Professor Andrew Urquhart is Professor of Finance and Monetary Know-how and Head of the Division of Finance at Birmingham Enterprise College (BBS).
That is the eighth installment of the Professor Coin column, wherein I convey essential insights from revealed educational literature on cryptocurrencies to the Decrypt readership. On this article, I talk about what provides 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 a whole lot of billions.
But regardless of its prominence, a persistent query stays: what provides Bitcoin its worth?
Bitcoin doesn’t generate money move like an organization, isn’t backed by bodily reserves like gold, and has no central authority guaranteeing its price. So why are folks keen to pay tens of 1000’s of {dollars} for a digital token? Latest educational analysis factors to a number of components.
Shortage and Financial Coverage
The primary pillar of Bitcoin’s worth is its programmed shortage. Bitcoin has a set provide: solely 21 million cash will ever be created. This restrict is enforced by the community’s consensus guidelines and is considered by supporters as a bulwark towards 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 person adoption and safety, each of that are underpinned by the incentives embedded in its financial coverage. Of their equilibrium framework, shortage performs a key function in sustaining long-term worth.
Shortage makes Bitcoin engaging as a hedge towards inflation, significantly in a world of increasing cash provide. A variety of economists have investigated whether or not Bitcoin’s shortage can clarify its valuation with Kruger, Meyer, and Withagen (2022) displaying the extensively mentioned stock-to-flow mannequin matches historic information moderately effectively, reaffirming the significance of shortage as one part of Bitcoin’s perceived worth.
Community Results and Utility
Shortage will not be ample with out demand—and Bitcoin’s demand comes from its use as a peer-to-peer digital asset and from the idea 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 person base. Their tokenomics mannequin exhibits that the extra folks undertake and belief Bitcoin, the extra invaluable 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 foreign money arises if customers anticipate it to retain worth and be accepted in transactions. Their mannequin formalizes how expectations of acceptance can stabilize a unstable asset like Bitcoin.
Value 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 course of will not be with out controversy, however researchers resembling Hayes (2015) have proven that the price of manufacturing gives a elementary flooring for Bitcoin’s worth. He finds that Bitcoin not often trades beneath the marginal value of mining, reinforcing the concept that vitality and safety provision matter for valuation.
Furthermore, the work of Pagnotta and Buraschi (2018) helps this by displaying 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 follow, nevertheless, Bitcoin’s worth additionally displays investor sentiment and hypothesis. A surge in media protection or social media buzz can set off worth rallies or sharp selloffs.
Research by Urquhart (2018) and Shen et al (2019) exhibit that Bitcoin costs are strongly correlated with on-line search developments 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 property, Bitcoin lacks ties to macroeconomic fundamentals, so sentiment and perception play an outsized function.
Macroeconomic Function and Portfolio Demand
Bitcoin’s worth can be formed by its function within the broader monetary system. In a low-interest-rate surroundings and amid issues about fiat foreign money 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 function in portfolios, significantly in occasions of market stress. Corbet, Larkin, and Lucey (2020) discover that Bitcoin behaves extra like a speculative asset than a standard protected haven, however it could possibly act as a weak diversifier beneath sure market circumstances. In the same vein, Ji, Bouri, Lau, and Roubaud (2021) use time-varying spillover fashions and present that Bitcoin’s hedging properties fluctuate considerably, with better hedging effectiveness throughout tranquil durations somewhat 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—usually . That complexity is what makes Bitcoin each so fascinating and so troublesome to worth with conventional fashions.
Ultimately, Bitcoin’s price is anchored not in what it does at the moment, however in what its customers consider it could possibly change into 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 alternate or speculative property? Journal of Worldwide Monetary Markets, Establishments and Cash, 54, 177-189.
Bolt, W., & van Oordt, M. R. C. (2016). On the Worth of Digital Currencies. Journal of Monetary Stability, 17, 81–91.
Cong, L. W., Li, Y., & Wang, N. (2021). Tokenomics: Dynamic Adoption and Valuation. Evaluation of Monetary Research, 34(3), 1105–1155.
Corbet, S., Larkin, C., & Lucey, B. (2020). The contagion results of the COVID-19 pandemic: Proof from gold and cryptocurrencies. Finance Analysis Letters, 35, 101554.
Hayes, A. (2015). A Value of Manufacturing Mannequin for Bitcoin. Telematics and Informatics, 34(7), 1308–1321.
Jahanshahloo, H., Irresbeger, F., Urquhart, A. (2025). Bitcoin beneath the microscope. British Accounting Evaluation, forthcoming.
Ji, Q., Bouri, E., Lau, C. Okay. M., & Roubaud, D. (2021). Dynamic connectedness and integration in cryptocurrency markets. Worldwide Evaluation of Monetary Evaluation, 74, 101670.
Kruger, P., Meyer, C., & Withagen, P. (2022). Is Bitcoin’s Inventory-to-Movement Mannequin Legitimate? Finance Analysis Letters, 48, 102956
Liu, Y., & Tsyvinski, A. (2018). Dangers and Returns of Cryptocurrency. NBER Working Paper No. 24877.
Pagnotta, E., & Buraschi, A. (2018). An Equilibrium Valuation of Bitcoin and Decentralized Community Property. Evaluation 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 Consideration of Bitcoin? Economics Letters, 166, 40-44.
