What Makes Cryptocurrencies so Valuable?

Image courtesy of Pixabay.com

Once upon a time the world existed without any medium of exchange, otherwise known as currency. Individuals were forced to trade items directly with each other rather than exchanging a form of currency. But eventually things changed. With the earliest forms of currency being pieces of stamped gold and silver known as Mesopotamian shekels. Many people may not think there is anything in common between the earliest physical currencies and the latest technologically advanced cryptocurrencies. However anyone who subscribes to this false belief is missing the core principles of all currencies…

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There is NOT a Difference

Although a cryptocurrency and a Mesopotamian shekel exist in two very different forms. The core principles in which they operate remain virtually untouched. At its core any form of currency gains and maintains its value by relying on a large group of individuals having faith in an agreed value. Although there are many other variables that can also influence this, the greatest indicator of a currency’s value is how much faith people have in its agreed value.

What Does This Mean?

Here is an example to help convey this idea, imagine an elementary school called Falcon Elementary. At this school students are rewarded for good behavior with “Falcon Bucks”, a school wide currency that can be exchanged for pencils and books at the principles office. The students and teachers at Falcon Elementary have faith in the value of Falcon Bucks. It is accepted in exchange for goods such as pencils and books because it is widely believed to have value at Falcon Elementary.

However what happens if a student named Elon goes to the store to buy something with their Falcon Bucks… The cashier does not have any faith in the value of Falcon Bucks, therefore he does not accept them as a form of payment from Elon. But Elon decides to walk to his friends house (who also goes to Falcon Elementary), where he exchanges Falcon Bucks for a jar of mixed vegetables. This exchange works because both Elon and his friend have faith in the value of Falcon Bucks.

Now lets imagine Elon and his friend graduate from Falcon Elementary, however Elon finds some extra Falcon Bucks in his room. Elon decides he wants to exchange a few more Falcon Bucks with his friend. However his friend declines Elon’s offer because he believes Falcon Bucks no longer hold any value to him. This is precisely how all currencies work at the most fundamental level.

How Does it Apply to Cryptocurrency?

Cryptocurrencies operate on the exact same principles, many people believe Dogecoin has value. So it is widely accepted as a form of payment for goods and services. However if bad news suddenly erupts surrounding Dogecoin, its value will plummet. This is due to the fact that many people no longer have faith in the value of Dogecoin. As you can see, the similarities between Dogecoin and Falcon Bucks are strikingly similar. Faith is everything…

Hype

The value of cryptocurrencies has skyrocketed lately, this is partially due to the large amount of hype surrounding the big name currencies. Bitcoin, Ethereum, Dogecoin, Cardano, Litecoin, Altcoins, the list goes on… and only continues to grow.

One More Thing

If you enjoyed this article, please consider following me on Twitter: @natexlee.

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