Wednesday, Aug 10, 2022
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What Is The Actual Underlying Value Of Cryptocurrencies?

The RBI governor's comment on lack of underlying value in cryptocurrencies has again pushed forth the debate on cryptocurrencies and their 'real' value, which depends on the market mood and popularity

What Is The Actual Underlying Value Of Cryptocurrencies?
What Is The Actual Underlying Value Of Cryptocurrencies?

While addressing the post monetary policy press conference on Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das raised his concern against private cryptocurrencies. "Investors should keep in mind that they are investing at their own risk. They should also keep in mind that the cryptocurrency has no underlying, not even a tulip," he said, referring to the Dutch tulip bulb market bubble seen in the 17th century. 

Das also said that the central bank does not want to rush into introducing a Central Bank Digital Currency (CBDC) and is carefully examining all aspects. Finance Minister Nirmala Sitharaman announced in the Union Budget 2022-23 that RBI will launch its own digital currency this year.

What Is Underlying Value?  

In simple terms, underlying means something valuable or investments whose value can decide another asset’s worth. For example, the Indian rupee is backed by the government reserves of gold, precious metals. forex etc. In this case, the metals are the underlying for the rupee. Similarly, the value of the US dollar, the world’s reserve currency, is tied to gold. 

This is different from intrinsic value, which describes the perceived or true value of an asset. The intrinsic value is prescribed to an asset by people. Why do people think that gold is valuable? It is because gold has some unique properties that are irreplaceable and cannot be copied by any other metal. Based on the intrinsic properties, people have assigned a value to gold.

Do Cryptocurrencies Have An Underlying Value?  

Most cryptocurrencies, which run on blockchains, do not have any underlying asset that can help decide their valuation. However, some experts feel that some of them, which have use cases, have intrinsic value.

"Bitcoin is a payment and a payment network like VISA, Bitcoin is truly decentralized, no single individual or entity governs it, it uses proof of work mechanism to arrive at a consensus, the blockchain is immutable, which means data cannot be altered. Also, it is censorship-resistant, which means it cannot be stopped," says Kashif Raza, founder of Bitinning, an online platform focused on crypto awareness. People who value digital tokens are willing to pay a price to acquire them, he added.  

Experts also make a case for the utility if digital tokens. “Cryptocurrencies definitely have several use cases which make them valuable. For example, using Decentralized Finance, or DeFi, one could get access to a loan at a fraction of the time through traditional methods. And at a fraction of the cost too! It is just one of the several use cases of cryptocurrencies," says Edul Patel, CEO and co-founder of Mudrex, a global algorithm-based crypto investment platform. 

Manish Kumar, co-founder of two blockchain-based financial market platforms GREX and RealX, says that crypto tokens have been issued for various reasons. "Some tokens represent real-world assets; some others represent a stream of income (so they represent financial assets).”

However, he cautions against a third category of crypto tokens that don't represent real-world assets or any stream of income. “This category of tokens is the most speculative and investors may lose the full principal investment in them,” he says 

The government has been cautioning against the risks associated with cryptocurrencies. You would do well to weigh the pros and cons before jumping into them as they remain unregulated.

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