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Key Takeaways

  • Cryptocurrency gains value primarily through market demand, driven by factors such as investor sentiment, adoption by businesses and institutions, and perceived utility within the ecosystem;
  • Limited supply mechanisms, such as fixed maximum coin supplies or deflationary tokenomics, can contribute to value appreciation by creating scarcity and reducing inflationary pressures;
  • Value can also be influenced by technological advancements, protocol upgrades, and widespread adoption of blockchain technology, which increase confidence in the long-term viability and utility of cryptocurrencies.
How Does Cryptocurrency Gain Value?

One of the most important topics in economics is trying to understand where value derives from. This is true inside the cryptocurrency market, and in other, more traditional sectors such as stocks, foreign exchange, and commodities. However, when it comes to understanding how does cryptocurrency gain value, the topic can become more complicated.

This is because crypto is a much newer asset class compared to others, and so there is much less information and knowledge available, and because economists and financial experts do not get explicitly taught about crypto and blockchain. As a result, even these individuals can get mystified and confused. That being said, answering questions like “why is cryptocurrency valuable?” and “how do crypto prices go up?” is not a completely futile effort.

While these questions touch upon areas that you theoretically do not need to know if you want to begin trading on platforms like Binance or Coinbase, it is a highly fundamental topic that all beginners can benefit from. Not only this, but even veteran crypto users can struggle with finding answers to matters like this, and so there is much for them to learn here, too!

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How Does Cryptocurrency Have Value?

Let’s start by analyzing our primary question: how does cryptocurrency gain value (or, how does cryptocurrency have value)? This is a highly rudimentary question that is basically asking about why any cryptocurrency would be worth anything on the market. After all, it is non-tangible, and cannot be held, touched, or seen in the physical sense, unlike traditional assets like gold or real estate.

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This, coupled with the fact that crypto as a concept has only existed for a little over a decade, leaves people questioning whether it serves any real financial purpose whatsoever. To tackle this, let’s take a look at what the core principles of the crypto industry are.

In its most basic form, a cryptocurrency is an electronic form of money, which is created, stored, and sent via the use of cryptographic technology.

The first cryptocurrencies to ever get created, including Bitcoin and Litecoin, used this technology. Although, this alone does not give us an indication of where their value arises from. Rather, it helps to understand what purpose they were trying to serve.

How does cryptocurrency gain value: Litecoin and Bitcoin.

The first-ever coins were made with a very specific utility. They were meant to function and operate without the need for a centralized organization to distribute them.

Not only this, but these crypto assets could be stored and sent without any intermediary or third party intervening. In other words, people can hold and transact the coins globally online without the help of anybody else whatsoever.

Thus, the first crypto assets allowed (and still allow) people to use their money in an independent and autonomous way.

This is because crypto technology is decentralized, which means that no one organization or person has complete control over the money. Instead, a globally distributed network of people keeps the system running by powering it and engaging with one another. Therefore, the major utility of crypto is complete financial independence.

The 2007-2008 Economic Crisis

To help understand why this idea became so enticing to people, it helps to know that Bitcoin, the first fully formed cryptocurrency, was released in 2009, hot off the heels of the global economic crisis that began between 2007 and 2008.

The causes of this recession are still being studied, but one of the major elements that contributed to it was centralized organizations and financial institutions making high-risk decisions without sufficient transparency or accountability.

These organizations had a disproportionate amount of power and influence over the global financial system, and their mismanagement led to widespread economic fallout, affecting millions of people worldwide. The trust in traditional financial institutions and the overall banking system was significantly eroded. Many started questioning the efficiency, reliability, and even the motives of centralized systems.

In this context, the idea of a decentralized currency, one not controlled by any central authority or susceptible to the actions of a single organization, became particularly appealing. Bitcoin was released at a time when tensions between the individual and the established financial giants in this world had reached an all-time high.

How does cryptocurrency gain value: a desperate person.

BTC, and eventually the wider crypto industry, offered the utility of independent and individualized control as a solution to this matter.

This was the fuel that allowed them to jumpstart their value. In this current day and age, where traditional organizations engage with crypto in a more direct way, this factor can sometimes get forgotten, but it is still the bedrock that explains where does crypto get its value, and helps to frame the discussion of “why is cryptocurrency valuable?”.

