to purchase bitcoin, many for the reasons Dr. Tomic outlined, it's worth more. The finite supply and increasing demand push the value of a single coin up. 

2. Buying low and selling high

In any setting where you're looking to invest, the key to making a profit is selling something for more money or resources than it took for you to acquire it. This basic theory backs the "buy the dip" strategy that certain investors use when looking at stocks or bonds, essentially aiming to buy a security for less money than they can get for it later. 

With crypto, some professional or retail investors will buy coins and hold them for a long time with the goal to sell them for more money in the future. In this way, users can hike up the price of the coins since the supply is essentially decreasing while the demand for it grows. 

3. Market perception

Market perception could be described as the way consumers view a product, service, or asset. "If you're the only person in the world that thinks something has value, it has sentimental value," Pierce says. However, if more than one person thinks something has value, that's where the market value comes from. If you think about art, the "true" value of a painting might just be the cost of the paint and the canvas. However, work by Van Gogh is perceived as being more valuable than work that uses the same raw materials by an unknown painter. 

This example illustrates the ways people's perception of "good" can immediately change how much that good costs. This directly relates to market value, because it explains how much the market is willing to pay. "When two people agree that something has value, that's where its value is derived from, and supply and demand determine the price," Pierce explains. 

With crypto, it's a new thing that receives wide media attention, and there are potentially big opportunities. Hearing success stories, or even watching the value of certain cryptos increase, all contribute to the way investors view the asset. 

Over time, if a company or particular asset builds a positive reputation among investors, they may speculate whether it's a good investment and potentially form positive opinions, which in turn could lead them to buy the asset. 

Crypto, like many other assets, is able to benefit from this, with demand increasing with perceived positive value. 

4. Mining 

Mining cryptocurrency requires an individual to solve complex mathematical equations to essentially validate new coins into circulation. As a reward for solving the problem, the miner is rewarded with a number of coins. 

It's a way to get into the crypto market through effort instead of a purchase. Though not every cryptocurrency is mined, well-known coins like bitcoin and ethereum are, and they can be lucrative for many who participate. Mining can impact both the supply of coins, as more are released into circulation, and the market perception, as more people get involved in "unlocking" new coins.  

Some investors will also participate in yield farming, an investment strategy that involves "locking up" cryptocurrencies for a specific period of time in exchange for interest and other rewards, like more coins. A centralized blockchain-based app will take investors' crypto and lend those assets out to others who are seeking credit. In theory, the creditor will pay interest, and both the depositor and the centralized app will keep a portion of it. However, this strategy can come with certain specific risks. 

The actual "locking up" process is often called "staking." This strategy reduces circulation and limits supply, therefore increasing the value of the coins. 

5. Utility and underlying technology 

As Dr. Tomic explains, utility is a key driver of cryptos' worth. As more institutions accept crypto as a form of payment, the value goes up. This also means individuals can contribute to this process by using crypto.

The underlying technology that powers most crypto, blockchain, can also prove to be extremely useful. "A blockchain is just a database," Pierce says. "With a database, you can do lots of things." Though there could be various real-world applications, Pierce notes it could be used to create a new asset class, a modern version of historic asset classes like gold, new utility, and even new tools to make equities more efficient.

Key characteristics of a currency 

So what does it take for crypto to reach the threshold where it can be used just as easily as any other currency? Economists often classify different characteristics a currency should possess to be useful. 

  • Acceptability: This means that the currency is widely accepted. Right now, some but not many, sellers will accept bitcoin or other cryptocurrencies as a form of payment. "With crypto, which one will have the infrastructure in place to be accepted as the medium of exchange?" Dr. Tomic questions, noting that bitcoin appears to be in the lead for now. 
  • Divisibility: Another key characteristic of currency is its ability to be divisible into smaller units. Both cryptocurrencies and fiat currencies are divisible, but crypto is often more so. For example, bitcoin can be divided up to 8 decimal places.
  • Durability: Currency should be reusable so it can be useful in future situations. For this reason, perishable items, though used throughout history, are not standard forms of currency. Crypto meets this requirement. 
  • Fungibility: Fungibility means there is a widely accepted value of an item and two of those items can be exchanged without either party losing value. Unless you have a rare coin, you can easily exchange one quarter for another. On the other hand, diamonds aren't fungible, and wouldn't be great units of money because size and clarity, among other factors, determine their worth. For the most part, dollars and cryptocurrencies are both fungible.  
  • Limited supply: For money to be exchangeable for other goods or services, it can't be available so abundantly that no one wants it. Many cryptocurrencies do have this limited supply. 
  • Portability: If you can't easily transport currency when you need to, it becomes much less useful. Physical currency is easily portable, even more so now with debit cards. Crypto can be carried through investing or brokerage apps and crypto wallets, which allow you to store and transfer cryptocurrencies. "You can send crypto anywhere in the world instantaneously," Pierce says.  
  • Stability: Lastly, a currency's value should be stable or increase in value over time. Otherwise, the goods or services you can purchase with a currency would have to be re-valued over and over again. Presently, crypto isn't very stable, what you can get with one crypto coin can change by the day, even by the hour. 

Getting to the root value of crypto, "is completely based on its acceptability," Dr. Tomic explains. "Enough people have to agree to accept payments in crypto so that it can serve as currency." Largely, infrastructure will drive that acceptability.  

Stocks vs. crypto

Crypto can "feel" like stocks because they have many similarities on a surface level. Both are intangible assets that can grow passively — or drop in value — over time, and both could easily be part of an investment portfolio. But they're not as similar as they may seem. 

Stocks are equity assets that represent ownership in a company, where the value of each share correlates with the organization's performance, supply and demand, and market perception.

Some companies will also pay out dividends to shareholders based on how well the company is doing. While every company's stock doesn't grow forever, the stock market as a whole has always trended upward. This is is because businesses will always adapt or be invented to meet the demand of the market. 

On the other hand, cryptocurrency is essentially competing to be as relevant as the US dollar, the Euro, or the Swiss Franc. "The true value of crypto will be: 'will you be able to actually conduct your transactions in crypto?'" Dr. Tomic says. While that "battle" plays out, the market has taken an interest in these digital coins, increasing the demand despite the limited supply and therefore increasing the value of each digital asset. 

When thinking about where to invest your money, consider the difference between the two vehicles. 

The bottom line 

Cryptocurrency's value is derived completely from the public's perception of its value. "We the people are ascribing value to the things that we have a shared belief around," Pierce says. Still, as Dr. Tomic explains, cryptocurrency's underlying, long-term, "true" value is still to be determined. "It's still very early," he says. The reason cryptocurrencies remain volatile at the moment is because it's "very difficult to get to that fundamental value," Dr. Tomic says.

Ultimately, the cryptocurrency that can be used as an everyday currency will be the most valuable long-term, which is what keeps people interested in owning the coins they do. "Which crypto will be able to live up to that potential is probably the few trillion-dollar questions," Dr. Tomic says.

Katherine McLaughlin is a writer based in Brooklyn, New York. Though she consistently forgets to post, you can still connect with her on Twitter or at her personal website