The value of cryptocurrencies like bitcoin, just like any other kind of money, comes fundamentally from what you can do with it. As a follow up to What Backs Bitcoin, I want to dig into that value. The idea, which comes from Austrian economist Carl Menger, is that just as a shovel’s value comes from its ability to dig, a currency’s value comes from its ability to help you do two things: transactions and savings. Think of transactions as the money you carry in your wallet or checking account, and savings as the rest of what you have in the bank or buried in the yard. It’s worth mentioning here that that vast majority of money demand is indeed savings, making up 90% or more of all money demand. The reason this matters is because if we know what transactions cryptocurrencies are good at, we can estimate how much money demand they’ll start pulling from fiat or gold, and therefore how much those cryptos will increase in price. For transactions, some features that matter are cost and speed of transaction, anonymity, reversibility, counter-party risk, regulatory treatment. For savings demand, those factors are overwhelmed by the specific question of how well the currency keeps its price. Read more here…

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