To summarise this, cryptocurrency has value because it serves the purpose of giving people financial freedom to store and send their money on their own, without any other parties getting involved to facilitate the process.

You could say that historically, people could do these two things with money in its physical form, and by transacting directly in person. However, this would only be possible in small communities where people are geographically near each other. There was never a way to do this globally.

How does cryptocurrency gain value: a person giving money to another person.

Plus, even in small close-knit communities, there was not complete independence from centralized bodies, as there would still be an organization that would mint or initially distribute the money to them to start things off.

Cryptocurrency, however, does not have this, because the distribution and creation of the assets in question often happens cryptographically, where predetermined and pre-programmed code handles this.

Though, it is worth noting that not every coin and token operates exactly like this, as there is such a thing as a centralized cryptocurrency, but these are still considered outliers in the space, and they exist for slightly different purposes.

It is a little beyond the scope of this discussion, but generally, they are made as a way of adding new tools to the crypto space (such as stablecoins with pegged value to fiat). These centralized assets would not exist without this bedrock of decentralization, and so their value is still tied to the utility of independence and autonomy, albeit in an indirect way.

How Does Cryptocurrency Gain Value?

I have explained why cryptocurrencies have value, to begin with, and begun to answer the question of “where does crypto get its value?”, but this still does not exactly explain how does cryptocurrency gain value.

It might make sense for something that offers decentralization and autonomy to have some level of value to it, but it does not explain “how does crypto price go up?”.

The fact that assets like Ethereum and Bitcoin trade are traded for thousands of dollars on platforms like Binance and Bybit can confuse some people. It leads many skeptics to question whether these numbers are truly justified.

There is no one clear answer as to how does cryptocurrency gain values so high, but there are several interconnected reasons that help shed light on the situation.

Utility

I've discussed this earlier a bit, but it bears exploring again. Utility is definitely a factor that plays into the gaining of value[1], not just the initial having of it. This is because when more people start to recognize the utility of an asset, its price usually rises. People view it favorably, and therefore they assign a monetary value to it.

This is something that happens on an industry-wide level, rather than just an individual one. When it comes to high-performing cryptocurrencies (sometimes referred to as blue-chip coins), their price is attached to how much people recognize and appreciate their functionality.

As an example, the fact that the Bitcoin network has been able to offer a decentralized method of distributing assets, peer-to-peer transactions with no third party, and a system that has never been successfully hacked or shut down for so many years shows that it is highly useful. In this sense, its success in performing its utility translates into its monetary value; at least to some extent.

Turning to Ethereum, the second most valuable cryptocurrency in the market as of writing, the situation is largely the same.

How does cryptocurrency gain value: Ethereum.

However, Ethereum has other utilities that Bitcoin does not. For starters, it acts as a blockchain ecosystem, which means that it can facilitate more than decentralized transactions and independent storage of money– people can build decentralized applications on it.

Programmers can make tools that run on the Ethereum network that also function in a decentralized and autonomous way. These are abbreviated to dApps, and they allow for more complex actions to occur within an environment that has no strict or traditional hierarchy. Its utility has expanded beyond Bitcoin’s.

This is the same for smaller and more niche assets in the market as well. Oftentimes, these will serve specific purposes that Bitcoin or Ethereum cannot offer themselves. For example, Monero offers fully private and untraceable transactions in a decentralized setting, while Binances BNB is a cryptocurrency that offers a huge variety of use cases within the Binance ecosystem and outside of it.

Public Opinion

Utility is only one piece of the puzzle when it comes to understanding how does cryptocurrency gain value. Another huge element is that of public opinion[2]. Like everything in this world, the way people think about something will change its value. If something is viewed positively, then there is a higher chance that people will be willing to pay more for it.

Some exceptions exist to this, especially when talking about things that are deeply emotive and ethereal, such as notions of love and kindness, which we often think of as being free because they transcend materialistic value and cannot be quantified or commodified. These intangibles, rooted deeply in our human experience, hold an intrinsic value that does not adhere to traditional economic principles.

However, when it comes to most other things, such as tradable goods and assets, the way people view them will change their financial status.

How does cryptocurrency gain value: a person holding BTC.

