Why Is Cryptocurrency Worth Anything? Unknown Secrets

Published: April 19, 2024 | Last Updated: January 31, 2023

Markos Koemtzopoulos

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

So why is cryptocurrency worth anything? Really now. I can’t meet any of my everyday needs with it. Can’t buy coffee. Can’t buy groceries. Can’t buy shoes or clothes. I can’t pay my utility bills or Netflix subscription. I can’t pay my mortgage installments with it, medical expenses or private school fees for my kids. I can’t use it on vacation or for transportation. The whole damn thing sounds pretty useless to me. They should remove the word “currency” from the term and stick with “crypto”. Or even better christen it “Cryptic” because no one really understands what this thing is about in the first place.

why is cryptocurrency worth anything
Why Oh Why

Dude dude! Calm down. You are getting the wrong end of the stick. Think of it like gold. A digital store of value. After all, most of your precious dollars in the bank account are digital.

Yeah, but…Bro! I want to be able to hold the thing.

Like, with my digital dollars I can go to the ATM and print out a dollar at any darn time I want to. Also, you can’t melt crypto down to make jewelry or put it to industrial use like you can with gold. Crypto literally has no utility. What is wrong with people! Really?

I think crypto is a big bubble and it’s all going to go away.

mckinsey wrong prediction on mobile phones
People have got things famously wrong in the past. Here the consulting firm McKinsey on Mobile Phones. Source: Stackexchange.com

The tulipmania argument

Remember that history class about tulipmania in the Netherlands? I looked it up.

In 1637 a tulip bulb would sell for as much as $1250 in current American dollars. What the fungus man? What’s wrong with people? Of course at some point people realized how irrational this was and the whole thing came crashing down. Crypto is new-age Tulimania, that what it is. TULIPMANIAAAA!!!

guy angry about crypto
How some people feel about crypto
Tulip price graph
Tulip prices crashed suddenly after about a year. Source: wikipedia

Ok calm down. You’re having a fit. Listen to what I have to say. Crypto is not like Tulipmania. Yes, it is unstable and fluctuates wildly but there are some good reasons that it holds value.

Yeah? Like What?

Cryptocurrency is worth something because it is a medium of exchange.

Well for one thing, despite what you assume, crypto is a medium of exchange. This is fancy language used by economics professors who like to complicate things in case someone figures out that they don’t really know what is going on.

But what it means is that you CAN buy certain things with cryptocurrencies. Most notably, you can buy other cryptocurrencies. And some of those cryptocurrencies are called NFTs and represent ownership of virtual goods and art. If you want to understand NFTs check out my explanation for Ape Coin.

NFTs on Atomic Hub
Atomic Hub is a marketplace for NFTs. You need a coin called WAXP to buy stuff from it. From “What is WAX crypto.”

Also, cryptocurrencies are making a big breakthrough in gaming. You can’t ignore Facebook’s rebranding to Meta, the massive amount of venture capital invested in the crypto gaming space or the fact that there are more than 2Bn gamers out there, many of whom are slowly transitioning to online economies where the major currency is some form of cryptocurrency.

axie infinity homepage
Axie Infinity is the most popular blockchain game. You need the AXS token to play the game.

Ok, but dude! What I am asking is, “why is cryptocurrency worth anything”. Put another way the questions is, “why are people willing to accept crypto as payment” and you are saying “because people are using it to buy stuff”. Dude, that’s not a very useful answer. It’s like me asking “why do cats have tails” and you replying “Cats have tails because they have tails”.

OK, let’s look at this differently. Forget about bitcoin and the commonly propagated store-of-value narrative for a moment. Let’s split cryptocurrencies into 3 groups

The 3 ways to think about crypto coins and tokens

The first group only contains one cryptocurrency: bitcoin. It’s gets its own separate category just because it was the first and is still the largest crypto by market cap by far. Put it to the side and forget it about it for a moment.

To fully understand crypto read What is a Bitcoin and how does it work.

The second category contains Alt coins. These are alternatives to bitcoin that promised something better. They promised to make it easier to program stuff on blockchains. In this category you’ve got Ethereum, who were the first to think this way, and then all of the copycats who thought they could make something sleeker, better and faster than Ethereum: Cardano, SolanaCosmosPolkadot and so on.

