Currency or Asset and What Gives Crypto Its Value?

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When I ask the question: “What is Cryptocurrency?” What is the first thing that comes into your mind? This question is a simple one but has a rather complicated answer. If you ask Google to define “cryptocurrency”, it will tell you:

“A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.“

If you decide to look on Investopedia, the first paragraph on “What is a Cryptocurrency” reads:
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We can even go and check out what was written in the original white paper by Satoshi Nakamoto:
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So, what can we gather from all this? That Cryptocurrency is a currency, right?

In a previous article, I attempted to explain why I think Bitcoin works.
Why Does Bitcoin Work?

In that article, I mentioned how many of my acquaintances don’t believe that Bitcoin and Crypto is a usable currency, because they believe it isn’t tangible. I then went on to explain why it does work as a medium of exchange. In most cases, a medium of exchange is generally money, thus technically making Bitcoin a currency.

However, I still believe that the answer isn’t all that simple. At the moment, in cryptocurrency’s current state, I feel that Bitcoin and most other cryptocurrencies are more of an investment and a short-term asset.

Let’s go into reasons why I believe this is the case. First, starting with some definitions of “asset.”

Google’s (Dictionary) definition

  • A useful or valuable thing, person, or quality.
  • Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Investopedia’s definition

  • An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit.

These definitions seem to accurately describe Bitcoin as well as quite a large number of other cryptocurrencies.

Probably the main reason why I currently view Crypto as more of an asset is due to the amount of public adoption and the total amount of use cases that Bitcoin and others currently see. Even though fiat is just inconvertible paper money, made legal tender by the local government with no physical commodity to back it, it is still used by people of all ages and backgrounds. Even we Crypto enthusiasts have to use fiat in order to go about our daily lives. To this day, I’ve yet to meet even the biggest Crypto nut live purely on cryptocurrencies alone.

The second biggest reason why I believe Bitcoin is more of an asset is because cryptocurrency is still in its adolescence and still has a long way to go before mainstream adoption. So, in my opinion, this means we are all still investing in the technology. With Bitcoin’s current scalability issue, developers from all corners of the internet are working on ways to help solve this problem.

One notable, scaling solution is a layered protocol called The Lightning Network. And I think that until a clear solution (or at least one that works well enough that the majority of the community is willing to go with) presents itself, we are all just investing our time and money in the hopes that in the near future, it will be mass adopted by the public and help further the cryptocurrency cause.

Some more minor reasons include:

There is a limited amount of Bitcoin in the world and there will never be more than 21 million BTC, ever in existence. This can make people somewhat more cautious and unwilling to use or spend their Bitcoin.

Another reason; and this is related to the one above, is the HODL mentality and trend that is popular amongst the online crypto community. I have written about this particular ‘problem’ before, in an older article:
Don’t just hodl. Spend. Share. Show.

In that article I stated: “It seems that today’s meaning for HODLing is to hold onto your Bitcoins and Crypto without doing anything else. It’s just that. Hold, sit and wait. However, the original understanding of HODL was that during a crash or a serious Bear market, instead of selling your position in fear of the price dropping further, you’d hold onto your position. HODL!”

Hopefully, the original true meaning of HODL will make its comeback one day. Hopefully sooner rather than later.

There are also quite a number of articles on the internet that support the statement that Cryptocurrencies are not “currencies” but are instead Assets. A few articles stated one particular reason why some countries legally classify Bitcoin and other cryptocurrencies as an asset. The reason being is so that it could mean trading crypto is potentially subject to capital gains tax.

In fact, I do think that citizens of the USA already have to pay taxes on the profits they’ve earned on their trades. This certainly doesn’t help with the spending and HODLing problem and hinders the possibility of cryptocurrencies truly becoming a currency.

 

Why isn’t Bitcoin usage as widespread as it can be?

To help answer this question, we need to look a little into the local currencies and money that we use today. Everybody knows how to use money and that’s where the problem for usage of cryptocurrency stems from. Even from an early age, we have seen our parents, families and other people use money in exchange for goods. Without really learning how or why, we knew that if we had money, we could walk down to the corner store and buy whatever we wanted.

We understand that we can exchange this money for things that we want or need, and we did this without much thought or education into it. Why? Because it worked, everybody we handed our money to, would gladly accept and it was easy. I have money, I give money to the person who has what I want, and that person gives me the thing that I wanted.

Of course, fiat has the advantage over cryptocurrency due to the fact that’s it’s been around for much, much longer. But it’s not the only reason why we give no second thought when using our local currency as a medium of exchange.

Another major reason is widespread usage and the ease of access that local fiat currency has. Don’t get me wrong, using Bitcoin and other cryptocurrencies is just as easy. Or rather, it can be just as easy. It’s simple for crypto users to go about spending/sending their coins because they already have the know-how, but it’s the complete opposite if we asked a complete newbie no-coiner to obtain some Bitcoin and start spending it.

Unfortunately, the world around us now is very different from the past, and if something isn’t handed to the majority on a platter, then it usually goes without much attention or care.  So, one way is to make it even EASIER to use. I know, crazy right? Crypto is already pretty easy to get into. Just download a software wallet, acquire some crypto and you’re good to go. But like I said, it’s easy because I already know how.

If you’re reading this and you’re currently thinking; ‘I don’t know how to obtain and use Bitcoin.” Not to worry! Fortunately, it’s extremely easy to learn and get yourself started. In fact, I’ve even written a few articles that may help with all of that:

Getting into Bitcoin and Cryptocurrency, at the end of 2017

Different Ways To Purchase Cryptocurrency

Different Ways to Acquire Cryptocurrency

So, that’s one particular problem that we face. People tend to be lazy, or just unwilling to learn new technology. They can find it difficult to understand, or just the thought of trying to learn about cryptocurrency can be intimidating to some.

