You know what are cryptocurrencies and how they work. You know you need a wallet to use them. You know there's a lot of them. But why do they even have so much of their value and how is it possible that they can reach 10.000$ and more?
Image Source: Blockchain.WTF
At the time of writing the article, there were 1691 cryptocurrencies. Yes, the number is going towards 2000. Does this makes sense? No. To explain why there are so many of them, we have to explain the history of cryptocurrencies.
FIRST CRYPTOCURRENCY
In Part 1 we said that Bitcoin (BTC) is the first and most popular cryptocurrency. Created in 2009 by an anonymous developer (or group of programmers) under the false name Satoshi Nakamoto. The first Bitcoin transaction was conducted in January 2009 between anonymous Sastoshi and Halo Finney, a programmer who passed away in 2014 of rare neurological diseases - ALS. In October 2009, a member of the bitcoin.com forum under the nickname "newLibertyStandard" bought from 5050 bitcoins from another member in the exchange for $5.02 that he sent him through PayPal. This set the first bitcoin value, 1 USD = 1006 BTC.
Shortly thereafter, the first real transaction took place. On May 17 2010, Hungarian by the name Laszlo Hanyecz offered to publish 10,000 bitcoins in the forum for the one who would order him a delivery of 2 pizzas. May 22 2010 the exchange was done, and on that day the value of those 10,000 BTC was $41. At the end of 2010 the first exchanges began to open. These were websites where you could change dollars for bitcoins. In December 2010 the first bitcoin exchange was performed through mobile applications. Then the momentum gradually started, the total value of the Bitcoin market was $ 1 million. Such news attracted more attention of the public and more and more people have begun to change their dollars, euros etc. into bitcoins, thus bitcoin's value has continued to grow and grow ...
ETHEREUM
Bitcoin has inspired many other ideas, different alternatives with some progress / changes in existing technology, and other cryptocurrencies, such as Litecoin, Monero, Ripple, Zcash, etc. The young man named Vitalik Buterin in 2015 introduces great news into the world of cryptocurrencies called Smart Contracts. These smart deals are essentially embedded in the blockchain. Simply put: a simple transaction is transferring money from A to B. By smart deals, transferring money from A to B is done only if C condition is reached.
Smart deals have enabled ICO (Initial Coin Offerng) to emerge. ICOs are essentially a crowdfunding campaign. Crowdfunding is actually a public campaign in which anyone can participate. How much money they will invest in something is left to the investors, and those who launch the campaign can offer something in return - an official thank you, the first product series, or something else. Many have begun to create new cryptocurrencies that would be financed through ICO. These cryptocurrencies would work on the Ethereum network, they would literally copy-paste one another with a different name and image. These currencies are often heavily promoted to attract a large number of investors who in return for the money invested receive a certain amount of this new launched cryptocurrency that is expected to increase in value.
1000+ CRYPTOCURRENCIES
Most of these ICO projects are fraud aimed at attracting more users to invest, after which the value of those cryptocurrencies just continued to fall because there are no reasons why someone would actually invest in them. The opportunity brought by ICO has been used, and as a result, we got over 1000 cryptocurrencies, of which only around 100+ are meaningful and are not fraudulent.
Smart contracts have enabled many other innovations, and the ICO is unfortunately a negative consequence of the new technology. Still, not all ICO projects are fake, some are very prospective (Cardano, Stellar, IOTA ...) and will probably be worth more than Bitcoin in the future.
SO FROM WHERE DO CRYPTOCURRENCIES GET VALUE?
Each cryptocurrency retains its value from the total amount invested in it. The more people investing, ie changing their money into cryptocurrency, the more it's value increases. Same as with stocks. Larger amount invested in one share = higher share price.
And why there are differences in the prices of cryptocurrencies? How can some be worth over 100$ and some less than 0.01$?
To explain this, you need to understand 2 things:
- Market Capital (Market Cap)- the full value contained in crptocurrency. It is calculated by multiplying the number of units of the cryptocurrency with the unit price. It is most commonly expressed in dollars (USD) and shows the total value of the Bitcoin market, for example.
- Circulating Supply - the total number of units of a cryptocurrency currently in circulation.
The value of a cryptocurrency, ie, an unit is calculated by dividing market capital / circulating supply. Since cryptocurrencies are mutually differently organized, each has a different number of circulating supply units. So Bitcoin currently has 17.17 million, Ethereum has 100.95 million, Ripple 39.31 billion, etc.
Example: IF current market capital of Bitcoin is 276 579 395 099 dollars, in order to get the current value of 1 Bitcoin, we must divide market capital with the number in the circulation. So, 276579395099/16788539 = $ 16,474.30. Value 1 BTC = 16 474.30 USD.
In the same way we calculate the price of any other cryptocurrency. Here is the list of all cryptocurrencies www.coinmarketcap.com.
That is the end of this part. If it was helpfull, tutorial part 4 of the guide is HERE, where I'll explain how to buy / sell some cryptocurrencies and where and how they can be used.