Then, finally, in the third category you have all the tokens from protocols that have been built on top of the platforms in category 2. For example, on the Ethereum blockchain anyone can “print” a token and then that token can have some special use within the protocol that was built on top of Ethereum. For example, Compound is a decentralized lending and savings platform. You can use their COMP token to vote on governance decisions like what the interest rate for borrowing should be.

With me so far? Ok now let’s try to understand why Alt coins, the second category, hold value

Some Cryptocurrencies are like a ticket to a theme park

Let’s talk about theme parks.

What about them?

I find it useful to think of alt coins like an entry ticket to a theme park. You can use the token in the theme park to purchase rides and other stuff. If the platform creates value then others will want to buy the token from you so they can enter the theme park. The value of the token reflects all the value that has been created as well the expected value of might be created in the future. If you expect that your theme park is going to build the most awesome roller coaster in the world you might decide to hang on to your token until you can sell it at a higher price.

Theme park entry ticket
Alt coins are like entry ticket to a theme park

How crypto works in a nutshell

For those of your who didn’t get the analogy here is how crypto works. You need the Alt coin to do stuff on the Alt coin’s platform. That’s why they call it the platform’s native coin. For example, to do stuff on the Ethereum network you need ETH. ETH is the fuel that powers Ethereum’s economy. Another name they use for it is “gas”. For example If you want to trade on Uniswap, which is an exchange built on Ethereum, you need some ETH. If you want to buy any other token that has been created on Ethereum you need ETH for the transaction to go through. Hence, to transact with stuff built on Ethereum you need ETH.

A more boring way to think of this is to imagine the token as the currency of a mini economy. Some economies don’t exist yet. For example, Aptos is valued at $9Bn but has zero things on it. It has just launched. It’s just like a big land clearing on which some people who are respected in the industry (they ‘re all ex-Facebook), have promised to build an amazing city but it’s not there yet.

Construction site
Aptos is a like a construction site. People are buying up the token because they believe in the developers of the project.

In a nutshell, Alt coins are worth something because people want to use them NOW to do stuff on the Alt coin’s platform. Add to that the speculation and exuberance of what the future might hold and you have got yourself the current recipe for extreme price swings and high volatility.

OK, what about the protocol tokens?

Why protocol tokens hold value: a mixed bag of irrational expectations, utility and rewards.

With protocol tokens you really need to examine them one by one. You have tokens that offer utility and others whose use is less clear.

For example Yearn FinanceUniswap, Compound and MakerDAO with its DAI stablecoin all issue “governance” tokens whose main function is to be able to vote on mundane governance proposals. In my view many of these are overpriced. In some cases, like Curve Finance, there is economic value to be obtained if you can sway the vote in favor of a decision that benefits you. But most of the time it is pure hype that is propping up the price of such tokens. If everyone is buying then you also FOMO into buying. If on the other hand the market is bearish then you also panic and sell.

Protocols that hold utility

However, some protocol tokens may offer utility. Maybe it’s the currency used to purchase in-game virtual items. Or maybe you need some of the utility token to perform transactions on the protocol. This takes us back to the theme park analogy where the price of the token reflects some base level demand for the token’s demand within the protocol.

Keep in mind that some tokens do offer monetary rewards, usually if you stake them. Staking is just another word for locking up. For example, when you stake the SUSHI token on SushiSwap, a decentralized trading exchange, then you earn a  reward fee of 0.05% on all trades. Similarly, other tokens might hold value because there is the expectation that they might offer rewards in the future even if they offer nothing today. For example, Uniswap does not currently offer UNI token holders a cut from trades but there is some expectation that token holders might vote on such an amendment in the future.

With me so far? Good because it’s time to tackle the most mother of all cryptocurrenies: bitcoin

Why is Bitcoin worth anything?

I have placed bitcoin in its own category because it is the original cryptocurrency. Developed by Satoshi Nakamoto in 2008 it has been proclaimed dead by false prophets more often than any other coin.

