Most people go through life without wondering why that piece of paper or plastic they use to pay for their life has any value at all.
If you mention cryptocurrencies,
or Bitcoin for that matter,
as it's the only cryptocurrency most people are aware of,
they will immediately start wondering,
how can someone invest in something that's not real or has no innate value?
It's an irony that always amuses me, as they are missing a really important point.
Money today is just a matter of imagination.
Imagination.
The mighty dollar, and even the Euro, as well as that American Express Centurion Card only have value because we say they do.
Today, I will tell you why crypto has as much value as fiat money.
Let's get it.
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Alright, guys. I know you all have been in the situation of having to explain crypto to other people or getting asked about it.
If you haven't been in that position, you might be new to crypto and be the one doing the asking.
If this is the case, don't worry, we all started there.
In this video, I'll be explaining why crypto has value and how it gains or loses it,
so you can answer this question to any peasant who asks you how you made your fortune.
You must be a Weasley.
A good place to start with this topic is mentioning how fiat currencies work.
Fiat currencies are the national currencies you're used to using.
Dollar, Pound, Euro or any other currency from a country that you can think of
Fiat currencies are controlled by what is known as a central bank,
an entity that is controlled and regulated by a country or a group of governments,
in this case, European Union,
which makes the decisions when it comes to printing, setting goals and overseeing monetary policy.
Money used to be backed by goods such as silver and gold in the past, using what was known as the gold and silver standards.
These meant that a coin, bill or note was a direct representation of a certain amount of the good,
which is no longer the case.
These standards ensure that if you have a bill or note, it is worth a certain amount of gold, which you can exchange at any point.
Nowadays, fiat currencies are all valued depending on the trust that governments and users have in the central bank,
or the trust people have in the government itself as they control it.
A stable government that is in a good economic position will have a strong currency with high value
as third parties will trust that piece of paper, coin or bits in a computer.
The opposite is also the case,
as a government that loses trust from the international community will see its currency value plummet.
Seems like a basic reward system where you give us points and then we redeem those points for prizes.
You're exactly right and you get a point.
My mom used to have a point system like this one,
where I would be able to ask or get stuff depending on the number of points.
If I did my chores and follow the rules, I would win points.
If I didn't behave, I'll get points taken away.
And my dad's point system was a little bit different.
Each notch on his belt was one point.
So, okay.
These points though were imaginary, just a number.
They had value for me because I trusted that my parents would give me that baseball glove if I had enough points.
It was just a matter of trust.
My mother could decide that the ball was 20 points or 25 points, and I just have to accept that.
Well, this is the same case with fiat.
It doesn't sound good now, right?
Now, the major issue of fiat currencies is that they are not only dependent on the stability and good decision making of the issuer
but on the perception the other governments and their citizens have.
Countries like Venezuela, Argentina and Zimbabwe have experienced firsthand the hyperinflation
that occurs when their governments issued too much money
and they were subject to international sanctions or just lost face.
Okay, so I know at this point, fiat currency does not sound great. Right?
Understanding this oversimplification of how it works is enough to understand how fragile our current economic system is,
as we are powerless when it comes to how our assets will be valued in the future.
This centralization creates a single point of failure that could destroy an entire nation,
taking its citizens down by reducing their buying power.
Do you really trust politicians enough to believe that they can possibly not mess everything up?
Well, most people don't trust them that much, and this is one of the reasons behind crypto.
You don't have to trust anyone.
So, how do cryptocurrencies generate value with no government or bank backing it up?
Well, crypto has value in the same way that fiat currencies have value---
user trust
If enough people agree that Bitcoin or Ethereum have value, well, then they do.
Just like my parents’ point system. They allowed me to buy and sell.
I was basically working for them by doing chores in exchange for that sweet imaginary money,
which is not different from people who have to go to their jobs every day.
People that work for me, they love coming to their job, but most people hate it.
You trust this piece of paper or number though on the screen, and the person on the other end has to trust it too.
This trust can also be translated to supply and demand.
If people trust that someone will fulfill their needs or someone else's, then they look to buy or sell that thing.
Capitalism is a thing, you know.
If I trust someone will watch the videos I am making, I will supply them.
I can be right or wrong, but I'm supplying.
The same is true in the end.
If there is a need, then there is trust in that asset.
Supply and demand is the most basic economic rule there is.
It is the Alpha and the Omega.
It is the way, the end all be all.
Summarizing, supply and demand is something you need to understand if you want to get economics.
The law is simple.
Too much demand and low supply will make the price go up.
Little demand and a lot of supply will make prices go down.
This is the reason why scarcity is a big advantage of Bitcoin over fiat.
Bitcoin is scarce and has a set supply.
US dollars and many other fiat currencies are abundant, and the total supply is increasing at an alarming rate every day.
Now, I already said that trust was everything,
quite vehemently too.
Let's change the question.
It is not how crypto generates value but trust.
I say this because if trust in a cryptocurrency increases, so does demand, which in turn raises its value.
I hope I don't really need to keep repeating this.
But anyways, this is a more complex question and depends on the type of cryptocurrency.
As we discussed earlier in the series, different cryptocurrencies are born from different intents.
BTC was created as an alternative to traditional money.
So it had to generate trust in a similar way to traditional currencies.
How did it do it?
Well, by using blockchain technology in mining.
The effort of miners who actively invested in mining the cryptocurrency
plus the security and transparency that blockchain technology provided
generated enough trust for investors to jump into the project.
With enough momentum, it just snowballed to the point where most people don't doubt BTC by now.
This is why Bitcoin has become the representative of the crypto world, and the performance of most coins is attached to it.
But hey, don't be fooled.
Bitcoiners are there for the technology, not the value.
Oh, Maxis.
Coins like USDT, USDC and other stablecoins get trust by pegging their value to commodities like gold or fiat currencies,
basically becoming a digital version of the currency they're pegged to.
Most altcoins, however, are a little different.
As native tokens power transactions taking place inside a blockchain network,
sometimes called utility tokens,
coins like Tether, Link, VeChain, Compound and others gain value by providing services.
The more wanted the services of those networks are, the more people should be wanting to acquire them or use them,
increasing demand.
So, these tokens are not only speculative, like fiat and BTC, but they also have other applications
even if most investors forget about that.
That's the truth.
They have utility that goes beyond being used as money.
Sometimes, people get so focused on the economic factor,
they forget what's really important.
But now it’s your turn.
Do you know any other way in which crypto gains value?
What do you think is the biggest advantage of crypto over fiat?
Let me know what you think down below in the comment section.
I hope you enjoyed this video.
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Thank you so much for watching.
Have a blessed day.
BitBoy out.