How do cryptocurrencies derive their value?
Cryptocurrencies | derive

How do cryptocurrencies derive their value?

*This content is brought to you by Jaltech

A common misconception is that all cryptocurrencies are attempting to displace fiat currency (R, $, £, €). This is certainly not the case for all, and the confusion stems from the loosely use of the term “cryptocurrencies”. To clear up the confusion it is important to distinguish between cryptocurrencies/digital currencies (e.g. Bitcoin, Litecoin & Ripple) which can be a substitute to fiat currencies and utility tokens (e.g. Ether, ADA & DOT) which are not aimed at competing with fiat currencies.

Cryptocurrencies

Cryptocurrencies are digital currencies that have increasingly been adopted globally as a means of storing value and transacting between parties. In most instances, digital currencies can provide a substitute to fiat currencies as they have all the properties of fiat currency, such as scarcity, divisibility, utility, transportability, fungibility and durability.

One of the main forces driving the growth of/demand for digital currency is that they can never be counterfeited and there is no central issuer (i.e. the Reserve Bank) that could influence the value of the digital currency.

As demand increases so does the value of Bitcoin and other digital currencies given their scarcity.

Do digital currencies have value?

The ultimate value of any asset may be derived from demand vs supply. Using Bitcoin as an example, given the increase in demand for the digital currency, the price of Bitcoin has steadily risen since inception and it now has a market cap of over $1.1trn (R16trn).

Utility tokens

What are utility tokens?

Using a trade on the JSE as an example: every time an investor purchases a share on the JSE, STRATE (the settlement company) charges the investor a fee in Rands to verify the trade. If this transaction occurred on the blockchain network, the fee would not be paid in Rands, it would be paid using the utility token associated with the particular blockchain. For example, when one transacts on the Ethereum blockchain, the fees would be paid in Ether.

The price of Ether will therefore appreciate as adoption and usage of the blockchain network increases because users of the network would need to purchase Ether to settle the transaction costs. Simply put, as usage of the blockchain network increases, demand for the relevant utility token increases, which drives the increase in the value or price of the utility token.

Do utility tokens have value?

The answer is evident from the market cap of the utility token. Investors who accept that blockchain adoption is the future, implicitly believe that demand for utility tokens will increase and could therefore consider investing in utility tokens, which in their view, may be widely adopted. A few examples include investing in utility tokens associated with Ethereum, Cardano and Polkadot, which have a combined market cap of over R9bn.

Which of these digital currencies are going to be the next dollar? Or which of these utility tokens are going to be associated with the next Microsoft? 

Jaltech believes that it has a solution to ensure that investors have exposure to several of the market’s most attractive cryptocurrencies/utility tokens.

The solution is a quarterly rebalanced basket of the largest cryptocurrencies/utility tokens. The basket is rebalanced to ensure that when new cryptocurrencies/utility tokens are gaining adoption they are added to the basket (subject to due diligence). Similarly, if existing cryptocurrencies/utility tokens are (as an example) under performing, that they are excluded from the basket.

This active management ensures that investors will always have exposure to the market’s leading cryptocurrencies and utility tokens as they grow in value.

To find out more about Jaltech’s Cryptocurrency Basket, click here and a representative will contact you.

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