Cryptocurrencies are like stocks. None of them have any inherent value. The only reason they’re worth money is because people have enough faith in their percieved value to trade real money for them, which isn’t so crazy, because money has no real inherent value either. Money, stocks, and cryptocurrency are all just tokens we assign a value to on faith.
The value of these tokens is based on two things: scarcity and the reputation of the person issuing them. For example, the U.S. government says, “We’re putting 10 trillion dollars into circulation. You can trade 1,000 of them for a cow. The more stable our economy is, the more our dollars will be worth. Trust us.” IBM says, “We’re putting one billion stocks in circulation. You can trade ten of them for a cow. The more profitable our business is, the more our stock will be worth. Trust us.”
Note: The video above says stocks represent ownership of assets in a company, which isn’t always true.
These promises are worthless until someone actually accepts these tokens as payment for real-world goods. Bitcoin was just an empty promise until people started accepting it as payment. Once other people saw that happening, they said, “Holy cow! This is worth real money!? Let’s buy and sell it too.” The more demand there was for it, the more money people would pay to get it, and the more it became worth, just like stocks. So you can think of Bitcoins like stocks in Bitcoin Incorporated. It’s even sold on cryptocurrency exchanges that work like the stock market.
The difference between cryptocurrencies and stocks is that there is no Bitcoin Incorporated. There’s no head office, CEO or profit margin because there’s no product being sold. Bitcoin is like a stock in a company that doesn’t exist. There are just a bunch of servers all over the world owned by volunteers, which run programs that were originally invented as a way to back up digital files in multiple locations simultaneously and securely.
Hospitals and big businesses used this technology so they could guarantee they’d never lose important records, and those records could never be tampered with. So employees couldn’t go back in and cook the books to cover up their mistakes or hide fraud. The system works sort of like Utorrent. There are a bunch of people all over the world running a program that allows their computers to collaborate with each other to write chains of data. Unlike torrent programs though, the data isn’t copied. Each server just shares the responsibility of creating and hosting a set amount of data.
The value of a Bitcoin isn’t backed by this data. The data is the money. So a Bitcoin mining machine is like a money printing press, but no matter how many mining machines are online, they collectively only create a set amount of data every day, which is distributed between all the printing presses. Ultimately, the Bitcoin printing presses will produce 21 million bitcoins, and then they will stop producing new ones. I’ve heard the number 21 million is supposed to reflect the amount of gold in the world, which is, in theory, should make Bitcoin the gold standard of cryptocurrency. The last bitcoin will be generated sometime around the year 2040. This system makes inflation impossible, but while Bitcoins are still being created, the more miners there are, the less each person gets to keep.
If this sounds ridiculous, think of Bitcoins like digital diamonds. Diamonds have no inherent value either. They’re just common rocks. The only reason they seem scarce is because DeBeers has a monopoly on the diamond supply and only lets out a few at a time. Plus, they’ve hyped up the value of diamonds so much that people believe they’re worth money.
If DeBeers flooded the market with all the diamonds they’ve hoarded, the price of diamonds would plummet, and your warehouse would become full of stupid, worthless rocks. Bitcoin miners can’t flood the market with Bitcoins and crash their value like DeBeers could with diamonds. They can’t split or reverse split a number of Bitcoins it has issued like IBM can. They can’t print 10 trillion more Bitcoins tonight and crash its value like third world countries sometimes do with their money supply. A foreign country can’t overthrow Bitcoin and crash its economy like America did to Iraq. In a crazy, turbulent world, cryptocurrencies like Bitcoin will always be stable… as long as the internet exists. That’s more than most currencies can boast.
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