Wednesday, November 29, 2017

Cryptocurrency Value?

Cryptocurrency Value?

Recently, cryptocurrency Bitcoin (BTC) has reached a price of US$10,000 on 11/29/17. Like many others interested in making a buck, I’ve been intrigued in how cryptocurrency prices, specifically BTC, can keep increasing; and how I can jump onto this money train. Early investors could have gotten BTC for pennies, and some of us are kicking ourselves wondering: why didn’t I invest? Knowing the true value of a stock or other financial instrument can be difficult to predict, but people make their livelihoods from it! Cryptocurrency is even more troublesome to predict the value of. With stocks for example, you can look at the company behind them, calculate a cost benefit analysis, or current events. Value can be seen pretty quickly, where as with cryptocurrency-there is not a centralized force behind them. No company that gives cryptocurrency its value, or money back if you are ripped off. Although, cryptocurrencies “were designed as a unit of exchange and as a place to store assets without relying on a central bank” (https://bitconnect.co/bitcoin-information/10/how-is-the-price-of-cryptocurrency-defined).

Based off of this description of cryptocurrency, we can start to see its true value: as a decentralized unit of exchange. With an innovative idea like this you can extend the uses of cryptocurrency from beyond a simple EURO to USD, currency exchange, into some more diverse applications. Not only can cryptocurrency be used as a unit of exchange to buy a hotdog from a vendor, but it can be used to skip over traditional wire transfers-trading peer to peer regardless of distance.  

If you look at the trending price of BTC, as well as the trending number of users/purchasers of BTC, you can see that as the number of users increase-so does the price of BTC. This insight can be seen as one of the ‘main drivers’ of cryptocurrency price defined by bitconnect: “perceptions on its value by the public”. If the public did not perceive value, they would not become users/purchasers and BTC would not have hit such a historic high. UofA’s very own Rachael Dunn, https://ai.arizona.edu/people/rachael-dunn, furthers this by saying “The value of bitcoin is essentially dependent upon the trust of its community that it will succeed”. BTC is a tool, and its value is defined by those who use/buy it. Once a tool becomes irrelevant, the value it once had plummets.

I ask you now, what is cryptocurrencies value?

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Rachael’s Full Response:
I've struggled to understand this myself [how do cryptocurrencies create value] but have come up with a few reasons the Bitcoin community has been able to justify the value of bitcoins. I'll try to condense it for the sake of time.

Historically, the value of anything has depended on the value a society is willing to place on an object.
Gold for example, is considered precious and limited and therefore valuable. Let's say someone was to stumble upon a large gold mine, for examples sake we'll assume the mine was so large that it would more than double the amount of gold in circulation. If this discovery were to be publicized the value of gold would decrease tremendously as a result of the increased availability of it.

Another example would be the value of diamonds. In first world countries, jewelers are able to market a diamond for thousands of dollars based on cut, color and clarity. Another price factor is the jeweler itself. Just like shoes and cars, people are willing to pay more for a brand name product. I chalk this up to equal parts good marketing and ignorance. In some areas of the world, diamonds are mined in large quantities but the companies who control their distribution have historically restricted their availability, thus creating the illusion that they are rare and valuable.

People buy both gold and diamonds because they trust that their value is timeless. Gold is advertised as an investment technique and grandparents often pass down jewelry they consider to be valuable mementos. Just like a sales rake in a store, when people stop buying something for its "accepted" price, the distributers of that product will lower the price and thus decrease the values of the products.

The value of bitcoin is essentially dependent upon the trust of its community that it will succeed. As I'm sure you're researched, the currency value of bitcoin only really began to increase after the amount of users began to increase. Even more recently, retailers have started to accept bitcoin as a form of payment, creating material value for the cryptocurrency.


I believe this essential trust is derived from a combination of the innovation and curiosity surrounding cryptocurrencies, the security of using a decentralized network structure, transaction anonymity, and the network of people using it from corporations to cybercriminals.
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I ask you now, what is cryptocurrencies value?

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