Cryptocurrencies: from the most basic to the most advanced — Are cryptocurrencies valuable?

When we ask people who have not yet invested in cryptocurrencies why they have not done so, most of them tell us that it is because they have no knowledge of the subject.

In this text we will try to give a relatively complete and brief overview of the world of cryptocurrencies and the DeFi world with the intention of facilitating a first approach. We hope that with the concepts given here the reader will be able to go deeper on his own if needed.

One of the questions many people ask when approaching crypto is this — are cryptocurrencies valuable? are they all smoke and mirrors? what are they based on?

Cryptocurrencies

Before we get into dApps (decentralized Apps, explained before), let’s look at the function that all blockchains, Bitcoin and Ethereum in particular, do. In these networks, you can send cryptocurrencies from anywhere in the world to anywhere else in the world in less than 1 minute, and for a very low cost (which can range from <$10 on Ethereum to pennies on Polygon or Optimism). And the fees are the same whether you send $10 or a million (they are not percentage fees, they are fixed fees for using the network). No censorship and with a network that is almost impossible to crash (especially ETH and BTC) because they are decentralized.

There would be people who might argue that you send cryptocurrencies that have a volatile value, but you have to remember that you can also send stablecoins through many blockchain, so we could send a cryptocurrency anywhere in the world in no time and with very low fees.

And all this (ability to send currency between any two parts of the world, uncensored, in less than 1 minute and with a very low cost), in itself is a very competitive product, non-existent with traditional banking, where transactions between countries (and even within the same country) take more than 24 hours and have high costs.

People who want to use this service, which is the most basic one, have to buy the cryptocurrency of the blockchain in which they want to operate (we have already said that the operations in the blockchain are paid in the crypto modena issued by that blockchain), since with the payment of the commissions for operating that blockchain the decentralized infrastructure is being paid (the different people who contribute their hardware throughout the world).

Therefore, a balance is created between the people who contribute their hardware and the people who use it to make transactions. If the network is heavily used, the price of transaction fees goes up, which encourages more people to contribute their hardware, as it is very well rewarded by those fees, but with more people offering hardware the transaction fee will go down — so a balance is reached between supply and demand [to be more precise, in PoW (BTC, for example) people contribute hardware, in PoS (Ethereum, for example) people contribute mostly capital].

The problem is that through the media, instead of selling the goodness of the crypto and DeFi world, the speculative side of cryptocurrencies has been sold much more, bringing in many players who do not understand the power of blockchain nor the uncensored decentralization, simply with the intention of driving the cryptocurrency up. This has caused cryptocurrencies to have incredible variations, of more than 100%, which are not related to that break-even point. [here one could separate between Bitcoin, which does intend to be a store of value, and therefore the break-even point with hardware might be less relevant, vs blockchains that support dApps, like Ethereum, where the break-even point with hardware/capital input should apply more].

Actually for those who use cryptocurrencies to transact, what they are interested in is a low coin price, since the transaction price in fiat currency is proportional to the cryptocurrency price:

Transaction commission in Ethereum = gas * (gwei*1e-9) * price ETH/USD, where:

• gas: gives an idea of how complex an operation is made in ETH, from a simple transaction to a video game share.

• gwei: this is what the network resource is valued at — it is the only parameter that fluctuates to reach supply and demand equilibrium — if the network is congested (too many transactions, not enough hardware to process them) → gwei goes up.

• And as you can see, the transaction price is proportional to the price of the asset in USD. If you double the price of ETH, it costs twice as much in $ to transact.

Tokens, altcoins, meme coins / shitcoins

As mentioned above, a simple way to divide cryptocurrencies is to call cryptocurrencies those issued by the blockchain itself (Ethereum and ETH) vs. tokens, which would be those associated with dApps (decentalized Apps).

The fact that a blockchain has dApps implies that the blockchain itself has more utility, it gives more value to the original blockchain, as it will be used more due to these dApps.

Tokens are currencies that have a certain utility within the dApp. But to understand the value that token has, you have to be very careful about the utility it has within that dApp. There are tokens that have a clear utility, for example, they offer a discount in that dApp, or they can even give a financial return, a percentage of the commissions earned in that dApp, and there are others that have a less clear use, such as governance tokens.

The tokens that are easiest to evaluate are the ones that have a financial return — in fact there is now a trend within the DeFi world to try to go down that path (see this article on #RealYield). Those with utility, are more complicated to value because it is difficult to estimate the break-even point. And those with no financial return or utility, like governance tokens… there’s no “reasonable” or “estimable” value there — it will be worth whatever two people are willing to give for it.

Altcoins can be defined as those currencies that are not Bitcoin or that are not Bitcoin and Ethereum, depending on how restrictive you are.

The meme coins / shitcoins, depending on how aggressive you are with the language, are coins that in principle have no use. They simply have whatever value users want to give them — so there is no “objective” value that can be assigned to them, you can’t estimate how much that token should be worth.

Although there are many assets that have no “measurable” value — for example, works of art or gold itself (a very important part of the use of gold is for storage in central banks and as an investment). Bitcoin, for example, in pursuing being a store of value, also has no “objective” value, it is similar to gold.