Where do (crypto)currencies get their value from?

Published in

Coinmonks

7 min readMay 14, 2022

Do you ever wonder where 1 Rupee gets its value from? Why 1 BTC is worth 35 lakhs today? Who decides that 1 dollar = 77 INR? Why is its value always fluctuating?

If you’re looking for answers, read the article till the end.

DISCLAIMER: This article is packed with a lot of events that happened in the past with respect to currency and trends. So your patience and appetite for knowledge are highly essential to get through the article successfully and uncover the answers to the questions above.

To begin with, let’s talk about the rise and fall of tomato prices in the market.

When there’s a large supply of tomatoes in the market and fairly low/moderate demand, their prices are generally low. But when there’s a shortage of supply (say, due to bad climatic conditions) and high demand, the prices are high.

The value of a currency grows/shrinks in a similar fashion.

When there’s more demand for a currency, but limited supply, its value grows.

Consider a situation where a country, say India, trades with the US. 🚢 In order for India to import goods from the US, it has to pay in US dollars 💲. India exchanges rupees for dollars of equal value through banks. Now, this makes a dollar more valuable as it is in demand 💰. Similarly, if the US wants to purchase Indian goods, it exchanges its dollars for rupees. This increases the value of rupees as there is demand for it.

Therefore, the demand for a currency is what determines its value and it changes from time to time.

But this (supply and demand) is not the only factor.

Political stability, inflation, interest rates, economic growth, etc also have an influence on the currency exchange rates.

Here’s a little history about the way the Indian Rupee is valued today.

Since 70% of the world’s gold reserves were with the US after World War 2 (where all countries spent on buying weapons from the US and had no gold left in their reserves for their currencies to have any value), the US dollar was pegged to the value of gold. All other currencies in the system were then pegged to the U.S. dollar’s value according to the Bretton Woods Agreement.

In 1971, the Bretton Woods Agreement collapsed and the US dollar was no longer pegged to the value of gold because the gold reserves in the US were no longer adequate to cover the number of dollars in circulation. This was undertaken by the then US President Richard Nixon and therefore this measure is also referred to as the Nixon Shock.

Countries were then free to choose any exchange methods for their currency, except pegging its value to the price of gold. They were given the liberty to link its value to another country’s currency or simply let it float freely and allow market forces to determine its value relative to other countries' currencies (i.e., floating exchange rate).

The value of Indian Rupee is determined by the forex market based on its supply and demand. This regime is called floating exchange rate.

However since the RBI intervenes in the USD/INR currency market to keep a check on the exchange rates, India is said to follow a managed/controlled floating exchange rate.

Keeping all these factors in mind, the foreign exchange market quotes that 1 USD = 77.33 INR, today, an all-time low 😔.

Now let’s talk about cryptocurrencies.

To learn how cryptocurrencies get their value, it is essential to learn about the first cryptocurrency and one which is highly popular today — Bitcoin.

Here’s an interesting story.

In 2010, the popular story of Laszlo Hanyecz who paid 10,000 BTC to a Bitcointalk forum user for 2 pizzas from Papa John’s, surfaced. It was the first time Bitcoin was used to purchase physical goods. Today, 10,000 BTC is worth nearly 300 million dollars…

But who would’ve known…

If you’re still wondering how it got that big, you have to dig into the history of Bitcoin with me.

The following facts are some of the most exciting things you’ll ever read about Bitcoin. I bet you don’t want to stop reading yet.

2008

The anonymous Satoshi Nakamoto published the famous Bitcoin whitepaper.

2009

Bitcoin had negligible value at the time of its creation.

In January 2009, the genesis block was created on the Bitcoin blockchain by Satoshi Nakamoto, a few months after the whitepaper was released, and Hal Finney, an American developer received 10 BTC from Nakamoto.

2010

In 2010, Bitcoinmarket.com, a market to buy and sell Bitcoins was proposed by an individual under the name dwdollar on bitcointalk.

In the beginning, 1 Bitcoin was valued at $0.003.

Soon, a new Bitcoin exchange platform called Mt. Gox emerged. It was founded by Jeb McCaleb who then sold it to Mark Karpeles. But the platform failed to succeed as it was hacked several times and lost thousands of BTC.

2011

The value of Bitcoin rose to $1 as it saw a good number of exchanges. It was mostly used on Silk Road, a digital marketplace for drug dealers and criminals that operated on the ‘dark web’. It was founded by Ross William Ulbricht (who went by the name Dread Pirate Roberts) in 2011. Silk Road helped people carry out illegal activities and transactions while remaining anonymous.

2013

However, in 2013, Silk Road was shut down by the US government after the FBI caught the 29-year-old American founder of the e-commerce site and charged him with narcotics trafficking, computer hacking, and money laundering. He was sentenced to spend the rest of his life in prison. You can read more about Mr. Ulbricht here.

In the meantime, other projects using blockchain technology (like Litecoin) were developing. Bitcoin wasn’t just traded by drug dealers and criminals but by a lot of interested blockchain developers, miners, and investors.

Afterward…

From $200 in 2015, Bitcoin got to the $1,345 mark in March 2017.

And in the fullness of time, Bitcoin had THE moment in December 2017 where it saw a parabolic rise in the value of over $20,000, reaching an all-time high.

Profitable investors started selling their assets to cash out. They started collecting other cryptocurrencies and BTC started losing its value. In December 2018, its value was only over $3,500. But in the year 2019, Bitcoin had a bull run and managed to rise to $11,500.

In early 2020, like most markets, Bitcoin got to its lowest point again during the Covid-19 pandemic but by December 2020, it got back up and ran at $29,000, another all-time high.

Once again, Bitcoin recorded an all-time high in 2021 at $64,000 in the first half but touched down to $30,000 in the summer. Once again Bitcoin recorded another all-time high at $68,000 but by January 2022, it dipped to $35,000.

It is well understood that the value of Bitcoin is highly volatile but it is believed that it has the potential to go as high as $1,00,000!

I hope you now understood how supply and demand change everything in the market from an asset that is worth nothing to everything and vice versa.

Bitcoin saw its use in the market in some form (in the dark web in its nascent stages) and soon became a cool asset to own and gained popularity through media and interested investors of the time.

That’s how Bitcoin’s value grew/ shrank over the period of time.

Moreover, Bitcoin’s supply is capped at 21 million.

According to CoinMarketCap, the fully diluted market cap ( i.e., the market cap if 21 million BTC were in circulation) of Bitcoin is $629,017,691,158 at the time of writing.

This limits the supply of bitcoins and hence further augments the need to acquire them in hopes that it would one day become a store of great(er) value.

With that being said, I hope you now understood how an asset like cryptocurrency gets its value. It’s all about the number of exchanges and a few other factors like competition, governance, etc.

If you found this article informative, do like and share.

Follow me for more crypto-related content.

Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing