If you’ve only recently started exploring the wonderful world of cryptocurrency, one of the questions you may be asking yourself is why digital coins and tokens have value. It currently costs almost $1,400 to buy a complete unit of Ethereum, and if you want to own a whole Bitcoin, you’ll need almost $20,000. So, why are they so expensive?
The truth is that very few cryptocurrencies are that valuable, but even tokens from the smallest projects are worth something. In this AAG Academy guide, we’ll look at why digital currencies are valuable, how their value is determined, and what causes it to rise.
It is often difficult to see the value in something intangible that you cannot physically hold in your hands. A cryptocurrency coin or token is, after all, little more than a long string of digits or a piece of data. What makes them valuable is that, just like traditional currencies such as the U.S. dollar, cryptocurrencies have what’s called a store of value.
A store of value is something that can be saved, retrieved, and exchanged at a later date without deteriorating in value. For instance, gold bars are a store of value because you can lock them up in a safe for years, and when you take them out later, they’ll still be worth something — more than they were worth when you first locked them up.
Cryptocurrencies are also a unit of exchange. Again, just like traditional currencies, they are an object, albeit virtual, that can be traded for goods and services. Some major merchants, including Microsoft, AT&T, NewEgg, and Virgin Galactic, now accept Bitcoin as payment for things like hardware, software, service plans, and space exploration (eventually).
Digital currencies like Bitcoin also have attributes that make them even more attractive than traditional currencies. In many ways, they are more versatile, more accessible, completely resistant to counterfeiting, and less susceptible to inflation. These are some of the reasons why cryptocurrencies were invented in the first place.
What are the most valuable cryptocurrencies?
As we mentioned at the beginning of this guide, Bitcoin and Ethereum are the most valuable cryptocurrencies in the world — and they have been for some time. A single Bitcoin is worth almost $20,000, and the market capitalization of Bitcoin as a whole is more than $377 billion. To put that figure into perspective, Facebook parent company Meta is worth $367 billion.
Ethereum is some way off Bitcoin, with a market cap of almost $166 billion, but is still more than twice as valuable as Tether, the third-most valuable cryptocurrency, which has a market cap of almost $68 billion. USD Coin is the fourth-most valuable cryptocurrency with a market cap of more than $47 billion, followed by BNB, which is worth just over $46 billion.
It should be noted, however, that while these figures were correct when we wrote this article, cryptocurrency values fluctuate constantly and sometimes considerably. One of the downsides to digital currencies is that they are significantly more volatile than traditional currencies — and many other assets and commodities.
What are the key characteristics of cryptocurrencies that have value?
We’ve touched upon some of the reasons why cryptocurrencies have value, but let’s look at them in more detail. Here are three key attributes that the most valuable coins and tokens have in common:
Utility All of the biggest and most valuable cryptocurrencies have some kind of utility. They’re not necessarily all “utility tokens,” which you can read more about in our guide to various cryptocurrency types, but they have a use or many uses that are worthwhile.
They might be alternatives to traditional currencies that can be exchanged for goods, like Bitcoin. They might be used to pay for blockchain services, like Ether. They might be used for staking and governance, like Polkadot. Or, they might be used to determine ownership of other assets — which can include property. Either way, they’re useful for something.
Scarcity Scarcity also adds value to a token. Many cryptocurrencies, including Bitcoin, have a finite supply, which means that once a certain number of coins has entered circulation — around 21 million in Bitcoin’s case — no more will be minted. What’s more, every four years or so, the number of new Bitcoins that are created during the mining process is cut in half.
As availability falls, the price of each coin rises.
Perceived value Sometimes, cryptocurrencies don’t necessarily need worthwhile utility — they just need perceived utility. In other words, if traders and investors believe they are useful, or that they could be in the future, then their value rises in anticipation of that.
Dogecoin is a good example of this. In reality, this “meme coin” has very little in the way of utility, and it doesn’t have scarcity either, since its supply isn’t finite. However, it has seen several significant increases in value in the past because many fans of the token believe that it will, one day, become a viable replacement for other currencies.
In addition to these three things, acceptability, portability, durability, and security can all add value to a cryptocurrency.
How is the value of a cryptocurrency determined?
While all of the things we’ve listed above can make a cryptocurrency valuable, it is the market that determines its cost. As with many things, it is supply and demand that is the deciding factor. For example, a new cryptocurrency may be listed on the market with a value of $0.01, however, if buyers are only willing to pay $0.009 per token, that’s what its value will fall to.
On the other hand, if the market believes the token should be worth $0.02 and buyers are willing to pay that price for it, its value will rise — and continue to rise until it reaches a point where the market feels the token’s true value has been reached or, perhaps, exceeded. While there is demand, the price will rise. When there isn’t, the price will fall.
How does the value of a cryptocurrency increase?
A number of things can impact the demand for a cryptocurrency, and therefore increase its value. Awareness of and excitement around a new project can cause notable spikes in token price, as can a new exchange listing that makes the token more accessible. New utilities, like the ability to use a token to pay for services, can also make it more attractive to investors.
In a nutshell, Bitcoin has utility (it can be used as a form of payment) and scarcity (only so many coins will ever be produced), so there is demand for it. That demand has been persistent for many years now, which is why Bitcoin’s value has risen so much.
Cryptocurrencies are incredibly volatile, which can cause their prices to rise and fall considerably and regularly, for a number of reasons. In addition to the fact they’re still an emerging technology, they are heavily influenced by market sentiment and media hype.
Awareness of and excitement around a certain cryptocurrency project, as well as new exchange listings and new utilities, can all cause a cryptocurrency’s value to rise.
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About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.