From Tomatoes to Tomatocoins: Exploring the Economics of Cryptocurrency Valuation

Do you know how physical or digital things acquire their prices? Or why a tomato doesn’t cost $1 million? Or why cryptocurrencies have certain values? The answer could be mostly summed up in the concepts of supply and demand that work inside and outside the crypto world. However, there are some crypto-specific things to consider as well.

In economics, supply refers to the quantity of a good or service that producers are willing and able to offer for sale in a given market at a specific price and time. It’s, let’s say, the total quantity offered or produced. Conversely, demand represents the quantity of a good or service that consumers are willing and able to buy at a certain price. It’s the total quantity desired or bought.

A seesaw or equilibrium + external factors

There’s also a medium spot between supply and demand, which we can call equilibrium. That’s the point at which the quantity supplied equals the quantity demanded in a market, resulting in a more-or-less stable price. You could picture a seesaw to understand this.

If more people want a product (increased demand) than is available, prices tend to rise. On the other hand, if there's too much of a product (increased supply) and fewer people want it, for any reason, prices tend to fall. The seesaw balances when supply and demand are equal, establishing a stable market price. An event that doesn't always happen.

Other factors influence supply and demand, though. On the supply side, production costs, technological advancements, and government policies can significantly impact the quantity of goods or services available. Changes in input prices, such as raw materials or labor, can alter production costs, subsequently influencing supply. Additionally, shifts in technology can either streamline production, increase supply efficiency, or necessitate costly adjustments, affecting the overall supply.

On the demand side, consumer preferences, income levels, and external economic conditions play pivotal roles. Consumer tastes and preferences can rapidly evolve, affecting demand for specific products. Changes in income levels can influence purchasing power, thereby impacting overall demand.

Moreover, external factors like regulatory changes, geopolitical events, and natural disasters can disrupt both supply chains and consumer behaviors, creating fluctuations in supply and demand dynamics. The intricate interplay of these factors shapes the equilibrium in markets, determining prices and quantities exchanged.

Some tomatoes

As an additional example, let’s think about that tomato from the beginning. It has different prices in different countries, but never $1 million per unit. That’s because the world produces around 44.2 million metric tons of tomatoes every year. There’s demand for tomatoes, but also a lot of supply. If you’re in the countryside, you can even pick up some tomatoes for free.

So, the tomato price ($0.0010 in Colombia, $0.27 in the USA, $1.5 in South Korea, etc.) is heavily determined by its intrinsic value or use (food), its supply, distribution costs, and likely local taxes. For one unit to cost $1 million it’d need to be very special in some way, like being the last-ever tomato on Earth (scarcity) and capable of curing cancer (additional intrinsic value).

Now, if we created today a decentralized cryptocurrency called Tomatocoin (TMT), why or how would this one have any price?

Why do cryptocurrencies have value?

Usually, the interaction between supply and demand determines the market value of cryptocurrencies. When demand outpaces supply, prices tend to rise, and vice versa. The decentralized nature (without middlemen and regulations) of these digital assets means that market forces (people buying and selling) play a crucial role in establishing fair value, as opposed to centralized control seen in traditional financial systems.

About the supply, contrary to most fiat currencies, crypto coins often have an intentional scarcity by design. That means they’re not limitless, but have a capped supply since the beginning. For instance, Bitcoin was designed to issue 21 million coins ever, nothing less and nothing more. Likewise, GBYTE has a limited supply of 1 million GBYTEs. Our Tomatocoin could have a capped supply of 1 million TMT as well, but that’s only the beginning of acquiring a real price. We need demand, people desiring to buy it.

Then, why would people want to buy Tomatocoin? That depends entirely on what benefits or features the coin is offering. Maybe TMT is a stablecoin pegged to the value of the tomato industry. Or perhaps is a representative share in a new investment model for tomato crops. Or it’s just funny, a memecoin like Dogecoin (DOGE), and we can make a funny website to attract buyers. In this case, Tomatocoin would need to offer some added value to create demand.

Bitcoin, on the other hand, is the first-ever cryptocurrency, considered secure and global. It has its value as a cross-border, pseudonymous payment method or speculative investment. Obyte's offer is more decentralized, with smart contracts and cheaper and faster transactions. To sum it up, besides their limited supply, most cryptocurrencies need to provide some other service, benefit, or product to attract customers (demand) and raise their prices from zero.

More reasons for cryptocurrency demand

In general, for the cryptocurrencies that already exist and provide some kind of product/service/benefit, the demand is influenced by several other factors. Growing interest from institutional investors, increased adoption of online transactions, and a desire for financial liberty and privacy contribute to the rising demand worldwide. Additionally, speculative trading and the potential for high returns attract individual investors to the crypto market.

The heavy censorship and unstable economy in certain countries are also important adoption drivers. In nations where freedom of speech is restricted, and the flow of information and money is tightly controlled, cryptocurrencies offer a decentralized and censorship-resistant alternative. They provide a means for individuals to engage in financial transactions and access a global financial network without fear of interference.

Besides, in countries facing economic volatility and hyperinflation, cryptocurrencies present a store of value and a hedge against currency devaluation. Citizens in these regions often experience difficulties in preserving their wealth due to the instability of local currencies. Cryptocurrencies like GBYTE, with their limited supply and decentralized nature, are perceived as a more stable and reliable store of value.

Speaking of which, the decentralized nature of cryptocurrencies is, likely, their main advantage. No other asset worldwide possesses that characteristic: all traditional currencies, stocks, and commodities (gold, oil, etc.) could be frozen or seized by third parties, for any reason —sometimes unjustified. Only cryptocurrencies provide you with full control of your own funds because only you have the keys.

The more decentralized the network is, the more protected you are. In Obyte, for instance, we eliminated miners as powerful middlemen. We only have less-powerful Order Providers (OPs) to order transactions in a Directed Acyclic Graph (DAG) structure, where everyone can register their operations without permission or interference. In a world full of surveillance and control, the demand for decentralization and privacy is going higher globally!

Featured Vector Image by vectorjuice / Freepik