Bitcoin doesn’t allow you to buy stuff. It’s slower than other crypto platforms and it only does one thing: it’s trying to be a form of money

Before we dive in, I want to frame bitcoin for you. A common complaint I hear is that it’s not a share or a bond. It does not represent ownership in an entity that coordinates human activity to elevate human progress like a share does.

So why do people value it? And why can’t people make up their minds about how much it is worth? Why on earth is the price of bitcoin ~$20K now when just last year it was trading at an all time high of $68K? It should be zero. It’s going to zero. After all it’s an abstract notion concocted out of our imagination. You can’t even touch the thing.

So yeah you are right. It’s not a stock and does not represent work done by others.

Does that mean bitcoin does not have intrinsic value? Let’ explore this further.

Cash, dough, dinero, bread, bacon, greenbacks. What is money?

First, let’s talk about cash. What about it?

The US money supply reached  $21 trillion this year. One trillion is a million million.

But what if we think of it like this: Let’s call a stack of $1Mn in cash a MegaDollar. There are 21 million MegaDollars and each is worth $1Mn. Just like there are 21 Million bitcoin and each is worth $20,000.

a million dollars
A million dollars!

This helps me frame the question a little better. It’s better if we use a different currency to see the analogy. Why is a MegaDollar worth €1Mn (Euro) today when just a few months ago it was worth €900,000? See, the u.s. dollar also sways in value. It’s just that it is way less volatile than crypto.

So yeah the best way to think of bitcoin is like money.

When I say its money you are going to come back at me with the “Yeah, but I can’t buy every day stuff with bitcoin” argument. But you need to think of what constitutes money more broadly. Stay with me because we are going on a journey.

It’s not there but we all agree it is

Now, I am going to get all philosophical on you. What is money anyway? Why is a dollar worth a dollar? Why have we all agreed that little strips of paper printed by a particular machine are worth a specific amount.

getting philosophical about crypto
Time to get philosophical about money

It’s a common delusion.

Fiat currency holds value because we all have decided to agree that it holds value. If everyone woke up one day and decided that the dollar is worth zero you would not be able to sway public opinion. Money holds value because we all commonly agree that it does. Period.

Like Yuval Noah Harari says: ” money is a “faith-based object” whose value is derived by the shared narrative about its worth. The same is true for other non-utilitarian objects, such as gold — it is also intrinsically worthless, since you can’t eat it, or fashion tools or weapons out of it.”

Money wasn’t always money

If you go back in time and you will see that, throughout human history, what people agree is money hasn’t always been the same. Shells, feathers, salt , cattle, tea and whiskey are just some forms of money that have been used across civilisations.

why is cryptocurrency worth anything: a RAI stone
Rai stones on the Yap islands of Micronesia were a form of money. The stones could change ownership but you couldn’t move them. Source: wikipedia.

Then at some point silver or gold weights started being used to measure against goods such as barley. The nice thing about these precious metals was that they were durable, portable, and easily divisible. It only took a few centuries to move from weights to coins.

At around 700BC, people in India, China and Mesopotamia concurrently came upon the same realisation and started minting coins out of these and other metals. Fast forward a few centuries later and China invented paper currency. The fact that you could stash away coins and notes made them a great way to store value.

Now this is a great segue (not segway) to why bitcoin is worth anything. And for this section I am going to use the argument put forth by Vijay Boyapati in “The bullish case for bitcoin” which I highly recommend you read.

It seems that all moneys have some common properties that make them a good store of value.

Properties for money: what constitutes a good store of value

For each of the dimensions that I describe there is a spectrum. Some moneys may score high in one attribute while others in another.

1. Durability

A good store of value will not perish. For this reason tea, cattle and feathers eventually were replaced by coins. Digital currencies do not perish and neither does bitcoin. In fact bitcoin will actually outlast all government fiat money. Fiat currencies come and go over long stretches of time. The bitcoin network is here to stay. It is just the nature of how it is set up.

2. Portability

It must be easy to transport. Gold: not so easy to transport. Cash not so easy. Digital fiat: easy. Digital assets like Bitcoin: very very easy.

