Whoo boy, let’s dive into this one…
Short answer: because it was designed that way. On purpose.
Long answer: for a currency to have any useful value, the amount and production has to be limited somehow.
(Which makes sense, right? If we tried to pay people in leaves, nobody would go to work for 15 leaves an hour, not when they could go for a hike and pick 15 leaves off the trees in 15 seconds.)
Precious metals – gold, silver, copper – have been popular for all of recorded history, because the limiting factor is “this material is physically difficult to dig out of the ground.”
With US dollars, the limit is part “bills are printed with complicated techniques that you need special equipment to pull off” and part “it’s illegal to for anyone except the government to print new dollars, and we will take you to jail if we catch you at it.”
With cryptocurrency, it’s all digital, so there’s no naturally-rare mineral involved. And it’s decentralized, so nobody has the authority to claim “we are the Bitcoin Police and we can take you to jail if you do this wrong.”
If you want it to work, you have to come up with some artificial limit, and then build that directly into the base code.
I’m not any kind of expert in the technical details here, so please nobody get too picky about it…but the general idea is, the blockchain will only spit out a new coin in response to a computer running calculations.
And for every new coin, it demands more calculations than the last one.
If you could still get a new Bitcoin by, say, “not using the internet for a day, have your computer use that power for mining instead,” then nobody would spend thousands of dollars to exchange for one Bitcoin, right? Anybody who wanted one would just take a day off Tumblr to mine it themselves.
Basically, there’s no reason to buy a Bitcoin for a dramatically higher price than it would cost you to mine a Bitcoin.
And the mining process keeps requiring more power, so:
- First you can’t do it with just spare processing power from your main device, you need to buy a new one that’s fully dedicated to mining if you want to keep up
- The extra power usage is enough to put a notable spike in your electric bill
- One computer won’t do it anymore, you need two
- Then four
- Then eight
- You have a warehouse full of computers
- You have the electric bill that it takes to power a warehouse full of computers
- Plus the storage rental costs of the warehouse space
- The internet bill to keep all your computers in touch with the blockchain
- The air-conditioning bill that it takes to keep the warehouse from just flat-out melting
- Ongoing maintenance costs
- Replacement parts
- Not just any parts, you are buying up high-quality graphics cards and computer chips that can do the fastest processing
- So much that it’s contributing to a global computer-chip shortage (this is not an exaggeration; Wall Street Journal source, Tech Republic source)
- And the power demands are so high that defunct power plants are being re-activated to fill them (also not an exaggeration; Ars Technica source)
- And the processing requirements just keep going up and up and up….
When the exchange rate for Bitcoin is at $10,000, that implies “the cost of the equipment, maintenance, and power bills to mint 1 Bitcoin is now so high that people would rather pay $10,000 cash than deal with it.”
…okay, this is a little oversimplified – there’s also gambling and speculating involved. Say, you think oil prices are about to go up, maybe you pay a little more than the current rate, figuring the power costs of mining are about to get more expensive and you’ll come out ahead. Or say Elon Musk said something mean about a coin you have, maybe you sell all your tokens for a lower price, figuring it’s better to get out now than wait for it to crash even farther.
But you can see how they’re generally connected. Nobody would pay around $10,000 if the production cost was around $10.
One more link (which explains some of the same things in different words, in case mine aren’t working for everyone):
And, finally, let’s tie this back to NFTs:
Another thing you need for your currency to work: it has to be useful for something other than “gambling on the price.”
It can’t just be something you endlessly swap for other currencies and hope the exchange rate works in your favor! There have to be places that say “we will take this in exchange for Tangible Goods And Services.”
Bitcoin has this, at least a little bit. Most places aren’t lining up to accept it, but it’s been around long enough to build up some credibility, so there are a few.
If I started a new cryptocurrency tomorrow where the cost of mining the first token was $10K, nobody would bother. Because it has no credibility, no staying power, no way to ever convert that currency into actual stuff.
To be clear, people are launching new cryptocurrencies all the time.
Most of them aren’t even trying to be useful, they’re just pump-and-dump schemes. Meaning the founders pump up people’s interest with “ScamToken will be the next Bitcoin, don’t miss this amazing opportunity, convert your $$$ into ScamToken now while it’s cheap!” Then they dump all their tokens, selling them to all the people they’ve convinced to buy. It isn’t long before the hype fades, the cold reality of “we can’t do anything with this” sets in, and the buyers are left with wallets full of tokens nobody new will buy, while the founders walk away with the $$$.
But some people are playing a longer game. They don’t want their currency to get “an afternoon’s worth of excitement from hyped-up crypto speculators” and then immediately flop. They want it to be useful for actually buying something, so it has a legitimate basis for getting some actual, stable value in the long run.
Or, failing that…they want it to appear to be useful for buying something. So it looks more credible. So the excitement lasts longer. So you reach outside the circle of “people who follow crypto for its own sake” and get the attention of “people who don’t care about crypto at all, but who do care about whatever Something you’ve convinced them your token will buy.”
So, hey: how big, do you think, is the market of people who care about digital art?
Now start paying attention to how many press releases for “an amazing opportunity to buy some cool new Non-Fungible Tokens” include “by the way, the specific Tokens we’re selling are from a cryptocurrency you’ve never heard of, let alone bought.”
