You can’t see me, or touch me, but I can be mined. What am I?
Answer: a cryptocurrency (of course).
Money that you can’t hold, or really see and only truly exists in cyberspace, but if it's not tangible, like gold or silver, what value can digital money possibly have?
Valuing Cryptocurrency That Doesn't Physically Exist
Money might make the world go around, but only because we let it. If you look beyond the shiny coins and banknotes, you’ll realise that the whole concept of money and its value is simply based on a shared belief system. For example, if you went into a shop and tried to pay for £10 worth of goods with a £5 note, whilst insisting that your fiver was really a tenner, you’d probably be marched straight to the nearest police station. We all agree that a £5 note is worth exactly £5 because the Bank of England says so - it's our collective consciousness that helps us perceive the value attributed to particular coins or notes.
Cryptocurrencies are slightly different; there are no set physical formats that denote their value. But this doesn’t make them any less real - only 4% of money in the UK actually being physical form and the rest of it is held electronically, existing as nothing more than numbers on a screen. With this in mind, cryptocurrencies like Bitcoin gain their value just like other currencies or commodities through supply and demand, including how much effort is needed to obtain it, usage and perception.
Gaining Value through Supply and Demand
Supply and demand is the basis of commercialism and every good salesman knows that you can have too much of a good thing. On the other hand, if you make something limited, then everybody will scramble to get their hands on it. This principle provides the backbone to understanding how cryptocurrencies like Bitcoin have value.
For instance, there are only 21 million units of Bitcoin in existence and can be ‘mined’. Although this sounds like a lot, take note that there were just over 2 billion £5 notes in circulation as of this year, which has been growing rapidly over recent years. The finite number of Bitcoins means that inflation is not an issue and as availability reduces, its value genuinely increases.
Effort Equals Value
The harder something is to earn, the greater the value we place on it, and earning/’mining’ Bitcoins (for example) can consume the same amount of energy that it takes to power an entire country. Although the effort in mining Bitcoins is done by hardware and fancy processors, the cost of running the equipment is expensive and as the computational puzzles become harder to solve, the energy consumed and as a result, cost, ever increases, making the quest for Bitcoin even harder.
Using Cryptocurrency’s Growing Acceptance
Bitcoin is probably the most well-known of all the cryptocurrencies and its growing popularity means it can be spent in actual shops to buy real things we might want. Last year, for example, US-based payments startup Flexa partnered with Amazon-owned companies, including Whole Foods, Nordstrom and Starbucks, to enable payment by Bitcoin. Alternatively, you can spend your Bitcoins on games, movies and apps at Microsoft, or if you fancy a trip to outer space, then you’re in luck as Virgin Galactic now accepts Bitcoin.
But it's not just shops, as Bitcoin ATMs have been popping up all over the UK; there are now over 11,000 Bitcoin hole-in-the-walls dotted throughout the country where you can buy or sell the cryptocurrency. Even governments are keeping an open mind and some recognise cryptocurrencies as legal tender - Singapore is in the process of creating a legal framework for this in the form of the Payment Services Act license.
Ultimately the ‘suck-it-and-see’ approach has rubbed off on early crypto adopters and helped cryptocurrencies boom over the last few years, rather than be dismissed as a fad dreamt up by a load of techs.
Perception IS Reality
If nobody wanted designer handbags, they wouldn't be so expensive. However, if one factory made two bags using the same materials but slapped a designer label on one of them, the designer one would still command a higher price?
The point is that designer handbags aren’t intrinsically better than their regular high-street counterparts, but it's the perception that they're somehow more worthy and desirable that reinforces their price. Whether it's the mystique surrounding a particular label, lifestyle association or a cool marketing campaign, it's the belief that something is special that we buy into.
The same can be said for cryptocurrencies; they’re new and exciting in the often dull and broadly predictable sphere of finance. The fact that they are not quite as mainstream as traditional currency also makes them more desirable to consumers, encouraging people to get involved in the sector before it becomes part of the everyday. Plus, in a world where the rich seem to get richer, cryptocurrencies can be seen as a way of redressing the balance. There are numerous stories of how ordinary people have become Bitcoin millionaires almost overnight.
Not only this, but the fact that cryptocurrencies are decentralised (but still legal in many countries) and not tied to a particular central bank or official organisation, makes them even more appealing to many who may feel suspicious of the banking system. The blockchain that they are built on is simply a shared ledger that holds all Bitcoin transactions and is visible to anyone. It’s this transparency and collective faith in the system that enables crypto to continue to flourish.
How do we Add Value as a Society?
Like a fine wine or a good cheese, value takes time to mature, and every time we use or discuss cryptocurrency, it gains another foothold in mainstream society and becomes more readily accepted. As the word spreads, businesses and organisations are growing to accept it more, realising that they need to understand it further.
Here at Wirex, we’re on a mission to bring crypto into the mainstream by creating a safe, easy and cheap solution for where crypto can be used in the everyday, with the ability to be spent in-store at over 54 million locations around the world.