That can lead to another problem. I’m sure we crypto enthusiasts hear these remarks or something like them often.

“BITCOIN IS A SCAM.”
“PONZI SCHEME!”
“Why would I buy Bitcoin? It’s easier to just burn my money.”

It’s easy to yell scam when you don’t understand something. What’s even worse, is the large majority who see Bitcoin and Crypto as a get rich quick scheme. When the hype train comes along and all their friends and family encourage them to get some because they will make some quick profits out of it, they buy into it (usually at an all-time high), and when it comes crashing down, they sell at a loss to try and recover some of the money they’ve put in. This then leads them to hate Bitcoin and Cryptocurrency, as it “didn’t work out” for them, so it must mean that Bitcoin is a scam.

To get around these problems is to have a more widespread education. Make the knowledge as easily accessible as possible, and to make sure that the information available is reliable. And that can be accomplished in many ways! Writing articles, making videos, sharing news and information or even helping people get started by downloading a wallet on their phone.

The other problem that Bitcoin has, which is also arguably the biggest one to have if you want to become a proper functioning currency, is the value. Bitcoin and the rest of Crypto are extremely volatile. Too volatile to function properly as a currency, or rather it incentivizes users who keep Bitcoin as an asset to sell and buy rapidly, along with the volatility. This further fluctuates the prices, which makes using and spending Bitcoin as a currency more difficult. That three dollar coffee is now nine dollars, and vice versa.

What gives cryptocurrency it’s value?

The answer to this question isn’t specific to just cryptocurrencies. The simplest form of the answer is “supply meets demand”. Price grows when demand is greater than supply, and the price falls when supply is greater than demand. The price of something stays stable when demand meets supply.

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Let’s take a deeper look at three different things. Fiat Money, Assets and Stocks. I think the term “supply meets demand” is the most accurate for Assets, when it comes to the three. Money and Stocks are slightly different and more complicated.

Gold
Let’s look at Gold as our sample for assets. Gold has a good store of value because it doesn’t corrode and is reasonably scarce and rare enough to make it a limited and finite resource. But not too rare that it doesn’t allow enough gold to circulate and allow commerce. It could also be melted down into other shapes, allowing for further uses and making it easier to work with. When gold was a popular use of medium exchange, the demand for it was high, and thus increasing the price and value of gold. But since money moved away from the gold standard and converted to fiat, the demand for gold has dropped.

Using the USA as an example; every time something major happened that caused the US dollar to drop, Gold would rise. From 9/11 happening in 2001, the gold price shot up from $276 to $869 in 2008. When the 2008 financial crisis happened, Gold further shot up to a record high of $1,895 in mid-2011. It has since dropped, but you can see how the demand for gold changes which also affects the price.

Fiat Money
Fiat is a wee bit more complicated. Money used to be tied to Gold, we call this the gold standard. Meaning that the standard unit of account is based on a fixed quantity of gold. But now money is on the system of fiat.

Money doesn’t really have any inherent value. It’s technically a fancy piece of paper that people in a country and in an economy, give value to. Everybody wants money so that they can use it to get goods and services in return. So, the demand is never-ending.

But because the only thing that backs our money is the good word of our government, this means that the supply is also controlled by them. When a country prints too much money, it causes inflation since the money supply is much higher than the supply of other goods and services.  This is a big downside, as technically there is no limit to the amount of money that can circulate within the economy.

Stocks
Ah yes, stocks. The main complexity of it comes when the stock is first listed as the initial listing price of a stock is based on the calculations when the company goes public (When the company undergoes an initial public offering).

Based on the valuation of the company, they will then determine how much shares they want to issue and for what price. The following example is pulled from Investopedia:
“For example, a company whose value is estimated at $100 million may want to issue 10 million shares at $10 per share or they may want to issue 20 million at $5 a share.”

After all, that, when the stock is available for trading, just like the others, supply and demand play the fundamentals. When more people want to buy a stock than sell it, the price moves up. And when more people want to sell a stock than buy it, the price would fall.

Cryptocurrency

So in summary of my personal opinion, cryptocurrency price values closely mimic how stocks price movements work. There are many details that can affect a cryptocurrency’s value. Anything from trade volume to news and information regarding the project. But at the end of the day, the fundamentals are still supply and demand. I do personally see Bitcoin more as an asset, but we have many different projects where I also believe some coins are better than others for transactions (maybe this can be a topic for another article), and I believe that in the future there will be a handful of different cryptocoins for different use-cases. I like Bitcoin as my digital gold. Perhaps Litecoin can be our future currency and everything can coexist harmoniously. Whatever the case is, I believe crypto is the future!

 

 

References and links:

https://www.forbes.com/sites/jeffreydorfman/2017/05/17/bitcoin-is-an-asset-not-a-currency/#789fe84e2e5b

https://www.bloomberg.com/news/articles/2018-03-20/when-is-a-bitcoin-not-a-bitcoin-when-it-s-an-asset-says-g-20

https://cointelegraph.com/news/liquidity-and-stability-bitcoin-as-currency-and-asset

https://www.investopedia.com/articles/investing/071114/why-gold-has-always-had-value.asp

https://www.disnat.com/en/learning/trading-basics/stock-basics/what-causes-stock-prices-to-change

https://www.thoughtco.com/why-paper-momey-has-value-1146309

 

Cover illustration artist Andrea-Reyes, DeviantArt

Mid-article illustration artist scottkho, DeviantArt

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Just two months after his first Bitcoin purchase, Loy found himself working with Embily and has been a Cryptocurrency evangelist ever since. Follow his journey as he continues to learn all he can about Crypto at embilyblogloy.wordpress.com

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