Value of crypto
Cryptocurrencies are volatile, and we all are well aware of it. The news about recent crypto highs and lows pops up every day in our feeds, making for the general impression that crypto is a tricky thing to deal with. Nevertheless, investing in crypto can still be a lucrative investment opportunity, if you know how its value is formed. The following piece sums up common factors affecting the value of digital currencies and indicators, reflective of their truthful value. Let us make a general overview of what makes cryptocurrencies valuable. To make a cryptocurrency valuable one needs to make it utile.
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Content:
- Bitcoin plunges: A bust or a buy?
- Frequently Asked Questions on Virtual Currency Transactions
- Cash, crypto, gold: the ‘race’ to preserve value in an age of QE
- The high price of a crypto salary
- ‘$200B wiped in 24 hours’: Crypto plummets again as world governments step in
- Crypto crash erases more than $1 trillion in market value
- Crypto market value hits $3T, Bitcoin near all-time high
- Why is the cryptocurrency market down today?
Bitcoin plunges: A bust or a buy?
Bitcoin and other cryptocurrencies received a lot of criticism during the last 9 years. It is not surprising that this criticism came from organizations that are threatened by the crypto revolution banks, government, central banks, finance companies, etc.
Nevertheless, it is very surprising to hear criticism from economics schools, which oppose central banking and advocate free choice in currencies such as the Austrian school of economics. Unlike the ordinary criticism that Bitcoin is a scam, a bubble, etc.
The object of the chapter is twofold: first to explain why the criticism is unfounded and second to analyze the origin of the value of Bitcoin and other cryptocoins from the perspective of the Austrian school of economics. In particular, it is explained that Bitcoin does not contradict the regression theorem for two reasons. First, the initial value estimation can be a random event, and second, the Bitcoin network even now has a nonmonetary value. Blockchain and Cryptocurrencies. Bitcoin is based on three technologies: the Internet, encryption methods, and the new blockchain technology.
Unlike these technologies, the Bitcoin revolution was both a technological revolution and a monetary one. It completely changed the monetary world, and it seems that its invention opened a Pandora box, whose effect cannot be underestimated or predicted. Since its inception in , the Bitcoin project had many opponents, and like any successful project, their number increases gradually. It is not very surprising to hear criticism from the industries and organization, which feel intimidated by the new invention.
One would expect to find criticism from leaders in the banking industries, the insurance, and investment industries and, of course, from politicians. It is not even surprising to find criticism in the academic world, since, after all, one of the main tasks of the academic world is to instill past knowledge into the future generation and to be skeptical of new ideas.
On the other hand, since Bitcoin is a decentralized technology, it was warmly adopted by anarchist organizations worldwide [ 1 , 2 , 3 ], but for similar reasons, it was attacked by many others [ 4 , 5 , 6 , 7 , 8 , 9 ].
Some attacked the Bitcoin from the fear of shaking the current centers of powers, but most attacked it out of ignorance. Strangely enough, even in the libertarian community, which in general embraced the new currency, there are some that used allegedly Austrian economics arguments to debunk the foundation of the Bitcoin economy [ 10 , 11 , 12 , 13 , 14 ].
In general, we encounter two strategies to attack Bitcoin: 1 presenting multiple minor or even clearly erroneous arguments. Consequently, the arguments keep reappearing, despite the fact that they are constantly refuted. And 2 using fundamental economic laws to allegedly demonstrate that Bitcoin does not possess the essential properties of money. The object of the chapter is twofold: 1 to present and refute all the main arguments in a single chapter and 2 to utilize these arguments to reinvestigate the origin of the source of money in general and cryptocurrency in particular.
The most common criticism against Bitcoin is that Bitcoin is actually a Ponzi scheme [ 7 , 10 ]. Clearly, there is no resemblance between the two. A Ponzi scheme is a fraudulent investment operation. The investors are made to believe that they gain from the investment operation, while in fact, the money comes from new investment, that is, a Ponzi scheme is a pyramid fraud.
While some cryptocurrencies or tokens do seem to be a Ponzi scheme, Bitcoin is definitely not. Everything about Bitcoin: its algorithm, its network, and its development projects are completely transparent. The network, the mining process, and the entire project are all decentralized.
There are no managers, no organizers, and no control. Therefore, there could be no fraud. Bitcoin does not even have a pyramid structure. An investor in Bitcoin can make a profit by selling it at a higher price, just like in any other trade. Unlike pyramid structures, the owner of Bitcoins does not have to convince multiple people to invest in order to make a profit. It is true that in both cases, the first investors gain more than the last ones, and that their profit rises with the number of traders.
However, by the law of demand, it is clear that the price rises with the increase in demand, that is, the price increases with the number of buyers. This is valid for any commodity, and Bitcoin is no exception. Moreover, the whole network structure is different. Moreover, the founders of a crypto network may not even own a share in this network, or they can sell their share, if they have one like Charlie Lee, the founder of the Litecoin network, who recently sold all his Litecoins.
