If you are reading this I suppose you are also fascinated and awestruck by the extraordinary returns(2x,4x, and even 20x!!) cryptocurrencies have provided in the past year. Many people are just getting into it because of FOMO, without realizing the underlying meaning of this beautiful innovation. Why is a digital combination of randomly generated hexadecimal numbers worth $50k?

In this article, I will try to explain the basic economics of cryptocurrencies, how they derive their value and what can be its possible future.

The concept of exchanging value with each other has been around ever since mankind was born. At first, it was a barter system, then came gold and silver coins and the most recent form which we currently use is printed/minted currency.

With the advent of the internet, companies like Paypal digitalized the process of transferring money, but the underlying aspect of it was still using a “centralized” platform monitored by a “centralized” entity to transfer the digital version of our traditional currency (and why is that a bad thing, is explained further in this article).

Value of cryptocurrencies going higher and higher

Up until 2007–08, people blindly trusted large financial institutions and banks with their money, and “trust” is a big factor in this industry. When the 2008 financial crisis shook the world, people started to realize that they cannot trust these institutions with their money. Certain people were profiting from other’s loss of income and livelihood. There was a gap to be filled!

Satoshi Nakamoto’s invention of Bitcoin in 2009 was perfectly timed. A completely ‘decentralized’ protocol of transferring money from one person to another with extra layers of added security, eliminating the middleman by establishing consensus within each member of the network.

Traditional currencies like( Dollar, Pounds, or the Indian Rupees) hold a certain level of value because “we” believe in it. A $5 note actually has no intrinsic value of its own, but the U.S. government regulates it in such a way that if you take that note to a store, you can get something else in exchange. The store manager accepts it because he believes that the same way. All of this trickles down to that one thing that I talked about in the beginning — Trust. Everyone trusts and accepts the value of ‘Dollar’.

So far, everything was working fine, because people believed in their respective nation’s currencies because of its limited supply. Recently with the advent of the pandemic, Governments all across the globe have started printing more and more currency (You can read about the problem with this here). This has led people to worry and question the relevance and value of their currency altogether. People have started to lose trust in this system and with globalization, they are looking for a more widely accepted and important (rare) form of currency.

Graph depicting the supply of Bitcoin with Time

Before we understand this, we need to understand why certain things possess more value than others. Gold is a valuable commodity because it’s so difficult and expensive to mine and refines. So, because of its demand and relatively limited supply, it continues to hold value.

At the time of writing this article, there are over 8000 different cryptocurrencies varying from a few cents to thousands of dollars.

All of them serve a different purpose and their value is either decided based on the problem they are solving or by their rarity.

Bitcoin is similar to gold. It’s so rare(only 21 million BTC will ever exist and around 19 million is already mined) and getting more difficult to mine each day, that its rarity is increasing its value.

Other cryptocurrencies like (ETH, BNB, LINK etc.) possess value because each of them is solving a particular type of problem. Generally, these Altcoins are backed by a product, just like a share of a company in the current stock market. As more and more people join the Blockchain community and start using these products like Decentralized Markets( like the stock market), Staking Protocols(which work like banks), etc., their respective cryptocurrencies will also grow in value.

Note: Not all cryptocurrencies carry value( *cough…Dogecoin...*) and some are actually for just gambling.

Blockchain and cryptocurrencies are still relatively new technology and are still in their nascent stage ( just like the internet in the 90s). According to my, they definitely hold a huge potential in the long term.

Governments won’t be happy with the idea of a mainstream acceptance of cryptocurrencies because that will take a lot of power out of their hands and we will see many resist the change in the upcoming future. It will be definitely interesting to see how this thing unfolds.

It also means that your neighboring grocery store won’t just start accepting crypto from tomorrow or the traditional currencies just won’t disappear overnight. Just like any other innovation, it will take its time to grow and be adapted widespread. Globalization will also grow in the meantime and Blockchain( and crypto) can help solve some problems associated with that and break the unnecessary barriers.

Because the world can use some more ‘Trust’.

