The valuations of the stock are reduced to updated estimates of the future cash flows of a company. There is no comparable valuation measure for cryptocurrencies because there is no underlying company; the value of a cryptocurrency is related only to investor appetite.
Cryptocurrency valuations boil down to one of two factors: the likelihood that other investors will buy the cryptocurrency’s blockchain asset or utility.
How does it work?
Cryptocurrency works with blockchain technology, but what precisely is a blockchain? The term has become so common, its meaning are often blurred. A blockchain is simply a book of digital transactions. This general register (or database) is distributed over a network of computer systems. No system controls the General Registry. Instead, a decentralized network of computers maintains a running blockchain and authenticates transactions.
Proponents of blockchain technology claim that it can improve transparency, increase trust and strengthen the security of data shared over a network. Detractors say blockchain can be cumbersome, inefficient, expensive and can use too much energy.
Rational crypto investors buy a digital asset if they believe in the strength and usefulness of its underlying blockchain. All cryptocurrencies work on the blockchain, which means that crypto investors bet (whether they know it or not) on the resilience and attractiveness of this blockchain.
Cryptocurrency transactions are recorded in perpetuity on the basic blockchain. Transaction groups are added to the “chain” in the form of “blocks”, which validate the authenticity of transactions and keep the network running. All transaction batches are recorded in the shared general ledger, which is public. Everyone can go and see the transactions carried out on the main blockchains, such as Bitcoin (BTC) and Ethereum (ETH).
The answer is that they are paid with the underlying cryptocurrency. This incentive system is called a proof-of-work (POW) mechanism. Computers that “work” to “prove” the authenticity of blockchain transactions are known as miners. In exchange for their energy, miners receive newly minted crypto resources.
Cryptocurrency investors do not hold their assets in traditional bank accounts. Instead, they have numeric addresses. These addresses are equipped with private and public keys, long strings of numbers and letters, which allow cryptocurrency users to send and receive funds. Private keys allow you to unlock and send cryptocurrencies. Public keys are publicly available and allow the holder to receive cryptocurrencies from any sender.
It is fair to say that Bitcoin has changed the paradigm as before, and it has triggered a new technology, a new investment platform and a new way of thinking about money.
Cryptocurrency started out as a grassroots movement with an anti-establishment spirit, but today companies and financial institutions are embracing cryptocurrencies for their potential to destroy clunky legacy systems and diversify investment portfolios. As innovations continue to reshape the cryptocurrency industry, including exciting new projects such as decentralized finance (“DEFI”), the importance of cryptocurrencies will continue to evolve.
Cryptocurrency is often simply described as digital money. This description may be true, but it fails to capture what makes cryptocurrency unique and so attractive to many investors.
In essence, cryptocurrency is a value system. When investors buy a cryptocurrency, they bet that the value of such an asset will increase in the future, just as stock investors buy securities when they think that the company will grow and stock prices will rise.