Last time, we had a brief explanation of what cryptocurrencies are and some of their use cases. Specifically, we saw how their lack of centralisation made them a useful tool. This mainly was due to their lack of government regulations. Therefore, today we will look further into the mechanisms and benefits of using cryptocurrencies.
How cryptocurrencies keep their value
The thing about cryptocurrencies is that they have a finite value. Currencies have no inherent value, of course. With traditional currencies, governments control the total supply of a currency. By doing this, they can ensure that their currency does not undergo runaway inflation. If they need more, they print more.
With cryptocurrencies, there is a finite supply of them from the very beginning. This is how they have value. However, they are not all available immediately. At first, as people start mining cryptos, their value remains lower. Cryptocurrency mining is a topic we will explain next time. As there are less and less cryptos available over time, their value increases. It is therefore possible that, over time, all the coins of a cryptocurrency will be mined.
This has not happened so far, so we will have to see what happens when this eventually takes place. Bitcoin is a great example of this process. Its first coins were worth less than a dollar. Now, each coin is worth many thousands of dollars. In this way, one can look at cryptocurrencies more similarly to precious commodities (like gold) than a fiat currency.
This is both a positive and a negative. It’s great because the coins do not inflate to ridiculously low values. The negative is that there is not much room for economic growth. Therefore, it is hard to see for now how it would be useful as a primary currency for people. However, there is still hope for a time where people can use more universal currencies without government intervention.