If you are reading this I suppose you are also fascinated and awestruck by the extraordinary returns(2x,4x, and even 20x!!) cryptocurrencies have provided in the past year. Many people are just getting into it because of FOMO, without realizing the underlying meaning of this beautiful innovation. Why is a digital combination of randomly generated hexadecimal numbers worth $50k?

In this article, I will try to explain the basic economics of cryptocurrencies, how they derive their value and what can be its possible future.

The concept of exchanging value with each other has been around ever since mankind was born. At first, it was a barter system, then came gold and silver coins and the most recent form which we currently use is printed/minted currency.

With the advent of the internet, companies like Paypal digitalized the process of transferring money, but the underlying aspect of it was still using a “centralized” platform monitored by a “centralized” entity to transfer the digital version of our traditional currency (and why is that a bad thing, is explained further in this article).

Value of cryptocurrencies going higher and higher

Up until 2007–08, people blindly trusted large financial institutions and banks with their money, and “trust” is a big factor in this industry. When the 2008 financial crisis shook the world, people started to realize that they cannot trust these institutions with their money. Certain people were profiting from other’s loss of income and livelihood. There was a gap to be filled!

Satoshi Nakamoto’s invention of Bitcoin in 2009 was perfectly timed. A completely ‘decentralized’ protocol of transferring money from one person to another with extra layers of added security, eliminating the middleman by establishing consensus within each member of the network.

Traditional currencies like( Dollar, Pounds, or the Indian Rupees) hold a certain level of value because “we” believe in it. A $5 note actually has no intrinsic value of its own, but the U.S. government regulates it in such a way that if you take that note to a store, you can get something else in exchange. The store manager accepts it because he believes that the same way. All of this trickles down to that one thing that I talked about in the beginning — Trust. Everyone trusts and accepts the value of ‘Dollar’.

So far, everything was working fine, because people believed in their respective nation’s currencies because of its limited supply. Recently with the advent of the pandemic, Governments all across the globe have started printing more and more currency (You can read about the problem with this here). This has led people to worry and question the relevance and value of their currency altogether. People have started to lose trust in this system and with globalization, they are looking for a more widely accepted and important (rare) form of currency.

Graph depicting the supply of Bitcoin with Time

Before we understand this, we need to understand why certain things possess more value than others. Gold is a valuable commodity because it’s so difficult and expensive to mine and refines. So, because of its demand and relatively limited supply, it continues to hold value.

At the time of writing this article, there are over 8000 different cryptocurrencies varying from a few cents to thousands of dollars.

All of them serve a different purpose and their value is either decided based on the problem they are solving or by their rarity.

Bitcoin is similar to gold. It’s so rare(only 21 million BTC will ever exist and around 19 million is already mined) and getting more difficult to mine each day, that its rarity is increasing its value.

Other cryptocurrencies like (ETH, BNB, LINK etc.) possess value because each of them is solving a particular type of problem. Generally, these Altcoins are backed by a product, just like a share of a company in the current stock market. As more and more people join the Blockchain community and start using these products like Decentralized Markets( like the stock market), Staking Protocols(which work like banks), etc., their respective cryptocurrencies will also grow in value.

Note: Not all cryptocurrencies carry value( *cough…Dogecoin...*) and some are actually for just gambling.

Blockchain and cryptocurrencies are still relatively new technology and are still in their nascent stage ( just like the internet in the 90s). According to my, they definitely hold a huge potential in the long term.

Governments won’t be happy with the idea of a mainstream acceptance of cryptocurrencies because that will take a lot of power out of their hands and we will see many resist the change in the upcoming future. It will be definitely interesting to see how this thing unfolds.

It also means that your neighboring grocery store won’t just start accepting crypto from tomorrow or the traditional currencies just won’t disappear overnight. Just like any other innovation, it will take its time to grow and be adapted widespread. Globalization will also grow in the meantime and Blockchain( and crypto) can help solve some problems associated with that and break the unnecessary barriers.

Because the world can use some more ‘Trust’.