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 – a case of the emperor’s new clothes perhaps? After all, surely something only exists because it’s tangible, right?
So…if it’s not tangible, like gold or silver, what value can ‘digital money’ possibly have?
Valuing cryptocurrency when it 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 the whole concept of money and its value, is simply based on a shared belief system – the emperor might not have any clothes on, but we’ve all chosen to believe that he has.
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, well…£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 value. Does this make them any less real? No – after all, just 4% of money in the UK is in physical form, 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; how much effort is needed to obtain it; usage; and perception.
Gaining value through supply and demand
Supply and demand – it’s 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, for example – have value. For instance, there are only 21 million units of Bitcoin in existence; it sounds like a lot, but not when you consider that there were 382 million £5 notes in circulation in February 2017. The finite number of Bitcoins, means that inflation isn’t 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 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 therefore cost) ever increases – making the quest for Bitcoin even harder.
Using cryptocurrency – 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. For instance, retailers on ecommerce platform Shopify have been given the option of accepting Bitcoin as payment. You can also spend your hard-mined Bitcoins on cosmetics from Lush.com; on games, movies, and apps at Microsoft; and 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, or interstellar travel, Bitcoin ATMs have been popping up all over the UK – there are now 104 Bitcoin holes in the wall dotted throughout the country where you can buy or sell the cryptocurrency.
Even governments are keeping an open mind and some recognise cryptocurrencies – Bitcoin, in particular – as legal tender. Ultimately the ‘suck it and see’ approach has rubbed off on adopters and helped cryptocurrencies boom over the last year or so rather than be dismissed as a fad dreamt up by a load of techs.
Perception IS reality
If nobody wanted a Chanel handbag, they wouldn’t be so expensive. But if one factory made two bags using the same materials, but slapped a designer label on one of them – guess which one would command the higher price?
The point is – designer handbags aren’t intrinsically better than their regular high-street counterparts (although connoisseurs would scoff into their Gucci clutches). Rather, it’s the perception that they’re somehow more worthy and desirable. Whether it’s the mystique surrounding a particular label, lifestyle association or a snazzy 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 dull and broadly predictable sphere of finance. There’s also something a little bit rebellious about cryptocurrencies – not too much, but as Goldilocks discovered, there’s just the right amount of non-conformity to make it appealing.
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 – it’s a financial good news story (and there aren’t many of those).
Also, let’s not forget – cryptocurrencies aren’t tied to any country, central bank or official organisation. Their decentralised but legal status (in some countries) just makes them even more appealing – particularly in the light of banking scandals and collapses.
The technology behind Bitcoin and the template for other cryptocurrencies – blockchain – essentially exists because of a collective faith in the system. Blockchain is simply a shared ledger that details all Bitcoin transactions and is visible to anyone.
So, despite cryptocurrencies being a thoroughly modern form of money, its transparency and the communal belief that powers it, is pretty quaint. In a world that seems overrun by extremes and suspicion of the banking system, the perceived visibility and mutual trust that enable cryptocurrencies to flourish feels like that first daffodil in spring – a new beginning.
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 cryptocurrency, or discuss it, it gains another foothold in mainstream society and becomes accepted…and it seems that word is spreading. More and more people are talking about Bitcoin; businesses are starting to accept it, organisations are realising they need to understand it and the media is reporting on it.
This is good news. More attention demands better utility and accountability throughout the industry, and that’s where Wirex comes in. We’re dedicated to building the crypto-community, and we do it by breaking down the barriers of entry. You don’t have to be a banker, broker, or tycoon; our financial platform allows you to easily and securely, buy, spend, and manage Bitcoin (and soon, other alt-coins too).
Sign up with Wirex today and become part of the crypto-revolution.