To bring this back to crypto, for several years, Bitcoin and Ethereum have been thought of positively in the public eye, which surely helped their price to increase. This is because when a majority believes in the potential and utility of a particular asset, demand for it rises.

The growing acceptance and endorsement of cryptocurrencies by major institutions, businesses, and influential figures have bolstered public trust and interest exponentially. The media attention and narratives around the transformative potential of blockchain technology and decentralized finance have further fueled this optimism.

Therefore, as more people come to understand, adopt, and advocate for cryptocurrencies, their perceived value in the market escalates, leading to a self-reinforcing cycle of increasing valuation.

The shadow of this concept is hype, which is a sub-type of positive public opinion. For example, some assets, such as Dogecoin, Shiba Inu, and other so-called memecoins have experienced a huge amount of hype, which resulted in huge price surges.

How does cryptocurrency gain value: Dogecoin.

When it comes to hype, utility is often believed to take a backseat in people’s minds. This is somewhat true, in the sense that many memecoins do not have a specific use case that cannot be achieved from other cryptocurrencies.

However, there are other subtle utilities that can come with memecoins that are often ignored. Social status, access to the communities formed around these coins, and overall enjoyment that can come from investing in these assets are also utilities.

Granted, these are definitely hard to pin down, because people connect with these coins and tokens in very personal ways, but they still function on a utility-level. That being said, it is more or less fair to say that hype is largely a byproduct of public opinion that is necessary to consider when asking “how does cryptocurrency gain value?”.

Marketing, advertising, social media discourse, and the ideas people share with each other within specific communities are where the hype is built and public opinion is shaped and formed. If these elements start to dwindle, or a poor image in the public eye is formed, then this can also help to answer “how does cryptocurrency lose value?”.

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Trust in the Industry (and Traditional Markets)

This idea connects directly to that of public opinion. When a cryptocurrency, or the industry as a whole, reaches an increased level of respect and trust from the world, then it can lead to financial gains. If an asset (or asset class) is trusted, then people will naturally feel safer or more comfortable engaging with it.

It is possible to argue that, on an industry-wide level, the public idea of cryptocurrency may rise at times when peoples perceptions of the traditional market fall. This notion sometimes occurs because of the simple fact that the crypto space was born at a time when there was a global economic crisisone that came along with people pointing fingers at financial elites and centralized figures.

How does cryptocurrency gain value: a businessman holding BTC.

Cryptocurrency presented itself as a panacea to this issue, meaning that the fall of the traditional markets often gets tied to the rise of this sector. In a similar, and arguably mirrored, sense, the crypto markets rose during the COVID pandemic.

This, too, was during a time when the public viewed centralized organizations unfavorably, as many governments, businesses, and institutions mishandled people.

It is no surprise that the markets soared, even when traditional sectors sometimes struggled around this time. Of course, two examples are not enough to show a direct pattern, but due to the limited time the world has had with the crypto space, it is still worth discussing.

In other words, the way people trust the traditional world might affect the financial behavior of the crypto industry.

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Scarcity

The amount of an asset that is available to the public has a major impact on its value, too. If an asset that is viewed favorably has a limited supply, like Bitcoin, for example, then it can be highly related to answering “how does cryptocurrency gain value?”.

When something that people like has a reduced amount accessible, then people start to drive the price up, especially if demand grows in a way that cannot compete with a lesser supply.

How does cryptocurrency gain value: Bitcoin stats on the BitDegree crypto tracker.

Not every cryptocurrency is scarce, and so this does not always directly relate to the questions of “why is cryptocurrency valuable?” or “how does crypto price go up?" talking about these assets. However, when it comes to assets like Bitcoin, it definitely adds a dimension to the situation.

After all, there will only ever be 21 million BTC in existence, and not all of these will even be in circulation due to some getting lost in wallets. This naturally fosters a scenario where most enthusiasts and fans will recognize that supplies will dwindle, and so the value of each individual coin drives up. This is a subtle factor that moves prices upward at times, even if traders do not always discuss or think about it.

How Does Cryptocurrency Lose Value?

To help frame this discussion on “how does cryptocurrency gain value?”, let’s examine how does cryptocurrency lose value. For the most part, we could look into the reasons that come from gaining value and simply inverse them. For instance, if there is no scarcity, no trust in the technology, poor public opinion, and a lack of utility, then an asset will likely have a low value.