3. Fungibility

You can change one for the other and you feel equally content about it. For example, if I give you a 20 US dollar note and your give me a 20 US dollar note then we are equally indifferent about the situation. A non-fungible store of value would be one that is unique. If I gave you my Monet painting and you gave me a Picasso painting we wouldn’t be sure that we have exchanged things that are equal in value. See What Is Fungibility in Crypto for more.

4. Verifiability

It should be easy to verify wether the money is authentic or not. Bitcoin: very easy. Gold: not so easy. You need someone to verify for you. Cash: easy most of the time. But you still need special gadgets to check if you process large volumes.

5. Divisibility

It should be fairly easy to divide into smaller units. For example, a massive Rai stone might be a good store of value because everyone can authenticate it is there but you can’t divide it (or move it). Fiat is divisible and so is bitcoin.

6. Scarcity

If you increase something in quantity it loses value. Seashells quickly became bad money as people ventured further and discovered it’s quite easy to find them. Units of air are not a good money because everyone has as much as they want of it (at least for now). Fiat’s value erodes over time due to inflation. The federal reserve and government will always coordinate to print more of it. Gold on the other hand has limited supply. We’ve discovered most of it and can only grow new supply by 4% per year unless we venture into space. Gold’s scarcity is a key reason it has been used as a store of value over time. Out of all moneys bitcoin has the highest scarcity. There will only ever be 21Mn bitcoin. Period. That’s just the way it’s been programmed.

7. Established history

Gold has been around for centuries. Fiat currencies too. Specific fiat currencies live much less. But the longer we are all commonly deluded about the value of something the harder it is to change that notion. Bitcoin has been around for 15 years. While that is much longer than Tulipmania, which lasted about a year, bitcoin still has a long way to go to catch up with gold.

8. Censorship resistance

This describes how difficult it is for others to prevent the money from being used as money. In 1933 the US made it illegal to hoard gold. Guess what, 90 years later people still use gold as a store of value. Bitcoin is way more censorship resistant. It’s going to be very very hard for governments to stop people from people buying bitcoin due to the distributed nature of blockchain technology.

why is cryptocurrency worth anything; bitcoin vs fiat and gold
Bitcoin scores pretty well against fiat and gold. Source: The Bullish Case for Bitcoin

So, yeah, you can’t use it to buy stuff but bitcoin has some pretty good properties as a store of value. This is what the whole hoo-ha is about. And depending on where you stand you may be holding anywhere between 0 and 100% of your assets in bitcoin. In summary, bitcoin is going to be around and will always be worth something as it slowly creeps into the public subconsciousness to become a common delusion.

One final comment about crypto in general.

Tokenomics and Ponzinomics

In the 1920s a dude called Charle Ponzi came up with a brilliant idea. To put it simply, he discovered that postal stamps were cheaper in Italy than in the US and that there was a way to exchange the two and earn a profit through arbitrage. After failing to get a bank loan, Ponzi sought to raise capital from friends promising to double their profits within 90 days. The problem is his math didn’t work out so he ended up paying rewards to early investors by using funds from later investors. Eventually the whole thing collapsed and Ponzi was to sent to prison (it was his third time). This wasn’t the first time someone had tried this but the name stuck and the set up has been known as a Ponzi Scheme ever since.

charles ponzi
Charles Ponzi

How tokenomics design can help prop crypto prices up

Now, many many tokens have been accused of being comparable to a Ponzi scheme. And the main reason is that for price to go up and stay up more believers or fools (depending on your take) need to buy the token.

Tokens have all sorts of incentives in place to earn more believers.

  • The first is to propagate the scarcity narrative. E.g. there will only ever be 21M bitcoin. Get ’em while you can folks.
  • The second is to bake inflation into the system and reward people who don’t sell. For example, if you stake (which means to lock up) your ETH then you get rewarded in more ETH. Most tokens and coins operate in this manner. So not selling props up the price.
  • The third is to bake extremely high rewards into the system. For example Olympus DAO or HEX crypto have highly elaborate configurations for you to earn a lot more of their token.
  • The fourth is to print a massive amount of tokens so that one token costs just a few decimals of a dollar. Think of Doge coin or Shiba Inu. Add to that some celebrity endorsement and you have yourself a nice recipe to get buyers who are thinking, “what if this thing just goes to $10. I will be a millionaire.” Then add all their friends who are feeling the FOMO and you end up with a meme coin being in the top 10 in terms of market cap.

