Where does the value of Crypto come from? Why do people buy?
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The value of crypto comes from the price people are willing to pay for it. People buy it for a variety of reasons but mostly because the feel that they can sell it later for a higher price and make a profit.
Same reason regular currency does; you can buy stuff with it.
Originally, you could only make online purchases with it, often on less than legal websites. Now, even Tesla dealerships will accept it as payment. And the more it becomes acceptable as a form of payment, the more valuable it becomes.
Same reason people buy gold as investment.
In free market capitalism something if worth as much money as people are willing to pay for it.
If you can convince people that something is valuable they will buy it for a higher price.
Think of art made by famous painters and their exact replica. People will pay more for the original even though it doesn’t provide more material value.
Crypto depends entirely on confidence due to it’s very nature as decentralised without government control. Someone selling things has to be confident that what they receive in payment can be traded.Someone holding crypto has to be confident it will retain value and/or be used to trade for goods or services.
Gold price reflects confidence, but it also happens that gold has some intrinsic value as a metal that resists corrosion, e.g. gold-flashed electrical connectors, and use for jewellery and decorative items.
Gov’t-backed fiat currency also relies on confidence, but behind that there’s assets, infrastructure, industry, services and tax payers able to give value.
The crypto markets are generally fairly opaque. With most of them, you can see which accounts the “coins” are being moved between, but you don’t know who controls the accounts or what the “coins” are being traded for. So it’s not really possible to give a complete answer to this question.
Clearly, there are a lot of people who buy cryptocurrencies because they are gambling that the price will go up. This creates demand and gives them “value”, even if it isn’t built on anything except hope and greed.
Cryptocurrencies have also been used for a lot of illicit activities, due to their opacity and lack of regulation. This includes money laundering, buying illegal goods, paying ransom money, and who knows what else. This also creates some demand and gives them value, because people need to buy cryptocurrency to start buying drugs with it.
They have also been used for a small amount of more legitimate economic activity – some mainstream businesses have occasionally experimented with accepting them as payment. But this is pretty negligible.
Finally, it’s very likely that there are some players in the markets who are artificially manipulating the prices. For example, suppose you run a cryptocurrency-related business, and it’s really important to your business that the price of cryptocurrency stays high. One thing you could do is sell cryptocurrencies backwards and forwards between your own accounts at a high price. This costs you some money in transaction fees, but it makes it look to everyone else like cryptocurrency is selling at high prices, helping boost the price. This particular strategy is called “wash trading”. This kind of thing happens in other financial markets too, but again, the opacity and lack of regulation make it especially easy to do with cryptocurrencies.
It comes from the same place as every other currency and product on earth: supply and demand.
Money is a shorthand way of barter. If you want to buy an egg, but only have a cow to sell, you don’t have to accept ten thousand eggs if you have a medium of exchange. Any medium that allows you to bypass this barter problem is worth something. Traditionally, people have relied on central governments to provide the solution. With the advent of computers and the Internet, it is possible to bypass government and rely on math instead of politicians for the creation of value.
There are advantages and disadvantages to this. The advantage is math is more reliable and predictable than politicians. The disadvantage is you have to rely on yourself to a greater degree, which has led people to make costly mistakes.
The value of all things, in the end, is set by supply and demand. Real estate, stocks, bonds, private companies, and yes, crypto.
I’m not a crypto enthusiast so perhaps someone here can add anything needed, but the idea is that, at some point, crypto can serve as a medium of exchange. Each one has its own quirks, but overall, the theory goes that the blockchain (a system for how computers use math to talk to each other to make sure no one is corrupting the system) controls how many of these tokens there are and can authenticate ownership through “keys” which, if you have, verifies that you are the holder. I can beat you up and steal your information, but I can’t hack the system. It can cross borders seamlessly, central banks can’t print it, and transactions are untraceable (at least for Bitcoin). Of course, there’s big questions as to whether the stuff will ever be able to serve as a means of exchange, but perhaps one day it could be, for example, let’s say Chinese factories start preferring payment in Ethereum over USD or CHY, and if you buy now, you’ll see massive gains, because J. Crew and American Eagle will need to buy Bitcoin to pay their suppliers (no talk of anything like that happening, just an example). So far, the only real-world use of cryptos I’ve heard at scale are crimes (because it’s not traceable) and NFTs (those have to be bought in crypto, you can make your own decision about that).
Of course, it could be that none of this stuff happens, it’s just a really, really cool technology that has minimal real-world applications. But, what has happened is the markets have so much liquidity that people would buy, and then people would see the price rise and get excited and buy, which that demand that drives up price, which causes more people to…and the cycle continues.
Truth is a lot of people bought not because they understand or believe in the technology, but because they were hoping to ride the price action for quick money. And there’ve been a lot of bad actors leveraging such enthusiasm to scam them out of money. Most often these people eventually get washed out.
The only difference between a $1 baseball card and a $5000 card is how much people will pay for it. Crypto works the same way, the fact that you’re willing to pay $1500 for a coin of some sort is because you expect it to hold, or exceed value.
The dollar isn’t worth anything, we simply accept it will buy $1 of goods. When too many dollars are made, they lose value and that’s how $7T of fake paper money dumped in the economy over two years caused inflation.
Bitcoins are finite, there’s only a certain number of them so they can’t be watered down to be made less valuable, but the whole system itself can lose value, thus the drop in bitcoin this year.
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