Cryptocurrencies: how can they have value if they don’t really exist?

Many people consider cryptocurrencies as a means to get rich. At the same time, they are able to change the existing order in the sphere of finance, law and bureaucracy.

The first cryptocurrency, Bitcoin, was created fourteen years ago, and since then it has attracted the attention of not only ordinary people, but also countries, regulators and, not least, investors. Many people consider cryptocurrencies precisely as a means of potential enrichment, while their wider spread as a means of payment in commerce is still only expected.

But their potential does not end there: from a technological point of view, they offer a completely new way of recording information that can change the established order in many areas, from finance to law and bureaucracy.

In fact, unlike Bitcoin, most cryptocurrencies do not have the main purpose of becoming payment. Therefore, their common name of cryptocurrencies is not quite accurate, and rather we should talk about crypto assets. And when we better understand their technological potential, it becomes clearer how something that “doesn’t really exist” can have high value at all.

The phenomenon surrounding cryptocurrencies, along with other new technologies, has also been covered in detail in many of our articles.

So what are cryptocurrencies?

A simple question at first glance, but the answer to it is much more complicated. This is an extensive term for a number of often contradictory things. But in general, they have two things in common – they are cryptographically protected and work on decentralized databases.

Cryptocurrencies got their reputation thanks to the first and most famous of them – Bitcoin. Their most important and fundamental goal was to become an alternative form of ordinary money that would not depend on any particular country or group of countries – that is why they are called cryptocurrencies.

One of the most common questions about cryptocurrencies is how they can have value if they don’t actually “exist”. This is a virtual work that is also fully digitized into ones and zeros. What matters is what informational value they have. People come to the cinema and pay, which means they see the value. With cryptocurrencies, everything is more abstract, but they also offer additional value.

Breakthrough decentralized databases

Bitcoin was created in 2008, and technologically it works on the basis of the so-called blockchain, which in simple terms is a decentralized database.

Like a chain, it consists of separate links connecting blocks (hence the phrase block and chain, a chain of blocks).

An important point is transparency, when anyone can read the entire database and, under certain conditions, anyone can write to it. An equally important feature is that due to the method of writing individual blocks, the data cannot be changed retroactively.

Shortly after the creation of Bitcoin, it became clear that a cryptographic record offering value protection in a shared decentralized database was a breakthrough idea and that it could be used not only for money, but also for many other purposes, be it securities, real estate, cars… in general, to verify the authenticity of any information.

The way data is recorded in decentralized databases has had, and in the future will have a significant impact on the functioning of almost all spheres, from the financial and legal system to management, media and other cultural and social systems.

The main trend of our civilization is a decrease in trust. Trust in institutions and the state, trust of public opinion groups or political movements and individuals to each other. Gradually, no one trusts anyone anymore. Shared databases, the authenticity of which cannot be doubted, can be used to create tools that can withstand the decline in trust.

A striking example is the appearance of fake videos, which are relatively easy to create nowadays. However, if a true, undistorted video was recorded on the blockchain at the time of its creation, it would be impossible to doubt the time and other parameters of its creation. This would to a greater extent prevent its misuse or perception in a different context than the one in which it was created.

Since decentralized databases are a relative technological novelty, the breadth of their application is not yet obvious. However, in the future, it is thanks to them that exchanges may appear, for example, for tickets to sports and cultural events, secondary markets are already appearing on the basis of tokens (similar to NFT), which allow you to sell tickets within milliseconds with confidence in authentication and payment.

The emergence of Bitcoin: from an uncertain experiment to a standard asset

When in 2008 a person or group of people under the name Satoshi Nakamoto presented the idea of Bitcoin, it was just an experiment. But since then, Bitcoin has experienced a huge increase in its value and other uses, which, in the case of cryptocurrencies, occurs in stages.

 

Transitions between phases occur quite quickly, but in the intervals between them at first glance it may seem that nothing happens.

It can be compared to water. When you heat it up, it seems the same most of the time, and you have no reason to believe that it will start bubbling soon. The same is the case with crypto assets.

Even when it seems that nothing is happening, in the meantime, a solid foundation is being laid – many companies using these technologies are being created, infrastructure is being built, regulation is being created, funds are being invested in further development. Over time, this leads to an unexpected and sharp increase in prices, often an order of magnitude higher.

In 2010, the first exchanges and applications for using cryptocurrencies began to appear. Two or three years later, the first wallets and hardware appeared, which marked the transition from an experiment to an alternative asset. In practice, Bitcoin was used, for example, to transfer money – in a matter of seconds it was possible to send an amount of money to someone on the other side of the world, and for a fraction of the cost of the traditional banking system.

Bitcoin acted as a cheap money transfer option and gained more and more users around the world, which also contributed to the growth of its value. The financial system itself became a limitation for further development – banks and other institutions began to pay attention to cryptocurrency, seeing it as an alien element and banning it as undesirable.

A lot has changed today. Trillions of dollars have been invested in Bitcoin and other cryptocurrencies. And even though the crypto market is going through hard times right now, the cryptocurrency industry will cope with this and continue to conquer the world.