Summing up

The main reason that cryptocurrencies are worth anything is that people value them. Yes there are many who are in the game purely to speculate. The rise of cryptocurrency exchanges and massive amount of volume they process in trades are proof to that. But it’s also proof that there is a market for crypto and that people are willing to take opposing views on how much a crypto token is worth.

You say yes, I say no

Even if you still don’t buy the arguments listed above it doesn’t matter. What matters is that some people do. And in the grand bazaar of crypto there are constantly people telling each other yes and no. There are constantly people saying “this thing is dead I am out” and other who are saying “nice price, I’m going in”. And that is just the way it’s going to be. Bitcoin has been around for 15 years. Ethereum for 8. I don’t think these things are going away any time soon. As to how much they will be worth and which narrative prevails no one really knows.

The question of why cryptocurrencies are worth anything is not easy to get your head around. But when it comes to nag you at night, just before you sleep, just know that there are 3 main forms of cryptocurrency. The Alt coins are equivalent to theme park tokens. You need them if you want to go on a ride in that ecosystem. Protocol tokens are the tokens used on stuff that is built on top of layer 1 platforms (the Alt coins). They are a mixed bag of utility, economic value and speculation. And then finally you have bitcoin which many consider to be digital gold.

For the detractors out there I leave you still with another famous quote that completely got the future wrong.

IBM quote about computers
IBM got it wrong

Useful terminology

FAQs on why crypto is worth anything

What causes cryptocurrency to rise and fall?

Prices in crypto fluctuate because it is a new industry that is trying to establish itself. Prices constantly move due to demand and supply conditions. According to Duke University, Cryptocurrencies are about 4 times more volatile than a stock indice such as the S&P. Events that have caused large shocks to crypto are booms and busts of crypto exchanges like FTX, sudden regulatory announcements plus hacks and insolvencies that can turn a bull run bearish in an instant.

Can bitcoin go to zero?

In theory yes. If suddenly all crypto investors decide that bitcoin is useless or if a fatal flaw that no one has even thought of is discovered it could go to zero. But the chances of this happening are very slim. Bitcoin will always hold value because there will always be enough people who believe in the narrative of a digital store of value with superior attributes to gold. A common way to think of bitcoin's value is to compare it to gold. Gold has a market cap of ~11 trillion. If you include gold that is un-mined then we are talking about $15 Trillion. Bitcoin, on the other hand, has a market cap if $300 billion. According to this logic bitcoin's price should be around $500,000. If people were to accept bitcoin as a store of value and kept 10% in bitcoin and 90% in gold then bitcoin should be worth around $70K.

Why do we value cryptocurrency?

The first reason the cryptocurrencies offer utility. You can use them to pay for services on apps that have been built on top of blockchains. Common ways in which people use their crypto are Gaming, (NFT) art and decentralized finance (DeFi). The second is that some cryptocurrencies offer rewards if you do stuff with them. The third is that some cryptocurrencies such as bitcoin have superior money attributes as a store of value. These three elements inform retail investors and financial institutions' trading decisions.

Is cryptocurrency worth real money?

Yes, cryptocurrency can be bought and sold on exchanges for real money that you can then transfer to your bank account. The most common way to buy cryptocurrencies is to sign up to a major crypto exchange such as Kraken, Coinbase or Binance and transfer some dollars or whatever currency you use from your credit card or bank account. With most exchanges you can just hit a buy button to purchase the different cryptocurrencies that you want.

Up Next

When You Buy Crypto Where Does the Money Go (For Real)

when you buy crypto where does the money go

Are you wondering where the money goes when you buy crypto?  Are you investing directly in the virtual currency or is it stored somewhere specific? Do your US dollars, pesos, euros, and nairas get stored directly on a blockchain?  In this post, I will walk you through the different scenarios of how people spend money to buy crypto and where the money goes. Read more.

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

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