What is cryptocurrency backed by, and why does it have value?

Most cryptocurrencies are not backed by anything. No government, company or stockpile of gold stands behind bitcoin or ether. They have value because people are willing to pay for them, and that willingness rests on scarcity, usefulness and the expectation that others will want them too.

Is cryptocurrency backed by anything?

In most cases, no. Nobody promises to redeem a bitcoin for dollars, gold or anything else. Its holder owns an entry on a public ledger and nothing more.

The main exception is the stablecoin, a token designed to stay worth one unit of a currency such as the US dollar. The largest stablecoins are issued by companies that say they hold reserves of cash and short-term government debt to match the tokens in circulation. Their value depends on those reserves existing and on the issuer honoring redemptions.

How is that different from dollars?

The dollar is not backed by gold either. The United States ended the dollar's link to gold in 1971. Modern national currencies are fiat money, meaning they have value by government decree.

The dollar does have supports that crypto lacks. It is legal tender, taxes must be paid in it, and a central bank manages its supply with the aim of keeping prices stable. A cryptocurrency has software rules in place of those institutions. Whether that is a strength or a weakness is the heart of the debate.

Where does the value come from?

• Scarcity. Bitcoin's code limits the supply to 21 million coins. Scarcity matters only if people want the thing that is scarce.
• Utility. Some coins are needed to use a network. Ether, for example, pays the fees for transactions and programs on Ethereum.
• Security and network size. A network with many users and operators is more useful and harder to attack than a small one.
• Demand. In the end the price is whatever buyers pay on the open market. Much of that demand is speculative.

The guide to why bitcoin has value looks at the largest example in more detail.

What do the critics say?

A share of stock gives a claim on a company's profits, and a bond pays interest. Most cryptocurrencies pay nothing. Critics argue that such an asset is worth only what a later buyer will pay, and that this makes prices fragile.

Supporters reply that gold and national currencies also produce no income and are valued by shared convention. Both sides agree on one point: when demand disappears, nothing props up the price. That is one reason crypto is so volatile, and many coins have lost nearly all their value, as described in what happens if a cryptocurrency goes to zero.