What is the Value of Cryptocurrency?
By late 2017, the value of Bitcoin (BTC) had risen to an unprecedented $19,843 per coin after trading below $1,000 just a year earlier. Though it has fallen well below those highs, Bitcoin’s value — and the value of other cryptocurrencies like Ethereum — has continued to remain much higher than anyone expected.
Where does this value come from? Among the many potential factors is supply and demand. Bitcoin, for example, is limited to a total of 21 million coins. By now, more than eighty percent of those have already been mined (Molly Jane Zuckerman, CoinTelegraph). This means each successfully-mined “block”now only yields a total of 12.5 BTC, and due to the nature of the system, that number will be halved to 6.25 BTC in 2020. This halving will occur again about every four years until all coins are mined in approximately 2140. (CryptoCoinMastery). As a result, Bitcoins are (and will continue to be) increasingly difficult to come by. In other words, the supply has diminished to the relative demand. This increase in demand is driven in part by the media hype surrounding the late-2017 spike and the fear of missing out (Daniel Shane, CNN Money).
Further, the increasing difficulty of obtaining cryptocurrencies via mining (as opposed to buying already-mined coins) creates a baseline value for miners who want to break even. This baseline comes from the cost of electricity used by the sudden emergence of crypto mining operations estimated to use as much energy in a year as the whole of Ireland. (Akshat Rathi, Quartz). As cryptocurrencies become harder to mine, more electricity is required to mine each coin, resulting in greater and greater power draws over time.
Based on the average electricity rates in the U.S., it costs roughly $4,758 in electricity to mine one BTC as of March 2018. (Nathan Reiff, Investopedia). At the current trading rate of approximately $6,000 per coin (Coindesk), hardcore miners are only looking at a potential profit of approximately $1,300 per coin. As this margin closes, the real-world cost of obtaining more Bitcoins the old-fashioned way (without buying them from other crypto users) will likely continue to drive up the value of each coin.
Cryptocurrencies also have value because of their utility as a decentralized, public ledger for transactions. For many fans and users of the blockchain, the ability to use an anonymous, open-source digital currency has immense value. A large portion of users are enthusiastic about the flexibility and anonymity of a currency unbacked by the gold standard or big government, (Megan McCardle, Bloomberg), while a smaller contingent may be enticed by the ability to carry out illicit transactions more easily than ever before. (Tristan Greene, The Next Web).
Given the volatile nature of cryptocurrencies in general, it is likely impossible to predict whether the value of those currencies will ever reach peaks as high as Bitcoin did in 2017. New regulations from the SEC and the Commodity Futures Trading Commission may limit cryptocurrencies, even as they seek to “[spare an] innovative market from too much early regulation.” (Tony Romm, Recode). Elsewhere, debate continues about whether cryptocurrencies have any intrinsic value (Jason Bloomberg, Bloomberg), and economists continue to deride cryptocurrency as a bubble or scam (Angela Monaghan, The Guardian). Additionally, the future utility of cryptocurrency may be hurt by the new U.S. tax bill, Public Law 115-97, unofficially known as the Tax Cuts and Jobs Act, which removes an exemption allowing the tax-free exchange of one digital currency into another (a “like kind exchange”). (Jeff John Roberts, Fortune). Still, cryptocurrency — and Bitcoin in particular — has made remarkable progress, and while the value of the coins themselves may not last, it seems likely the technology that facilitates them will.