What gives a cryptocurrency value?

Market capitalization is the price of a crypto asset multiplied by the circulating supply; the calculation offers a sense of the overall growth potential of a project. As an example, for the popular meme coin Shiba Inu (SHIB) to grow from a price of 0.00002447 to $1.00, it would require a 40,866x (4,086,600%) increase in price. This move would take the market cap from approximately 13,500,000,000 to 551,691,000,000,000 USD (yes, $551 trillion, which is more than the total value of all of the world’s real estate). Excluding discussions of burn mechanisms and prior performance (SHIB is still up 43,718,959.3% from its all-time low), the likelihood of SHIB reaching $1.00 is slim. 

A common misconception in the world of crypto assets is the desire to find “bargain coins” that are priced at sub $1 with the idea that they have greater growth potential. This flawed practice leads to many retail investors loading up on coins like SHIB with the idea that if it just grew to $1, they could 1,000x their investment.

Coins like ETH have value because they are the fuel used to transact on a secure and decentralized network. Since the network has a broad use and many dApps are built on Ethereum and require gas to operate, ETH benefits from high demand. While ETH grants the user the ability to process transactions on the Ethereum network, it also allows the user to put forward and/or vote on Ethereum Improvement Proposals (EIPs) that are intended to continually improve the Ethereum network. As a result, ETH has both an inherent utility and a governance component built into its economics.

Tokens do not have this same inherent value, so they must rely on either their utility or the right to direct the project they are associated with in the form of governance rights. Some tokens have a combination of these two attributes.

The utility of a cryptocurrency is a “use case,” which can come in the form of a discount for services provided by the project, act as an in-game currency, or help generate rewards in the case of crypto gaming. It can also unlock higher yields for staking or lending (more on this later). 

Governance tokens effectively grant voting rights and allow holders to guide the direction of a project either in the form of submitting improvement proposals or voting on a project’s milestones or roadmap. Uniswap and its native token UNI are one of the better-known governance tokens. UNI can be used to vote on existing proposals or generate new ones to help steer the direction of the project. These tokens have value because they allow users to influence the project. Since Uniswap is a DEX, users generate revenue by acting as liquidity providers (LPs). Users who generate revenue from this platform are incentivized to have a say in protocol evolution because it directly affects their profitability.

Whether a cryptocurrency is considered a utility token, governance token, or a combination of both, from an accounting perspective, we treat it similarly to a stock for tax purposes.