Another common criticism is that Bitcoin and the other cryptocurrencies are a bubble [ 4 , 6 , 8 ]. This claim is not a very informative one. What does it mean? Does it mean that the Bitcoin price is too high? In a free market, the price is always right.
When there is a housing bubble, it does not mean that there is something wrong with the houses, or that the sellers are greedier than they usually are, but it does mean that the government manipulates the interest rate and subsidizes bad mortgages, etc. If everyone buys cryptocurrencies, it is probably because the public has no other investment channels.
The banking interest is practically zero; the stock market is too high after 10 consecutive years of rising prices; and the housing market is recovering from the latest collapse. The fact that Bitcoin is in a state of a bubble, whatever that means, cannot be used as evidence to the argument that Bitcoin is worthless. Another repeating argument is that Bitcoin is not a real asset in the sense that it does not yield any return. People purchase Bitcoin only to sell it later.
But this is a strange argument, since, after all, money never yields return. A one-dollar note does not yield a return. This is exactly the function of money and the same applies to Bitcoin. One very common attack on Bitcoin is that it must be useless as money or currency since it has very high volatility [ 12 , 13 ].
However, it should not considerably affect its prospects to be used as a medium of exchange. Even today, most Bitcoin transactions are quantified in US dollars, that is, in these transactions, Bitcoin is used as a medium of exchange, while the US dollar is used as a unit of account. However, it should be stressed that in these transactions, the dollar takes no role. Bitcoin is currently exploring a new territory, in which it is used as a medium of exchange, but yet to be used as a unit of account on this discrepancy see Ref.
In the case of Bitcoin, the price increases exponentially, which is a clear sign of a nonequilibrium scenario. Exponential rise is an indication of a constant amplification process, which cannot occur in the vicinity of equilibria. In this case, it is clear that the volatility will increase exponentially as well. Therefore, there could be two options: A the approximately constant amplification process is close to its end, in which case the market will converge to a semiequilibrium state, and the volatility will decrease dramatically.
B The constant amplification process is going to last for some time, in which case the value of Bitcoin will continue to rise dramatically. Therefore, in both cases, the attractiveness of Bitcoin will increase, and in any case, the high volatility in an exponentially growing process cannot be used as an argument for the claim that Bitcoin is worthless. It is only a sign that the crypto market is in its infancy stages.
Another important claim is that Bitcoin is worthless as a medium of exchange because most people, who purchased it, hoard the coins [ 12 , 13 ]. This claim is often heard even in the crypto community, where the holders are encouraged to exchange their coins with goods, that is, to sell and buy the coins repeatedly e. However, the two properties of money are tightly linked.
A good cannot be a store of value unless it is a medium of exchange and vice versa. How can an object be valuable, without the option of exchanging it for something else? How can something be a medium of exchange, unless it is valuable? In this case, fewer coins are used in circulation and, as a consequence, their price increases.
This is the mechanism that persuades the hoarders to part with their coins. The hoarding dilemma is a very important point because it is related to another criticism: how can Bitcoin be used as a medium of exchange while being a deflationary currency?
In a deflationary monetary economy, the argument continues, prices decrease perpetually, and therefore people have no incentive to buy anything, for they know that they will probably get it for less money in the future.
In such an economy, consumption decreases, and the economy stagnates. There are several problems with this argument. First, there is a problem of definition. Bitcoin is an inflationary currency, not a deflationary one since the number of coins increases gradually. It is true, however, that its rate decreases, and eventually the total number of coins is limited around 21 million. However, and this brings us to the second misconception, there is nothing wrong with rising prices.
In fact, the economic sectors, which experience decreasing prices, are the sectors with the highest growth rate. The computer industry belongs to this category.
Computer prices perpetually decline for decades, while the industry is growing. People have needs, and as economists explain, they have a time preference, that is, they do not like to postpone gratifications [ 16 , 17 , 18 ]. If they need a computer, they will eventually buy it, and decreasing prices is a good incentive to make the purchase.
Eventually, they will buy the computer. The third misconception is that saving is worse than spending and therefore people should be encouraged to spend their money. In fact, unlike the Keynesian thinking, over consumption is the enemy of economic growth.
Clearly, people have to buy to encourage production; however, the economy cannot grow unless there is enough savings and investments. Saving is a crucial ingredient in any economic growth, and therefore, there is nothing harmful in an economy with rising prices.
In fact, at the end of the nineteenth century, when the American economy was based on the gold standard, the US experienced one of its best economic eras during a deflationary period [ 20 , 21 ].
However, if, in the future, it will be clear that there are some benefits to inflationary currency, then there are many other coins, in which inflation is part of their algorithm, for which case there is no upper limit to the number of coins. There is a claim that governments may create a competitive coin to Bitcoin, and simultaneously, the governments can outlaw Bitcoin.
