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How Do Cryptocurrencies Work & Gain Value? | Cryptocurrency Explained For Beginners | - YouTube
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Cryptography in black and white.
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What determines the value of cryptocurrencies?
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Since 2008, over 5000 new聽
cryptocurrencies have been created,聽聽
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resulting in a $500 billion聽
digital token market by late 2020.
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may seem like a lot of money, but聽
it's nothing compared to the S&P聽聽
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500, which is worth almost $30 trillion.
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The S&P 500 is 600 times larger than聽
the Dow Jones Industrial Average,聽聽
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and it only contains the United States'聽
500 largest publicly traded firms.
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But where did the $500 billion come from?
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What determines the value of a cryptocurrency?
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Jenny will be the one to answer to that.
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Jenny is the brains behind the聽
cryptocurrency New Crypto Coin.
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With a maximum of 1000 coins available,聽聽
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each currency is pre-mined and immediately聽
marketable when it is initially created.
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Jenny's bitcoin is worthless聽
because no one has bought it.
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John is intrigued by Jenny's cryptocurrency聽
suggestion, so he researches it more.
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Jenny's coins are worth $10,000, and聽
he offers to buy them at $20 each.
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Jenny offers to buy 500 coins from John聽
and sell them to him on a secondary market.
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Following the sale, John upped聽
Jenny's crypto project's entire value,聽聽
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or market capitalization, to聽
$20,000, with each token worth $20.
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Jenny is ecstatic because she now owns the聽
remaining 500 coins and has made a $10,000 profit.
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She may sell her coins immediately聽
and make a quick profit,聽聽
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or she could wait and see if聽
the price grows over time.
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Jenny meets James, who is looking聽
to buy 600 coins for $18,000,聽聽
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and is ready to pay up to $30 each coin.
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The currency's true intrinsic value,聽
according to James, is around $100 per coin.
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For a profit, James agreed to acquire聽
300 coins from John and Jenny.
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Jenny and John now have a total of $6,000聽
in coins and a profit of $9,000 each.
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James has a total of 600 coins valued $18,000.
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Both John and James contributed to the聽
project's value by believing that they聽聽
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could create more value for themselves by聽
exchanging the coin for more in the future.
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Because there are 1000 coins accessible in total.
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The value of a cryptocurrency acts聽
similarly to a bucket full with water.
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Water represents money or wealth聽
flowing into and out of the coin.
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Yes, some people sell an exit,聽
but if the cryptocurrency has聽聽
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a compelling purpose to exist in the聽
first place, this will fade with time.
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As the number of people contributing聽
extra capital increases,聽聽
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the price of the asset, the聽
water, and the bucket will climb.
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At some point, the number of people聽
entering and exiting will be almost聽聽
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equal, and the bucket will be full.
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This is when a cryptocurrency's聽
intrinsic worth hits its highest peak.
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Any new capital provided sloshes out the聽
edge of the bucket as people exit an exit.
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As a result, this concept doesn't just apply聽
to cryptocurrencies; it also applies to fiat聽聽
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currencies, stocks, real estate, gold, and聽
everything else that can be bought or sold.
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These assets are distinct in that they are聽
not bound by cryptographically protected code.
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There is always new gold mined,聽
new fiat currency created,聽聽
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and the possibility of a聽
company issuing more shares.
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Think of these assets as聽
infinitely expanded balloon money.
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The balloon in our metaphor is always filling with聽
air, but because the number of units isn't fixed,聽聽
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it just keeps becoming bigger聽
and bigger until it bursts.
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People are recognizing that their investment has聽聽
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become so diluted that it聽
is effectively worthless.
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This has happened multiple聽
times throughout history,聽聽
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with Germany in the early nineteenth聽
century being the most notable example.
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Where banknotes, such as聽
this 10 billion mark note,聽聽
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began to be used as wallpaper聽
by the general people.
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This will never happen to a coin with聽
a fixed, predetermined amount of units.
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Over the course of a cryptocurrency's useful life,聽聽
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its value is decided by a deal聽
between multiple buyers and sellers.
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What criteria do you use to聽
assess a cryptocurrency's utility?
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That's something to think about for聽
a future crypto black-and-white.
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