What Backs Cryptocurrency? Bitcoin’s True Value Proposition

Cryptocurrency is a term you have likely heard when referencing terms like Bitcoin or Ethereum. With more than 12,000 cryptocurrencies (and growing) currently on the market, this new form of digital money is challenging traditional fiat currencies. Wait! So if cryptos are not issued by governments who or what backs cryptocurrency?

Cryptocurrency is backed by investor confidence that the project solves a problem. Some cryptos are pegged to the price of another asset like precious metal or regular fiat currency. All cryptocurrencies depend on solid math, trusted source code, cheap electricity, and internet-connected servers.

But, you don’t have to be a technical whiz or a financial guru to begin understanding cryptocurrency, even if you are new to the concept.

Woman tapping bitcoin symbol knowing what backs cryptocurrency is stronger than fiat

Are cryptocurrencies backed by precious metals, natural resources, or just math?

Some cryptocurrencies are not solely secured by mathematics and solid source code.

There are crypto projects backed by precious metals verified and stored like Pax Gold (PAXG) and Perth Mint Gold Token (PGMT).

Others projects are tied to natural resources such as Petro (PTR). This cryptocurrency was proposed by the Venezuelan president Nicol√°s Maduro and is supported by the oil and mineral resources of the country.

Additionally, there are also digital currencies that are pegged to government-issued, fiat currencies such as the U.S. Dollar (USDC), Euro (EURS), and many of the world’s strongest currencies.

In the crypto community, these coins are typically referred to as stablecoins.

How does cryptocurrency value increase?

Generally, a cryptocurrency‚Äôs value increases when there are more investors wanting to buy the coin than there are people willing to sell. Some cryptocurrency projects regularly ‚Äúburn‚ÄĚ coins causing the value to increase. The value of stablecoins rises when their underlying asset increases in value.

This is the same pattern that most investible assets follow.

In the traditional sense, market value is typically measured using basic calculations involving supply and demand. However, as we transition to a more digital world, defining value comes at a faster pace and is a bit more challenging.

The more the majority of a group of individuals or society believes in a way of life, traditions, and values, the more likely they are to strive for what they have in common together. The same theory applies to creating a successful cryptocurrency.

If millions of individuals believe in one cryptocurrency and back it with their own time and money, placing value on the coins, it becomes increasingly valuable. The value of a cryptocurrency will also increase as more people ultimately believe in the goal(s) of the coin and the overall problems the coin intends to solve.

There’s also an element of trendiness to cryptocurrency assets. Similar to the popularity latest social network, crypto projects will become popular for a time and later fade away.

However, some cryptocurrencies may never die out because they provide real utility and benefit to users. For example, Bitcoin has been around since 2009 but still remains relevant today.

These swings in popularity also drive prices up and down.

Bitcoin coin laying on price chart with green and red arrows. What backs cryptocurrency anyway?

On what basis does the cryptocurrency coin price fluctuate?

Cryptocurrency coin prices will fluctuate as community sentiments and goals change or shift in different directions. Understanding what may cause a cryptocurrency coin price to fluctuate is essential as an investor or as an active member of the crypto community.

Backed by another asset

Coins are created and destroyed based on the current demand to an automatically tracked, underlying asset price.

This intentional link allows investors and traders to speculate on the value change of assets that they may not have access to otherwise.

Non-backed coins

A non-backed coin’s price may fluctuate for the following reasons:

  • Overall vision or sentiment of investors has changed with regards to a crypto project‚Äôs progression
  • External legal factors
  • Government regulations and/or restrictions
  • Vulnerabilities or hacking attempts against the cryptocurrency‚Äôs code
  • Hacking attacks on centralized cryptocurrency exchanges
  • Increase prices on electricity or computational power

Where cryptocurrency comes from?

The idea of cryptocurrency is generally credited to the Bitcoin project, an idea that was originally launched in 2008. A pseudonymous poster, Satoshi Nakamoto, is the first known individual to share a white paper detailing Bitcoin describing a digital decentralized coin would work on the internet.

Other cryptocurrency coins, such as Ethereum (ETH), began entering the mainstream in late 2013. ETH was originally pitched as an idea by Vitalik Buterin, who created the first white paper on the project. In January of 2014, the coin was officially launched. This project became the foundation for smart contracts enabling crypto assets to represent the intrinsic value of other assets.

Alternative coins, often referred to as ‚Äúaltcoins‚ÄĚ, fill a different role in digital finance, but generally stem from the primary ideas set out by Bitcoin.

Who is behind cryptocurrency?

While Satoshi Nakamoto is credited as the originator of cryptocurrency, communities have taken the concept to a new height as people find new and novel ways to apply the concepts to real-world problems.

Most projects remain owned, operated, evolved, and managed by decentralized groups of volunteers and the holders of the digital coin.