If any of these factors begin to falter, then it could lead to a dropping in value. The two most common ways this occurs is via rising poor public opinion or the failing utility of an asset. For example, the price of Solana is often questioned due to the fact that its blockchain has shut down or halted on several occassions, suggesting that its utility is not fully there.

Another example would be when a cryptocurrency gets a lot of bad press in the media, which used to regularly happen with Bitcoin. On some occasions, this negative social response would lead to price drops– although this was not always the case.

How does cryptocurrency gain value: a candlestick chart.

However, another noteworthy factor that can relate to the question of “how does cryptocurrency lose value?” is the act of market corrections.

This is where the market self-adjusts after a supposed period of overvaluation. In simpler terms, if the price of a cryptocurrency has risen too rapidly, often due to speculative behavior or excessive hype, it may undergo a correction wherein the price falls to reflect its true or perceived value more accurately.

Market corrections are a natural part of any financial ecosystem and are seen as a way for the market to rest after periods of rapid price movement. These corrections can be influenced by various factors, including the ones discussed earlier.

For cryptocurrencies, which are known for their high volatility, market corrections can be particularly sharp and swift. This is because the crypto market is still relatively young, and heavily influenced by retail investors who might make emotion-driven decisions.

How to Know When Crypto Will Rise or Fall?

Most people trying to understand how does cryptocurrency gain value (and, subsequently, how does cryptocurrency have value) eventually find themselves asking “how to know when crypto will rise or fall?”. Essentially, they are hoping for a method of timing the markets as best as possible, to help their own financial endeavors. The sad truth is that there is no foolproof way to do this.

Some people will say that the optimal method to predict market activity is to use technical analysis, which is where you look at past crypto chart data and hope to identify patterns that can be used to predict future activity, along with fear and greed indices.

However, this is not an exact science, and even technical analysis applied to traditional markets fails at times. This is even more problematic with the crypto space as we have less historical data and we are still in the process of learning how it functions and operates economically.

How does cryptocurrency gain value: price analysis.

Another method that can help with trying to discover how to know when crypto will rise or fall is by viewing the overall financial world. Recessions and times of global inflation, for instance, can help give some indications as to what will happen in certain sectors.

This can be slightly hard to navigate in terms of crypto because the industry has shown in the past to not synchronize with the global sentiment, in the sense that sometimes it can rise when everything else falls.

However, there is some debate as to whether this is always the case. Generally speaking, it makes sense to keep abreast of global financial movements because, at the very least, it will provide context and a broader perspective on economic forces at play.

How does cryptocurrency gain value: global market analysis.

Even if cryptocurrencies occasionally behave in a counterintuitive manner compared to traditional markets, understanding the global financial landscape can offer clues about potential triggers for crypto market shifts.

Factors like central bank policies, interest rates, geopolitical tensions, and major economic announcements can indirectly influence the crypto space. For instance, a significant tightening of regulatory controls in a major market could dampen crypto sentiment, or conversely, a country's positive embrace of blockchain technology could trigger renewed interest and investment.

This could even contribute to answering the question, “how does cryptocurrency gain value?”.

Conclusions

Questions like “how does cryptocurrency gain value?”, as well as “how does cryptocurrency lose value?” are extremely important for all members of this community to delve into. While they might seem like highly simple matters, they cut to the heart of what makes the crypto market stand out and flourish. This industry is not easy to understand, and so it makes sense that people will struggle with these questions.

What should be kept in mind when navigating such matters is that nothing is truly set in stone just yet. These are top-level economic subjects, and so a great deal of the ideas raised are theoretical in nature, connecting to sociological, political, and technological concepts that could be ever-changing.

While you do not exactly need to know how does cryptocurrency gain value, or how does cryptocurrency have value to begin trading on platforms like Binance or Bybit, having some idea of how to answer these questions arms you with a specialized foundational type of knowledge that can help make more informed decisions.

The content published on this website is not aimed to give any kind of financial, investment, trading, or any other form of advice. BitDegree.org does not endorse or suggest you to buy, sell or hold any kind of cryptocurrency. Before making financial investment decisions, do consult your financial advisor.


