Why Cryptocurrencies Have Value (Part 1)

(This was a letter written to a friend, so take it with that context in mind.)

Here’s a little write-up to better explain crypto. It’s honestly a bit difficult to find quality articles that fully understand what’s going on, because the mainstream media is missing the bigger picture at hand. So here are a few links to get some sense of what’s kind of going on:

If you only have 30 minutes and want a good laugh, I highly recommend the last link. John Oliver took a very difficult topic and simplified it. Although he also misses the bigger picture in terms of the real innovation underway, it’s a great look at the absurdity with a balanced approach towards its possibility and cautionary optimism.

Understanding Value

At the root of why cryptocurrencies have value is the notion that value itself is a subjective concept attributed by faith in the system that supports it. One can argue that while earnings support stock valuations and tax income back government-based fiat currencies, in reality one doesn't necessarily have to receive dividends (stocks) or receive govt handouts for holding dollars to still attribute value to their respective monetary unit. Rather, just as gold doesn't provide an income component to justify its valuation, it's assumed value is attributed to it's universal acceptance, utility, and supply scarcity. In the end, all of these are worth what someone is willing to trade them for.

Bitcoin is the most overrated crypto at present, but justly so as the oldest and most universal embodiment of a currency operating outside of centralized control. It is paired in trading to the entire crypto world and supports the largest market capitalization (refer to www.coinmarketcap.com). I’ll skip over crypto’s value to the undeveloped and unbanked world since we talked about it already. Its worth noting it also has value to Millennials who feel like they’ve been given a bad long-term economic outlook and rigged game when it comes to who has the power in this economy.

Anyways, the reason people are fixated on Bitcoin, apart from the media hype, is the large comparative valuations it's been attributed to have, which tends to attract reckless speculators. But to a degree even this is misleading. Just as one values gold by the ounce rather than by the ton, Bitcoin’s smallest divisible unit is actually the Satoshi (official term) which is officially 0.00000001 BTC. To gawk at 1 BTC being worth $10,000 is akin to being amazed that 1 ton of gold is worth $64 mil and yet not even moved if it was equivocally stated to only be worth $2000/oz. Right now, one Satoshi is worth 1/hundredth of a penny (equivalent to $10k/ BTC)... but should we really be shocked if it continues to go higher?

Simply put, bitcoin is the first digital currency to operate universally without centralized regulation or manipulation... so 1/100 of a penny for its most basic unit honestly isn't too impressive of a valuation in my opinion when we explore what it enables.

Now Bitcoin aside, the reason that crypto has value at all comes back to the real innovation that is taking place via blockchain. Blockchain has decentralized the ability to partake in maintaining an account of something, a task that originally required a trusted third-party verifier. You want stocks, you go to a broker. You want money, you go to a bank. You want ownership in a house, you claim it with the govt. Etc etc. It may be difficult to see initially, but it's going to allow for disruption across almost any industry you can think of... particularly as real assets become tied to digital tokenization. An example: https://www.cnbc.com/2018/03/19/own-shares-of-brooklyn-building-with-tokens-blockchain-real-estate.html

There also lies an additional, but very real value that trust-less digital currency ecosystems can provide. What if a "currency" had much deeper functionality/utility than just the value it supposedly represents as a unit of account? Unlike paper fiat currency that maybe can be burned or written upon as an additional utility, unique blocks of code can provide a whole host of enhanced utility. This gets trippy. Programmatic code can be designed to relay functional instructions. Imagine if your dollars were designed to duplicate or delete themselves or express instructions as to who should own what to who based on ownership....

(continued in part 2: https://steemit.com/crypto/@investingpennies/why-cryptocurrencies-have-value-part-2)