People believe currencies have worth, and communities or organizations have chosen that they will be utilized as a means of exchange.
After the gold standard was abolished, fiat currencies became widely used (which mandated that every dollar be backed by a holding of physical gold). Fiat currencies, such as the US dollar, are not backed by any commodity and only have value because a larger system or community recognizes them.
For example, you can go to the store with a $20 bill and buy $20 worth of things, time, and effort. The tangible piece of paper you use to pay, on the other hand, has no inherent worth.
In other words, Bitcoin is valuable “because people believe it is,” according to Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business. “And if that sounds a little shaky and wacky, that’s because it is.”
People believe Bitcoin will one day be worth more than it is now, which drives up demand for it, and its value, like gold, continues to rise.
“Gold is essentially dirt that people determined had worth to people because it is kind of shiny,” says Kiana Danial, author of “Cryptocurrency Investing for Dummies.” “Gold, like your $100 dollar, has that value assigned to it by humans. The $100 banknote is worthless in and of itself. That is the value we attribute to it.”
You can’t (typically) buy and sell Bitcoin at a store like you can gold, but you can buy and hold it. But gold has one advantage over Bitcoin that Bitcoin doesn’t have — at least not yet: it’s been around for a lot longer, so its value has been demonstrated time and time again.
“What you want to know is, will your Bitcoin be acknowledged as a Bitcoin in a year?” Routledge asks. The solution, according to Routledge, is contingent on the future of blockchain technology and the hope that it will continue to achieve public acceptance.
Bitcoin’s price changes a lot, and it’s impossible to predict whether it will continue to gain in value or fade away, which is why you should only invest a tiny portion of your overall assets in Bitcoin. Cryptocurrency investments, like any other speculative investment, should be limited to less than 5% of your whole portfolio, according to experts. Also, don’t put your money into Bitcoin at the expense of other financial goals like saving for retirement or having an emergency fund.
People acquire Bitcoin, like gold, “not because they expect to be able to go to the shop and spend it, but because they want it to keep its value,” according to Galen Moore, director of data and indexes at crypto news site Coindesk.
Ethereum, the second-largest cryptocurrency by market capitalization, is more like oil if Bitcoin is digital gold. And, like oil, its value is tied to real-world applications – even if those applications aren’t yet mainstream.
Oil is valuable in and of itself, but you can also invest in oil futures or equities that represent oil firms and energy technology on the commodities market. Similarly, cryptocurrency investors can choose Ethereum, which uses the ether currency as its native currency.
Although Ethereum has a clearer underlying use case than Bitcoin, this does not ensure that it will sustain or increase in value. With thousands of alternative cryptocurrencies all claiming to meet some unmet need or opportunity, experts advise sticking to the big two cryptocurrencies, Bitcoin and Ethereum. Even yet, all cryptocurrency assets are unregulated and speculative, and there isn’t enough data to make any kind of solid forecasts about how your investment will do in the future.
Kiara Sofia Smith
My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.
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