Indeed, the government can create a token of its own, and it seems that some governments seriously think about such an enterprise [ 22 , 23 , 24 ]. However, it is not clear what would be their motives. If these governments intend to create simply a true decentralized competitor to Bitcoin, then they would face two problems: 1 a government would never be able to compete against the decentralization level of Bitcoin and 2 with a decentralized coin, the government would lose all its benefits of controlling the national currency, that is, by replacing fiat currency with cryptocurrency, the government literally kills the goose that lays golden eggs.
If the government plans on creating a centralized coin i. Governments can confront the problem differently, and it can try to ban Bitcoin.
Frequently Asked Questions on Virtual Currency Transactions
The digital token declined as much as 4. Though, Ether outperformed Bitcoin from the adoption of blockchain technology by financial technology companies, and perhaps more notably the popularity of non-fungible tokens NFTs in the art and gaming worlds. The recent swings in cryptocurrencies come amid a volatile period for financial markets. Spiking inflation is forcing central banks to tighten monetary policy, threatening to reduce the liquidity tailwind that lifted a wide range of assets.
Cash, crypto, gold: the ‘race’ to preserve value in an age of QE
We use cookies for a number of reasons, such as keeping FT Sites reliable and secure, personalising content and ads, providing social media features and to analyse how our Sites are used. Make the most of Lead your own way in business and beyond with our unrivalled journalism. Siddharth Venkataramakrishnan. Delivered every weekday. Use of the phrase in the digital asset space dates back about four years, according to David Gerard , an author and journalist. Certainly, financial institutions have made efforts to appear more crypto-friendly over the past year. Payment companies such as Mastercard and Visa are among those that have run experiments with digital currencies. But critics say this does not necessarily translate into a healthy industry.
The high price of a crypto salary
The global crypto market cap also saw a fall of 7. Cryptocurrency prices on the morning of Tuesday, 16 November, were a mixed bag. While Bitcoin, Ethereum and Dogecoin witnessed a fall in their value till am today, Tether witnessed gains. The digital token has grown immensely over the last few months, up by over percent this year-to-date so far. Ethereum, the second-largest digital token also saw a fall in its value, falling 7.
‘$200B wiped in 24 hours’: Crypto plummets again as world governments step in
This guide to valuing cryptocurrency is an introductory look at how to value a cryptocurrency. Assessing a number of important factors would be helpful in understanding the value and potential of a coin. For traditional investments in stocks or real estate, fundamental analysis entails evaluating the financial health and viability of a company according to its financial statements. If the numbers look good, we can be confident that the company has good fundamentals and we can, therefore, invest in it. Performing fundamental analysis for cryptocurrencies, however, is radically different since there are no financial statements to analyze. Thus, fundamental analysis on cryptocurrencies must be performed with a different methodology.
Crypto crash erases more than $1 trillion in market value
News is trending up on Bitcoin? Ethereum looking sluggish? Who knows: Maybe someone will build a new smarter DAO tomorrow that will draw in the big spenders. The key to understanding what to buy or sell and when to hold is to use the tools associated with assessing the value of open-source projects. This has been said again and again, but to understand the current crypto boom you have to go back to the quiet rise of Linux. Linux appeared on most radars during the dot-com bubble.
Crypto market value hits $3T, Bitcoin near all-time high
And the superlatives have piled up really quickly. With the Federal Reserve intending to withdraw stimulus from the market, riskier assets the world over have suffered. Other digital currencies have suffered just as much, if not more, with Ether and meme coins mired in similar drawdowns.
Why is the cryptocurrency market down today?
It is indisputable that a fundamental change is underway in the global economy. As ever, there are observable markers of a deep, structural transformation taking place. And as with earlier transformations, the Internet lies at its core. It is gathering pace across a wide range of industry sectors, from personal banking to hospitality and the apparel industry, to name a few.
Bitcoin , the largest cryptocurrency by market value, and ether , the second-largest, hit all-time highs, while altcoins , like meme-inspired dogecoin, surged in popularity. Other digital assets , like nonfungible tokens, or NFTs , sold for millions of dollars alongside fine art in major auction houses like Sotheby's and Christie's. In addition to art, NFTs representing in-game assets and digital land soared in value as well. Blockchain-based applications, including decentralized finance, or DeFi, garnered interest from both retail and institutional investors, pushing the growth of Web3 , which is the decentralized iteration of the internet based on blockchain technology that powers NFTs and underpins cryptocurrencies. The milestone came after major institutional investors and notable financial companies began to support the cryptocurrency earlier in the year.
The price of ethereum, BNB, solana, cardano and XRP also experienced significant drops of between 7 to 11 per cent in the last 24 hours. Still in its relative infancy, the cryptocurrency market has faced similar tumultuous periods where large chunks of value disappear overnight. Experts in the field believe values have dropped as a result of the US Federal Reserve raising rates in , alongside heightened pressure from China and Russia to stifle digital currency trading within their borders. The result sent bitcoin and crypto prices spiralling, with the downward trend continuing steadily in the first few weeks of
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