Professor Coin: What Gives Bitcoin Its Value?

Professor Andrew Urquhart is Professor of Finance and Monetary Expertise and Head of the Division of Finance at Birmingham Enterprise College (BBS).

That is the eighth installment of the Professor Coin column, by which I convey essential insights from printed educational literature on cryptocurrencies to the Decrypt readership. On this article, I talk about what offers Bitcoin worth.

In simply over a decade, Bitcoin has gone from a distinct segment innovation in cryptography to a globally traded asset with a market capitalization within the hundreds of billions.

But regardless of its prominence, a persistent query stays: what offers Bitcoin its worth?

Bitcoin doesn’t generate money circulate like an organization, isn’t backed by bodily reserves like gold, and has no central authority guaranteeing its value. So why are individuals keen to pay tens of 1000’s of {dollars} for a digital token? Latest educational analysis factors to a number of elements.

Shortage and Financial Coverage

The primary pillar of Bitcoin’s worth is its programmed shortage. Bitcoin has a set provide: solely 21 million coins will ever be created. This restrict is enforced by the community’s consensus guidelines and is considered by supporters as a bulwark in opposition to inflation.

Tutorial research have likened Bitcoin to gold due to this shortage. Pagnotta and Buraschi (2018) mannequin Bitcoin as a decentralized community whose worth stems from consumer adoption and safety, each of that are underpinned by the incentives embedded in its financial coverage. Of their equilibrium framework, shortage performs a key position in sustaining long-term worth.

Shortage makes Bitcoin engaging as a hedge in opposition to inflation, notably in a world of increasing cash provide. Various economists have investigated whether or not Bitcoin’s shortage can clarify its valuation with Kruger, Meyer, and Withagen (2022) exhibiting the extensively mentioned stock-to-flow model matches historic knowledge fairly nicely, reaffirming the significance of shortage as one part of Bitcoin’s perceived worth.

Community Results and Utility

Shortage shouldn’t be ample with out demand—and Bitcoin’s demand comes from its use as a peer-to-peer digital asset and from the assumption that others will settle for it sooner or later.

That is the place community results come into play. Based on Cong, Li, and Wang (2021) Bitcoin’s worth grows with its consumer base. Their tokenomics mannequin reveals that the extra individuals undertake and belief Bitcoin, the extra beneficial the community turns into. This dynamic helps clarify why Bitcoin has survived a number of boom-and-bust cycles.

Moreover, Bolt and van Oordt (2016) argue that the worth of a digital forex arises if customers anticipate it to retain worth and be accepted in transactions. Their mannequin formalizes how expectations of acceptance can stabilize a risky asset like Bitcoin.

Price of Manufacturing and Community Safety

Bitcoin can be underpinned by a real-world value: mining. To safe the community and course of transactions, Bitcoin depends on a system known as proof-of-work, the place miners compete to unravel cryptographic puzzles utilizing electrical energy and {hardware}.

This energy-intensive process shouldn’t be with out controversy, however researchers corresponding to Hayes (2015) have proven that the price of manufacturing offers a basic flooring for Bitcoin’s value. He finds that Bitcoin hardly ever trades beneath the marginal value of mining, reinforcing the concept vitality and safety provision matter for valuation.

Furthermore, the work of Pagnotta and Buraschi (2018) helps this by exhibiting that mining incentives and the energy of the community’s safety are central to Bitcoin’s equilibrium worth, not simply provide and demand within the conventional sense.

Hypothesis, Sentiment, and Consideration

In observe, nonetheless, Bitcoin’s price additionally displays investor sentiment and hypothesis. A surge in media protection or social media buzz can set off value rallies or sharp selloffs.

Research by Urquhart (2018) and Shen et al (2019) display that Bitcoin costs are strongly correlated with on-line search traits and that buying and selling quantity in flip, drives investor consideration.

Equally, Liu and Tsyvinski (2021) present that cryptocurrency returns are considerably predicted by investor consideration proxies. In contrast to conventional belongings, Bitcoin lacks ties to macroeconomic fundamentals, so sentiment and perception play an outsized position.

Macroeconomic Position and Portfolio Demand

Bitcoin’s worth can be formed by its position within the broader monetary system. In a low-interest-rate surroundings and amid issues about fiat forex debasement, traders have turned to Bitcoin as a non-sovereign retailer of worth. That is demonstrated by early work by Baur et al (2018) who present that traders are holding Bitcoin for lengthy durations, however is supported by followup work by Jahanshahloo et al (2025).

Latest analysis has reassessed Bitcoin’s position in portfolios, notably in instances of market stress. Corbet, Larkin, and Lucey (2020) discover that Bitcoin behaves extra like a speculative asset than a standard protected haven, however it might act as a weak diversifier underneath sure market circumstances. In an analogous vein, Ji, Bouri, Lau, and Roubaud (2021) use time-varying spillover fashions and present that Bitcoin’s hedging properties fluctuate considerably, with larger hedging effectiveness throughout tranquil durations quite than throughout crises.

Conclusion: Worth from Code, Group, and Perception

Bitcoin’s worth emerges from a mix of engineering and economics: shortage enforced by code, utility derived from decentralized consensus, and demand formed by sentiment, prices, and macro circumstances.

It behaves like a commodity, a tech inventory, and a speculative token—typically unexpectedly. That complexity is what makes Bitcoin each so fascinating and so troublesome to worth with conventional fashions.

Ultimately, Bitcoin’s value is anchored not in what it does immediately, however in what its customers consider it might grow to be tomorrow. And so long as that perception persists—backed by utility, adoption, and incentives—the worth might persist too.

References

Baur, D. G., Hong, Okay-H., Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets? Journal of Worldwide Monetary Markets, Establishments and Cash, 54, 177-189.

Bolt, W., & van Oordt, M. R. C. (2016). On the Value of Virtual Currencies. Journal of Monetary Stability, 17, 81–91.

Cong, L. W., Li, Y., & Wang, N. (2021). Tokenomics: Dynamic Adoption and Valuation. Evaluate of Monetary Research, 34(3), 1105–1155.

Corbet, S., Larkin, C., & Lucey, B. (2020). The contagion effects of the COVID-19 pandemic: Evidence from gold and cryptocurrencies. Finance Analysis Letters, 35, 101554.

Hayes, A. (2015). A Cost of Production Model for Bitcoin. Telematics and Informatics, 34(7), 1308–1321.

Jahanshahloo, H., Irresbeger, F., Urquhart, A. (2025). Bitcoin under the microscope. British Accounting Evaluate, forthcoming.

Ji, Q., Bouri, E., Lau, C. Okay. M., & Roubaud, D. (2021). Dynamic connectedness and integration in cryptocurrency markets. Worldwide Evaluate of Monetary Evaluation, 74, 101670.

Kruger, P., Meyer, C., & Withagen, P. (2022). Is Bitcoin’s Inventory-to-Stream Mannequin Legitimate? Finance Analysis Letters, 48, 102956

Liu, Y., & Tsyvinski, A. (2018). Risks and Returns of Cryptocurrency. NBER Working Paper No. 24877.

Pagnotta, E., & Buraschi, A. (2018). An Equilibrium Valuation of Bitcoin and Decentralized Network Assets. Evaluate of Monetary Research, 31(9), 3498–3531.

Shen, D., Urquhart, A., Wang, P. (2019). Does twitter predict Bitcoin? Economics Letters, 174, 118-122.

Urquhart, A. (2018). What Causes the Attention of Bitcoin? Economics Letters, 166, 40-44.