The value of cryptocurrencies has surged in the last year. What does the value of cryptocurrencies depend on? How to evaluate cryptocurrency value from a more reasonable perspective?
Definition of Value
In order to be able to predict and analyze the future value of cryptocurrencies, we should strive to understand how the value is derived.
Value is a measure of a given thing. Some things are instrumental goods that enable us to acquire other goods. The other, the intrinsic commodity, is what we strive to achieve.
The value of Cryptocurrencies
Adam Smith said in the Wealth of Nations, “Money has no other use than the purchase of commodities.”
Money is an instrumental commodity. For money to be an effective means of exchange and store of value, it must function.
Thus, the value of money lies in its ability to effectively do these things: facilitate transactions and serve as value. Cryptocurrencies act as a medium of exchange and store of value.
Paul Krugman posed the question in a blog post titled “Bitcoin is Evil” a few years ago, when digital currencies were not long ago appreciating. “To be successful, money must be both a medium of communication and a reasonably stable store of value,” he wrote. “It is unclear why Bitcoin should be a stable store of value.”
“A currency‘s ability to store value and its ability to mediate exchange are entirely different things, ” Krugman said. But how are these two questions related? A medium of exchange can become a store of value.
If money is to become a store of value, its value must be stable. In order for a currency to have a stable value, it must be an effective facilitator of transactions. For money to be money, it must be everywhere.
The ubiquity of money and the accompanying value are known as network effects. The more widely a currency is used, the more flexible it is to facilitate transactions, thereby stabilizing its value, because simply the more people accept it as a valid payment method, the more people will It is used as a payment method.
With the popularity of money, its value also rises.
If the value of a currency depends on its flexibility and ubiquity, then the viability of that currency depends on users seeing him as a better transaction facilitator for the medium of exchange. If cryptocurrencies are to replace paper money, users must trust that tools like bitcoin and ethereum are better at facilitating transactions.