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What Gives Cryptocurrency Its Value?

One of the biggest questions on beginners' minds is, "How does crypto have value?"

It is the most common question I get from the crypto-curious. If you think about it, what gives Google or Facebook their value from a foundational point of view? Wouldn't you agree it is their users? Then look at it from a larger picture, it is the value of all those users making up their network. An ecosystem without users is worthless.

There are many things that drive more users to an ecosystem.

These are several that I came up with: Access, Utility, Social impact, Community, Connections, Entertainment, Knowledge, Information, Commerce, Exclusivity, etc. All of these give networks an added value and a reason for the user to come back again and again.

Marketing is the fastest way to grow a network and adding value will give it more sustainability and long term value. Companies ultimately want to have the user experience so cool, memorable, and useful that users attract or invite others users so their acquisition costs goes down. Organic growth can easily turn into viral or exponential growth. We have seen it come out of nowhere with both, Facebook and Google.

Keep in mind with both of them and others companies with similar models - if you are joining a network for free, the user base (YOU) are most likely the product too. They are monetizing your data by selling it to their advertisers.

All of these fundamentals apply to building a network on the blockchain too. The main difference with a decentralized model is the user base gets to own their part of the network and get rewarded by adding some value. The more you participate, the more you can earn or see the value of your coins go up.

As an investor, community member, token or coin holder you will need to evaluate how and what level you want to participate. Every project has its own distinction that adds value and hopefully attracts other users. Regardless, every decentralized project, starting with Bitcoin, has an inherent, incentive-based model for organic growth. Since users are coin/token holders of the network they are often sharing the story of their favorite project in hopes of mass adoption and a future 10X-1000X returns.

Because as George Gilder states in his book, Life After Google, "Whoever owns the networks wins!" I don't think that is the actual quote, but it is the main point of view in his book. What he is referring to is Metcalfe's Law.

Metcalfe's Law

Metcalfe’s Law is a concept used in computer networks and telecom to represent the value of a network. In blockchain, we hear it said as, “The Network Effect”. Metcalfe's Law states that a network's impact is the square of the number of nodes in the network. For example, if a network has 10 nodes, its inherent value is 100 (10*10). The end nodes can be computers, servers and/or connected users.

Think of yourself or your device as a node adding value to a decentralized network.

Metcalfe’s Law was conceived by George Gilder, but is attributed to Robert Metcalfe, co-inventor of Ethernet (1980). It speaks to both the growth in the number of node connections as well as the value. Given that the Internet as we know it today was not around when the Law was formulated, it spoke more to the value of devices. For example, owning a single fax machine was useless. With two fax machines, you can communicate with one other person, but when there are millions, the device and network has additional value.

Source: Techopedia

Over time Metcalfe’s Law was linked with the Internet's substantial growth and how it works in parallel with Moore’s Law. The concept is similar to the business concept of a "network effect" in that the value of a network provides both additional value and a competitive advantage. For example, eBay may or may not have had the best auction website, but they clearly had the most users. Because this is so difficult to replicate, the power of the network drove out other competition.

Bonus: Who is Gordon Moore?

The founder of Intel, said the number of transistors on an integrated circuit will double every 2 years.

The next time someone asks you what makes crypto so valuable, just tell them, the value of the network and its users.

What you need to decide is what networks do you want to own a piece of to hopefully see your net worth increase with the growth of blockchain, cryptocurrency, and the evolution of the Internet - Web 3.0.

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