In the series "The 10 Biggest Myths About Cryptocurrencies", let's take a closer look at the 10 most widely used claims about cryptocurrencies and their opportunities and risks. In doing so, we will daily explore a new myth and check it for accuracy.
Myth 8: Cryptocurrencies have no intrinsic value
What determines the value of a currency? To determine this, let's take a little digression into monetary history. Since its first use, money has fulfilled two key functions: value retention and exchange. Thus money had a decisive advantage over the previously prevailing trade in goods, which it replaced by making it possible to preserve values over longer periods of time and transport them over longer distances, qualities that goods and services can not (always) afford.
At the beginning of the money trade were naturals, to which a certain value was attributed. This could be - depending on regional specificity - shells, rare stones or weights. However, in common, these naturals had that the exchange value attributed to them exceeded the material value. Over time, gold, silver and, to a lesser degree, other precious metals could emerge as dominant commodities. To give the whole thing a state verification, governments began to shape official coins and only accept them as a means of payment in their territory.
The coinage represented an important step in the development of the money, it created for the first time the confidence of the citizens in a fixed and guaranteed by the state side value of the object of exchange. Trust is the keyword here, because trust is what gives our money legitimacy as a means of payment even today. With the advent of paper money and electronic money, money has continued to evolve from an intrinsic value to an object whose value depends solely on trust in its acceptance. We accept money for a service because we believe we will get back a service of comparable value for that money at another time.
Money derives its value from trust, or more precisely from trust in institutions such as the state or the central bank. But what about cryptocurrencies, which are deliberately decentralized and thus organized beyond any state control? Here, the trust of users in the institutions as intermediaries is replaced by the confidence in the blockchain and its algorithm. The intrinsic value of money in cryptocurrencies is basically no different from what it is in Fiat currencies.
In addition, decoupling the question of the value of a currency from the confidence factor and looking only at the material component gives a completely different picture. Thus, at the latest since the abolition of the international gold standard, central bank money is maximally covered by the value of the paper on which it is printed. On the other hand, a large part of the cryptocurrencies have a high production value, which results from the mechanism by which these coins are produced. The proof-of-work algorithm, which underlies Bitcoin, among others, rewards miners for distributing their computer computing power to the network by distributing new cryptocurrency units. The production value of the cryptocurrency thus corresponds to the computing and hardware performance provided. Compared to fiat money, this is a much more costly process, especially since monetary expansion in a Bitcoin ecosystem, as is possible with a central bank, is inconceivable. Bitcoin is limited to 21 million coins and also the mining of the blocks can not be accelerated easily. These limits set Bitcoin remains scarce, which in turn has a positive effect on the value stability.
Thus, this myth can not only be rejected, but in a certain way makes a relativization of the term "intrinsic value" necessary. The value of any currency whose exchange value does not exactly correspond to its material value is trust. Only collective trust in the sense of widespread acceptance among the population and companies creates lasting and stable values. The process of building trust and adaptation takes many years and has to contend with great resistance and setbacks. Still, cryptocurrencies seem to be on the right track.