It can be difficult to get your head around why cryptocurrencies demand such high price tags. They don’t really exist anywhere, and they aren’t backed by anything physical. They aren’t even endorsed by governments.
So what is it that gives cryptocurrencies their value? There are a few factors, but the good news is you don’t need to be a technical expert to understand what drives the btc price through the roof.
Supply and Demand
Cryptocurrencies are a free-market product, and they aren’t issued by any government. That means that the prices of cryptocurrencies are governed by the same law that governs all free-market products: Supply and Demand. Basically, there are two questions-indicators. How much do people want it? And how much is available?
We’ll get to the demand side of things and why people want cryptocurrencies. But, what is unique about cryptocurrency is its supply.
Cryptocurrencies have a controlled supply. The amount of Bitcoin that’s available was defined before the first Bitcoin was ever created, it is 21 million. The amount of Bitcoins that will ever be released is determined in advance by a set of rules. We know how many Bitcoins are available in the world right now, and how many will ever be available. Nobody can create (or will ever be able to create) Bitcoin out of nowhere. The amount that becomes available through mining is limited and predictable.
Different cryptocurrencies have different rules programmed into them for their supply. Some have a fixed supply, while others have a certain amount that is about to be made available every year. The exact method changes depending on the needs of the cryptocurrency.
This restricted and predictable supply means that when people want Bitcoin, there’s not that much on the market. The prices can get pushed up very quickly. Now, let’s take a look at the demand and why people want to buy cryptocurrency in the first place.
The most obvious thing that makes people want cryptocurrency is their utility. That is what you can actually do with the cryptocurrency. For Bitcoin, the core utility is the ability to transact with anyone in the world, almost instantly, at a very low cost.
This is a very big deal in the financial world. With banks, international payments are slow, restrictive and typically cost a fortune. Cryptocurrencies offer a whole new way to make transactions, and that’s why people are excited to buy and start using them.
Cryptocurrencies have struggled to push past the price highs reached all the way back in 2017. That’s because they haven’t delivered much more utility since then. Payments on the major crypto networks like Bitcoin and Ethereum are still slow and sometimes expensive. This reduces the utility of those networks, and thus reduces the value of their tokens. If developers can find new ways to increase the utility of crypto tokens, then the value of those cryptocurrencies can vastly increase.
Cryptocurrencies have utility beyond just payment networks, and that’s where things get really interesting.
Cryptocurrencies have brought the age of decentralized applications with them. These are applications that are run without a central point of control. They are peer-to-peer and allow users to use an application or a platform without a company at its center. It’s a little hard to get your head around at first.
Take Facebook for example. Facebook is a centralized application, they have ultimate control over how the social network operates, what features are released, who can use it, what’s allowed on the platform, and how they make money. As a Facebook user, you have no control or say over how Facebook works. Facebook can change anything about the app whenever they like.
Decentralized apps take a completely different approach. They essentially allow people to run an application (like Facebook) without the central point of control. Everyone agrees on the rules of the app before they start using it, and nobody has the right to change things without everyone else’s permission.
These types of applications are taking off in finance. For example, decentralized peer-to-peer lending platforms are allowing people around the world to borrow and lend money to each other without banks. This is a big deal, especially in the developed world.
Having the ability to access new applications is a major driver of the value of cryptocurrencies.
At the core of the best cryptocurrencies is a great community. At the end of the day, that’s all a blockchain network really is, a community of people that agree on a set of rules to interact with each other.
These communities come together to provide value in all kinds of ways. The Ethereum community is huge and focused on unlocking people’s financial freedom all over the world. It’s the community of leaders, developers and users that gives Ethereum it’s enormous multi-billion dollar market capitalization. Networks like EOS have attempted to take this to the next level by designing the blockchain itself to be community-driven.
It’s the crypto communities that really differentiate cryptocurrencies from traditional finance. As the strength and coherence of the community rise, so with the value of cryptocurrencies.
The vision of a new financial future
Perhaps the main thing that’s been driving the value of cryptocurrencies for the past 10 years is a hope. The utility, DApps, and communities all have a long way to develop, but it hasn’t stopped the value of cryptocurrencies going into the hundreds of billions.
What delivering value and driving demand is a vision. The vision of a future free from greedy financial institutions and irresponsible government fiscal policy. One where each person has control of their own personal finances and no government or bank can take that away from them.
Cryptocurrencies are still volatile because this dream is still volatile. Nobody knows if the technology can truly deliver on this promise in the future, but there are many people working very hard to make sure it does.
If cryptocurrencies can keep delivering real-world solutions to users, and manage to keep from being regulated to oblivion, then the value of cryptocurrencies can go up for a long time.