Scientific References

1. G. Giudici, A. Milne, D. Vinogradov: 'Cryptocurrencies: Market Analysis and Perspectives';

2. P. Roozkhosh, A. Pooya: 'Dynamic Analysis of Bitcoin Price Under Market News and Sentiments and Government Support Policies'.

About Article's Experts & Analysts

By Kai M.

Expert Analyst, Contributor

Born and raised in London, UK, Kai is a Web3 ethicist with a Law & Philosophy degree that empowers him to see the broader regulatory & ethical landscapes of the still-young and forming crypto space. An avid enthusiast of DAOs, Kai advocate...
Kai M. , Expert Analyst, Contributor
Born and raised in London, UK, Kai is a Web3 ethicist with a Law & Philosophy degree that empowers him to see the broader regulatory & ethical landscapes of the still-young and forming crypto space. An avid enthusiast of DAOs, Kai advocates for the liberty and freedom of the Web3 ecosystem.
As an expert analyst of blockchain tech-related concepts, Kai has been officially nominated for Hackernoon Contributor of the Year in the Proof-of-Stake category. Specializing in Web3 ethics and blockchain philosophy, Kai tackles some of the hardest and most thought-provoking questions this space has to offer.
Employing his expertise, Kai researches and covers the topics of the Metaverse, the future of DAOs, Web3 ethics, and crypto regulation, with the goal of better understanding the growing topic interest curve in the masses.
In addition to being a hardened blockchain researcher, Kai is an avid history lover, and enjoys discussing historical events with his peers.

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FAQ

Why is the crypto market unpredictable?

There is no exact framework or guideline for figuring out how does cryptocurrency gain value and why the market is so upredictable. However, there are several reasons that definitely have an impact, such as global and retail-based user base, the lack of historical data, and the rapidly evolving technological landscape. Technical analysis can help in this area, with exchanges such as Binance and Bybit offering good TA tools within their dashboards.

How does crypto lose value even in a bull market?

While bull markets are typically times of economic flourishing, there will occasionally be outlier coins and tokens that lose value even in the midst of this. This is just an important question to ask as “how does cryptocurrency gain value?”, and it can happen for a myriad of reasons, such as poor public image, a faulty product leading to a drop in utility, or even a very specific market correction focused directly on one asset in particular. Some people enjoy taking advantage of situations like this by shorting certain cryptocurrencies, which can be done on platforms like Binance and BYDFi.

How to pick the best crypto exchange for yourself?

Picking out the best crypto exchange for yourself, you should always focus on maintaining a balance between the essential features that all top crypto exchanges should have, and those that are important to you, personally. For example, all of the best exchanges should possess top-tier security features, but if you're looking to trade only the main cryptocurrencies, you probably don't really care too much about the variety of coins available on the exchange. It's all a case-by-case scenario!

Which cryptocurrency exchange is best for beginners?

Reading through various best crypto exchange reviews online, you're bound to notice that one of the things that most of these exchanges have in common is that they are very simple to use. While some are more straightforward and beginner-friendly than others, you shouldn't encounter any difficulties with either of the top-rated exchanges. That said, many users believe that KuCoin is one of the simpler exchanges on the current market.

What is the difference between a crypto exchange and a brokerage?

In layman's terms, a cryptocurrency exchange is a place where you meet and exchange cryptocurrencies with another person. The exchange platform (i.e. Binance) acts as a middleman - it connects you (your offer or request) with that other person (the seller or the buyer). With a brokerage, however, there is no “other person” - you come and exchange your crypto coins or fiat money with the platform in question, without the interference of any third party. When considering cryptocurrency exchange rankings, though, both of these types of businesses (exchanges and brokerages) are usually just thrown under the umbrella term - exchange. This is done for the sake of simplicity.

Are all the top cryptocurrency exchanges based in the United States?

No, definitely not! While some of the top cryptocurrency exchanges are, indeed, based in the United States (i.e. KuCoin or Kraken), there are other very well-known industry leaders that are located all over the world. For example, Binance is based in Tokyo, Japan, while Bittrex is located in Liechtenstein. While there are many reasons for why an exchange would prefer to be based in one location over another, most of them boil down to business intricacies, and usually have no effect on the user of the platform.

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