As confusing as cryptocurrency can be, perhaps the most elusive question of all is how can virtual money possibly be worth something? Coins, bills, make sense: they’re tangible, and are worth something physically? But crypto tokens like Bitcoin and Ethereum exist only virtually. In this article, we will examine how, exactly, cryptocurrencies derive their worth.

Durability

The best way to break down where currencies like Bitcoin find their inherent value is by stacking it up against one of the economy’s basic laws: the properties of money, which is grounded in mathematics. The first property of money (that is, why we use bills and coins and now tokens instead of, say, bushels of corn) is Durability.

Durability is the quality of being able to last. Whereas bartering with food or livestock runs the risk of decay or disease, money in the modern sense does not have the same issue. Bills or coins are designed for longevity–it doesn’t matter how long you have them stored away, when you retrieve them again, they will be more or less intact.

Bitcoin (and Ethereum and Ripple and all the other digital currencies) actually have a leg up on traditional currency in this regard: since they are confined to the virtual world, there is no danger of them ever being damaged or even lost in the way that traditional money could be.

Portability

Similarly, money has to be able to be easily carried. A herd of cows is much harder to navigate than a stack of twenties–and cryptocurrencies are even easier. It is all stored on a digital wallet that can be accessed from any device.

Fungibility

You might be familiar with the term fungible if you have ever heard of NFTs. Whereas NFTs derive their value from being irreplicable, money is meant to be easily replaced without worry of depreciation. Natural resources like grain or corn will always be slightly different, and runs the risk of having differing values even within one crop. Money, on the other hand, has a consistent value no matter what. A dollar will always be worth a dollar. Cryptocurrencies are much the same: one BTC will always be worth one BTC.

Scarcity

In order to retain its value, money must remain in limited supply. The US dollar is regulated by the Federal Reserve, which only keeps a certain amount of money in circulation at any given time. Comparatively, there will only ever be 21 million Bitcoins produced. This increases the inherent value of an individual Bitcoin, especially once the last one is mined.

Divisibility

Just how a $100 bill can be further divided into lower denominations–twenty $5 bills or ten thousand pennies–Bitcoin is much the same. There are one million “bits” in one bitcoin and even those can be divided up to eight decimal places. This ensures more people can get a share–further increasing its value.

Recognizability

The last characteristic of money is recognizability. This one is where Bitcoin still has room to grow as more and more places start to accept Bitcoin as a form of payment. But just because Bitcoin hasn’t (yet) been accepted as a widespread form of payment, the same can be said for American currency. The US dollar can’t be used in Warsaw instead of złoty, for example, or in France in place of euros.

Though Bitcoin has a long way to go, you can trust that cryptocurrency is not going away anytime soon. In fact, it might very well be the currency of the future!