However, some companies and governments have tried to create their own cryptocurrency as a means to jump in the evolution of money.

When Facebook’s Libra (now Diem) attempted to launch as a centralized cryptocurrency, it quickly fell flat as it was against the core idea of cryptocurrency’s decentralized purpose.

As mentioned earlier, even governments are watching cryptocurrency’s success in attempting to leverage the technology to solve their real-life problems. Venezuela’s Petro (PTR) coin offering was a monumental step in legitimizing the use case for cryptocurrency, it ultimately never gained traction and is headed to obsolescence.

Man tapping the screen of a bitcoin atm now that he knows what backs cryptocurrency

Can cryptocurrencies replace national currencies?

Cryptocurrencies are being tested as a replacement for national currencies. Venezuela and El Salvador are experimenting with it as legal tender alongside their fiat currency. While governments write regulations around cryptocurrency, citizens and corporations worldwide are already using it.

Eyeing Venezuela’s creation of their own cryptocurrency, the president of El Salvador announced the country’s intention to adopt Bitcoin as a legal currency alongside their current use of the US dollar to help with stabilizing the country’s economy.

El Salvador has a lot of experience changing and using different currencies. The country used the macaco and the Spanish peso in parallel before issuing its first currency the real in the 1870s. Later it reissued Salvadorian pesos followed by a change to a US-dollar pegged currency, the colon. This lasted until the 1980s when El Salvador simply adopted the US dollar directly as their national currency.

The implementation of Bitcoin as a national currency adds 21st-century complexity and had matching 21st-century glitches. El Salvador’s experience in currency switching will be put to the test while other nations watch.

As financial crises rise and fall, virtual currencies may help with alleviating stress and strain in various areas of the economy, ultimately enriching the lives of citizens.

What impact will cryptocurrency have on income inequality?

Cryptocurrencies have the potential to have a positive impact on income inequality by enabling cross-border markets for e-service industries. Additionally, cryptocurrencies increase financial literacy by providing basic banking and investment services to anyone with an internet-connected smartphone.

By providing financial services where individuals can store and exchange value, cryptos open the opportunities only previously available to those with the privilege to be in markets where financial institutions are accessible.

In countries throughout the world, there are more than a billion people without access to central banks. In the United States, around 23% of the lowest-earning households do not have a bank account or credit cards. Often without an account, workers are unable to get jobs that pay better wages.

Additionally, using digital tokens opens opportunities for unbanked individuals and entrepreneurs to start small businesses and participate in asset-backed markets that are otherwise unavailable to them.

With the power of cryptocurrency, it is now possible for more people to bridge the income inequality gap and raise their standard of living through financial inclusion.

What happened to all the cryptocurrency hype?

Like most tech innovations today, the technology adoption life cycle is proving to be applicable, even when it comes to cryptocurrency.

The awareness of digital currency has left the early adopters stage entered the stage called the early majority. Most users have heard of bitcoin, cryptocurrency, and are open to the idea. Some have started to be active in the community and influence their peers to explore digital assets.

The buzz and hype of cryptocurrency have ebbed and flowed since its inception. The popular cryptocurrencies have had their moments in the news cycles as they’ve started to challenge traditional currency dominance.

By now, most people have at least heard the term name Bitcoin or the term cryptocurrency, which removes some of the allure from the prospect of changing the way we exchange money and conduct business.

The news coverage has shifted from the positive impacts of cryptocurrency and gold-rush events like the explosion of the NTF art markets to the negative events like the latest crypto exchange hacks or when retail investors are conned.

Although cryptocurrency is becoming more well-known and the original hype is coming to an end, the movement itself continues to make major progress.

As the cryptocurrency space continues to evolve and solve real-world problems, it will remain relevant and become even more widespread. The more commonplace the network of cryptocurrencies becomes, the easier it is for everyone to make an investment or complete a transaction of their own.

Ultimately, I predict that cryptocurrencies and the use of a digital wallet will become a part of daily life alongside government-issued currency. This competition with the world’s traditional fiat currencies will drive down transaction fees and increase the flow of money worldwide.

Still wondering what‚Äôs the point of cryptocurrencies and Bitcoin? ūüĎą Read this article next.

Financial Disclaimer: This content is for educational purposes only and is not suitable as financial advice. Opinions and statements expressed herein are those of the author. They do not reflect the views of Data Overhaulers or its owner. Data Overhaulers is not a subsidiary of or owned by any ICOs, blockchain startups, or companies that advertise on our platform. Investors should do their due diligence and meet with a licensed financial advisor before making any investments in any ICOs, blockchain startups, or cryptocurrencies. Please be advised that your investments are at your own risk, and any losses you may incur are your responsibility.

Mike Chu

Mike is a web developer and content writer living as a digital nomad. With more than 20 years of devops experience, he brings his "programmer with people skills" approach to help explain technology to the average user. Check out his full author bio by clicking here.

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