Evaluating cryptocurrency economics

Asking why cryptocurrencies have value is equivalent to asking why anything has value. We put a numerical value on things because it gives us something – a house that provides us with a secure place to sleep, a car that gives us the capacity to travel to distant places, or food for survival. Generally speaking, blockchains have utilitarian value as a tool to store money, to make almost instant digital coin transfers, and to use a specific type of applications that wouldn't work without blockchain.

Exchanges play a big part when it comes to converting cryptocurrencies. You can go to any exchange that accepts Ether and convert it to any other currency, since they agreed that it's something valuable. Money is based on agreements. We all agree that an apple has a specific dollar value that could vary slightly, as long as people want to consume that apple and accept dollars in exchange, they will buy it. It's the same thing with Ether—as long as people want Ether for whatever they can do with it and accept dollars in exchange, they will buy it.

Before money existed, people exchanged things by agreement, for instance, a table for a potato sack. Then, they decided to use an abstraction, a number, that could be used for understanding the value of things in a more precise manner.

Note that price is never fixed. It's not like the metric system, where 1 kilogram is the same for the entire planet. Fiat and cryptocurrencies derive their price by comparing themselves with other currencies. $1 dollar is $1 dollar compared to 0.8 euros. 1 Ether is 1 Ether compared to 200 dollars. The global exchange of fiat currencies in the world is called Forex (foreign exchange). For cryptocurrencies, there are individual exchanges that deal with prices on their own.

The moment that someone is willing to exchange a coin for another, both coins attain a price. For instance, imagine the following scenario:

  1. Think about a new virtual coin called RED that someone just created. It doesn't have any value, because nobody wants to buy it since it's not well-known yet.
  2. Now, John reads about this new RED coin and decides that it will help him purchase apples at a lower price, because they have reached agreements with local producers. The RED coin has a utility value.
  1. He goes to the exchange and negotiates with the owner of the coin. John wants to buy 100 RED coins, so they talk until they decide that 100 RED coins are worth $300 dollars based on the utility of the coin.
  2. At that moment, the RED coin gains a value of $3 dollars until the creator of the coin decides to reduce the price to increase buyers or vice versa.

The market decides the prices of all currencies that depend on the people's willingness to buy them.

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