The Basics: Why do people buy Cryptocurrency

In this article, we will cover the following:

  • How does cryptocurrency have value in the first place?
  • Why is it becoming more and more popular to invest in cryptocurrency?
  • How does cryptocurrency shape up against government-issued money?

Golden Bitcoin coins in front of keyboard

How does Cryptocurrency have value?

To showcase the value of cryptocurrency, we will compare and contrast Bitcoin against government-issued fiat currency, and in this case, the New Zealand dollar.

To be clear going forward, there is a difference between price and value. Price is how much it costs to buy and sell something, and value comes from its worth, usefulness, and importance. The value of anything comes down to a matter of perception, just like how a bottle of water is much more valuable to someone who’s thirsty over someone who is not.

Stack of gold bitcoins in front of the New Zealand flag

Since value comes down to a matter of perception, in this article we are going to primarily cover what backs Bitcoin’s price in the first place, compared to what backs the NZD.

As demonstrated in the first article on the basics which outlines what crypto is and what it can do – it is clear that cryptocurrency has several ingenious attributes that give it value and utility in one way or another. One of them being its ability to be used as a borderless decentralised universal currency.

World map next to bitcoin with lights in the background

Why do people buy Bitcoin

Bitcoin’s market value as an intangible asset comes from the same thing that determines the price of any other commodity, the laws of supply and demand. Nature does not slab a price tag on anything, the free market does.

The price of Bitcoin is simply determined by what the market is willing to pay for it. The same goes for a floated currency like the NZD, where the price is determined by the means of supply and demand, as well as how it shapes up against a basket of other currencies.

Bitcoin in front on green trading graph with red and green candels

The laws of supply and demand are universal for determining the price of a product or service, but there are several other factors that may indicate that Bitcoin may have a stronger backing than the New Zealand Dollar.

First things first – a government can print and destroy money as they like, unlike Bitcoin which can and will only ever have a total supply of 21 million.

money printer in action

Printing and destroying money fulfills purposes like keeping a currency stable, or to replenish batches of old or damaged notes.

Although printing and destroying money is required for certain reasons at certain times, there are many examples in the modern day that show that a government’s executive control over the price of cash can have bad results. Recent examples include Argentina, Venezuela, and Zimbabwe.

This is a key difference between fiat money like the New Zealand dollar and cryptocurrency, as the total amount of NZD can be manipulated whereas the total amount of most cryptos cannot. Hence why the price of Bitcoin is so volatile – there is a finite amount of it in existence so market confidence can severely impact the demand for the limited amount of Bitcoin that exist., and therefore the price.

Bitcoin whale impacting the crypto market

Supply is not the only factor that can be used to manipulate a currency’s price, and Bitcoin is a prime example of how this can happen. As investors or institutions with deep pockets buy and sell large amounts of Bitcoin, the price of BTC can drastically fluctuate.

Due to these deep-pocketed investors (whales) and/or general market trends, the price of Bitcoin can be extremely volatile, a desirable attribute to some but a deal breaker to those wanting to use it as a stable, full-time currency.

See our guide on what cryptocurrencies to buy here.

Roller coaster going fast on blue tracks with blue sky in background

Due to this high level of volatility, the majority of crypto users are accumulating these virtual currencies as digital assets or as ‘speculative’ investments, rather than cash to be used on the day-to-day, for now.

That isn’t to say that cryptocurrency isn’t being used and accepted as a payment method in franchises around the world, you can see the map for yourself here.

Map of places accepting crypto coinmap.org

A currency needs to be stable to be fully functional, or else you could be selling a product that cost $100 to build yesterday for only $80 today. Even though Bitcoin and other cryptos face immense price fluctuations, it’s important to consider that as the number of users who enter the market continues to increase, the less influence deep-pocketed individuals have over the price.

This is part of the reason that cryptocurrencies like Bitcoin are seen as solid investment vessels for the long term.

cryptocurrency price graph with red and green candels with blue background

Another interesting comparison between crypto and fiat is how it’s stored. Cryptocurrency is stored in digital ‘wallets‘ where only those who have the keys to it can access it. 

When putting your money in a traditional bank account, your money is stored in one big account that your bank owns. The account balance on your phone or ATM resembles debt that the bank owes you, rather than actual funds sitting in their own physical or digital account.

Money in your bank account is best represented as an ‘IOU’, whereas Bitcoin and cryptocurrency wallet balances represent your physical cryptocurrencies sitting in an account that you are in sole control of.

Mobile Banking On Smartphone

New Zealand Dollar vs. Bitcoin

Having Bitcoin in your own cryptocurrency wallet is like carrying an ingot of gold around in your virtual pocket at all times. The price of the gold may vary, but you know you will still have the same weight of gold on you at the end of the day. Nobody can stop you from using or storing this digital gold either.

Bitcoin next to gold ignots

Having government-issued fiat currency like the NZD is like having an IOU for a gold ingot that is in your bank’s pocket. Meanwhile, gold bars are slowly being added to the total gold supply, so tomorrow the gold bar in your pocket might only be worth the price of two gold bars now – devaluing your gold by half.

This is called the practice of inflation, and it is the reason that if you kept $100New Zealand dollars for the last 100 years, it would only be worth $2 dollars now.

New Zealand dollar purchasing power since 1928 graph screenshot

Conclusion

In conclusion, cryptocurrencies like Bitcoin hold value not only as a currency but also as a store of value.

Due to the lack of executive control from one individual or government, cryptocurrency has been called ‘the catalyst for the separation of money and state’. We will only find out in time if this is true.

The value of cryptocurrency goes even further if you consider it’s potential to provide autonomous banking to the masses, as well it’s ability to be integrated into other systems like Smart Contracts. (Legal computer backed contracts where the need for a middleman like a lawyer is removed) And its ability to be used in autonomous Machine to Machine transactions.

Black Background with a bunch of people holding up a golden bitcoin

It is only fair to say that cryptocurrency is not perfect. For a currency to operate properly it is required to hold stability, and since crypto’s like Bitcoin have a finite supply, there is no way that any individual party can tame its volatility. This is not a surprise though as less than 0.5% of the world owns any. You can learn more about how many people are already using cryptocurrency here. 😎

As mentioned earlier, as more people enter the market every day, the less of influence one individual can have over the price. It is also important to know that Bitcoin has experienced periods of stability in the past too, such as from February to April 2019.

Screenshot of bitcoins price from February to April 2019

How you can get involved in the action

Hopefully, after reading this article (and our first article about the basics), you are starting to get a grasp on the concept of virtual currencies. The best way to wrap your head around it, like anything, is to mess around with it yourself.

To become an early adopter, sign up with Easy Crypto here, and in a few minutes you will have created an account and a crypto wallet, and purchased some cryptocurrency for your own, all at the best rates in New Zealand.