30s Summary

Cryptocurrency’s ‘true’ value can be determined by its useability, scarcity, network value, and security. Methods used to measure this value include Metcalfe’s Law, production cost, and discounted utility models. Unlike traditional currencies, which derive value from trust in government, cryptocurrencies gain value from decentralisation and scarcity. Realising the inherent value of cryptocurrencies can help investors to identify strong projects and avoid riskier ones. Bitcoin’s value lies mostly in its limited supply and strong security whilst Ethereum’s value comes from its role in decentralised applications and smart contracts.

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Main Points

1. Cryptocurrencies like Bitcoin get their value from things like scarcity, useability, and security, they aren’t physically backed.
2. Popular ways to figure out a cryptocurrency’s ‘true’ value are through Metcalfe’s Law, production cost and discounted utility models.
3. Calculating this ‘true’ value is tough as the market fluctuates and is affected by speculation.
4. Ordinary currencies don’t have a ‘true’ value as they rely on trust, whereas crypto coins’ value is based on decentralisation and scarcity.

So what is this ‘intrinsic’ value thing all about then? Well, it’s like the actual worth of something based on the fundamentals, not the market price.

For example, in normal financial stuff, a stock’s value is often worked out through things like earnings, cash flow, and potential for growth. When it comes to cryptocurrencies, it’s a bit more complex. This is because crypto coins aren’t tied to things in the real world or reliable income streams like shares dividends. Figuring out the intrinsic value involves a combination of techy, economic, and useability factors.

In a nutshell, figuring out the intrinsic value answers the question: “Why is this cryptocurrency important outside of its trading price?”

The ‘true’ value of cryptocurrencies hinges on several things:

1. Useability: What problems can this cryptocurrency fix?
2. Scarcity: Can the supply be inflated or is it capped?
3. Network value: How big and active is the ecosystem backing it?
4. Security: How well can blockchain fend off attacks?

For instance, most of Bitcoin’s value hangs on the fact there are a limited number of coins, a decentralised network and some solid security measures in place.

On the other hand, Ethereum’s main value comes from being the backbone of decentralised applications and smart contracts.

Did you know that a June 2024 report reveals that worldwide crypto ownership shot up to 562 million from 420 million in 2023? That’s about 6.8% of the world’s population, and Asia is leading the charge.

How to figure out a cryptocurrency’s inherent value: Three popular methods

1. Metcalfe’s Law: This is all about how the value of a network is directly linked to how many active users it has. As more individuals use a network, its value goes up quickly.

2. Cost of production: This way of calculating a coin’s true value takes into account the production or mining cost.

3. Discounted utility model: This method estimates a cryptocurrency’s inherent value by predicting its future usefulness.

One example of a currency that’s difficult to estimate in value is BNB as its value comes from its specific role within the Binance ecosystem.

Whether or not normal currencies have ‘intrinsic’ value

Normal currencies like the US dollar or the euro don’t have an ‘intrinsic’ value in the usual sense. Unlike things like gold or silver, ordinary money isn’t backed up by a physical resource. The value equivalent here comes from people’s trust in the government’s ability to manage the economy and honour its debts.

A few reasons why cryptocurrencies’ values matter

Understanding the inherent value of cryptocurrencies can help investors pick out the stronger projects from the risky ones. For instance, during the 2017 wave of initial coin offerings, thousands of tokens with little to no inherent value were released, but most of them crashed because they lacked the fundamental features required to maintain long-term demand.

If you focus on inherent value, you can make decisions based on information, not just hype. For instance, Bitcoin has remained on top because it demonstrates strong inherent worth through scarcity, the effect of a network, and usefulness, while many other tokens fade into obscurity.

In conclusion, understanding the inherent value of crypto versus normal money resides in comprehending the proper meaning of inherent vs. extrinsic value and how each applies. Knowledge is power!