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CRYPTO 101: What gives cryptocurrency its value?

"The actual value that these units have in people's mind, like Bitcoin, for example, is whatever people believe it to be."

 In recent years, cryptocurrencies have been popping up like weeds.

Cryptocurrency is so popular that after 22 years of operation, the Lakers and Clippers home arena was renamed Crypto.com Arena in December of 2021.

Bitcoin, the first and best-known cryptocurrency, has a current value in the tens of thousands of dollars and at one time was above $70,000.

Okay, so cryptocurrency is popular, but what determines its monetary value?

Professor Andrew Wu from the University of Michigan teaches cryptocurrency to more than 120,000 students, and he says the reasoning behind the value of cryptocurrency is very simple.

“The actual value that these units have in people's mind, like Bitcoin, for example, is whatever people believe it to be,” Wu explained. 

Because a group of people assigned monetary value to Bitcoin and other cryptocurrencies, now people are willing to pay for it, even if it’s priced at  $40,000.

You’re probably wondering why people assign value to crypto, and it’s because Bitcoin and other cryptocurrencies have some traits that make them attractive as a mode of exchange.

For example, the nature of cryptocurrency puts a hard limit on the number of units that can exist. That means there’s a limited supply. That makes it different from cash, which governments can always print more of, causing the value of the cash to go down. Crypto can be a hedge against that kind of inflation.

Not everyone has to accept the value of Bitcoin if enough people do, and the more people that do accept Bitcoin’s value, the higher its value can rise.

“People believe that it has some way it has some value, for example, either as an inflation hedge, or as a way of a speculative vehicle. So, it's very similar to a digital version of gold, and that's basically the case for almost all of these cryptocurrencies out there,” said Professor Wu.

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