digital currencies; Unsupported, but valuable

When 16-year-old Jeremy Scott tried to explain to his parents in 2012 about the great opportunity to invest in the digital currency called bitcoin, his father, a seasoned accountant, told him in a serious tone:

  • It has no support and therefore no value.

But Jeremy Scott, a lover of computer games, who was seriously following CS:Go (the multiplayer version of the popular game “Counter Strike: Global Offensive”) and had been able to acquire a lot of computer skills at that time, was able to find a value. which was hidden in Bitcoin to recognize well.

He also started an interesting business for himself, designing and selling “skins” (types of clothes and weapons in the counter game). He used the money he earned from selling them to upgrade his computer hardware.

With this investment in hardware, he was able to use his computer’s graphic card toBitcoin miningpay (at that time it was possible to mine Bitcoin with a graphics card). Scott started it as a hobby, but it soon became serious. He would overclock his computer’s graphics card, improve its cooling system, and spend hours reading about bitcoin mining to increase his productivity.

It didn’t take long for his father to notice that the electricity consumption of their house had increased drastically, and for this reason, he opposed his son’s action. He told Jeremy:

This (Bitcoin) is not money and has no backing. If you want to get anywhere in your life, you have to stop doing this.

This was probably not the first and last time that a person reduced the value of digital currencies to “nothing”.

But the interesting thing is that in the financial markets there are also a series of securities that have “no” support and roots.

For example, consider zero coupon perpetual bonds. These bonds are issued at a discount many times higher than their nominal price, no interest is assigned to them, and it is not possible to resell them to the government. However, these bonds are considered one of the legal financial instruments. The only way to convert these bonds into money is for someone else to buy them.

What is the price of “hope”?

Cryptocurrencies may be based on nothing, but that doesn’t mean they’re worthless. Perhaps the value of digital currencies is due to their lack of support. If we look at digital currencies from this point of view, we will see that they are placed in a different category of assets such as precious metals, collectibles or works of art.

This is despite the fact that financial securities have a series of restrictions that determine their risk and value. Bonds are issued by borrowers, and their value and interest rate depend on the creditworthiness of their issuer. Bonds can generate predictable cash flow, their maturity date is also known, and on this maturity date, it can be sold at the nominal value stated on them.

The amount of predictability of cash flow for stock bonds is much lower or not predictable at all. But the owners of these sheets, depending on the number of shares they own, can participate in the decision-making process of the management of the company in question.

Money also has the ability to be used to buy and sell goods and services. Of course, digital currencies have not yet been able to play this role well.

But despite the volatility of the markets in which bonds, stocks and currencies are bought and sold, their “value” is ultimately determined by their inherent limitations.

Although securities have high risk, their returns are also high. For this reason, their value may depend on the growth rate of the company in question, the growing industry in which the company is present, or its specific business model.

Although bonds are relatively predictable financial instruments, they rarely yield significant returns unless the buyer is able to purchase them at a deep discount.

The value of official currencies (which are essentially a means of exchange) should also be assessed through the purchasing power they provide (ie the products and services they can be purchased with).

But there are no such limits for determining the value of digital currencies.

“Discounted cash flow” or “estimated valuation” pricing models cannot be used to determine their value. There is no comparable analysis or meaningful approach to review and compare transactions with respect to previous examples, or even a cost approach to determining the “value” of digital currencies.

At all, if there were such models for valuing digital currencies, we would no longer be able to consider them as capital whose price is expected to increase in the future. Digital currencies in their current form are a rare example of unconstrained securities. In other words, their value is only due to their fluctuations (the ratio of supply to demand and its volume) in the market.

Why should you buy unrestricted securities?

Why should we even think about investing in securities without restrictions? Exactly because of the lack of limitations. Because at the time of strong increase in demand, a very high profit can be achieved.

To understand it better, you can imagine a time when in a betting game you put a small amount into the game, but this amount is very small compared to the final prize. Unrestricted securities allow for a very high return on investment because there is no basis for determining their value at the outset. In fact, there is no upper limit for the income from these securities and it is not possible to identify this ceiling at all.

Are digital currencies really rootless?

In order to understand whether the value of digital currencies can be tied to something or not, it is better to first know for whom this phenomenon is important. Statistics show that the demand for digital currencies is higher among urban youth who have limited access to other investment methods, high cost of living and monthly salary.

If a person has $500 in cash to invest, the interest earned on investing it in bonds at the end of the year is quickly spent on ordinary living expenses.

Due to financial pressures in life, such people are deprived of one of the most basic components of investment, which is compound investment (adding profit to capital).

Even if they make a profit of $1000 on their investment, the probability that they will spend this money is still high. One of the reasons for this is lack of financial discipline; But the main reason for this issue is the high cost of living.

A thousand dollars may seem like a lot of money, but when real estate prices are compared to the minimum wage, it seems like a very small amount. For this reason, it is no surprise that digital currencies are considered a valuable investment tool for young people around the world.

It’s true that digital currencies may not make you rich today, but the possibility exists in the future, and that possibility is attractive to someone who is dealing with everyday financial problems. In the eyes of millions of young people, the capitalist system is beneficial for certain social classes, and for this reason, these young people think that traditional securities are a low-value way to make a profit.

We should also take into account that this young generation, which has suffered a lot from global inflation and the increase in the value of traditional capital, is afraid of losing a little of its capital, and for this reason, it turns to digital currencies to diversify its capital. This approach makes the importance of investing in digital currencies more clear to others.

Despite all these reasons, it is not the case that digital currencies will always remain as a form of securities without restrictions. Perhaps the day will come when digital currencies will actually help facilitate the seamless transfer of value or serve as a universal means of storing value.

In this way, digital currencies will gradually change from their current status (which has no roots and support) to a capital with roots and basis. This conversion reduces the hopes of obtaining astronomical profits from their sale in the future, and they can no longer be placed in the form of unrestricted securities.

Related Posts

What is Tether and how is it different from dollars?

Tether (USDT) is a digital currency whose value is equal to one US dollar. This digital currency, which is backed by the dollar, is designed to protect investors…

What is Metaverse? What will be the future of metaverse and digital worlds?

Imagine a world where you can sit on the same couch with a friend who lives on another continent, or be present in a virtual version of…

What is BNX digital currency? Introduction to Binary X Cryptocurrency

New projects that have emerged in the decentralized space of the cryptocurrency world are usually based on the Ethereum blockchain network and provide the possibility of making…

What is a miner and how is a miner’s income calculated?

You must be hearing terms such as bitcoin mining , miner’s income and digital currencies a lot these days. We know many people who earn money in this way and have benefited…

What Is Staking In Cryptocurrency?

Staking cryptocurrency is a yield technology technique that’s usually utilized by cryptocurrency traders who wish to put their belongings to work. What’s Crypto Staking? Staking is likely…

How To Make Money With Cryptocurrency Trading

Cryptocurrency trading is a volatile market and can be very risky for newcomers. However, there are some people who are making money through cryptocurrency trading. This article…

Leave a Reply

Your email address will not be published. Required fields are marked *