Professor Andrew Urquhart He is a professor of finance and financial technology and is the head of the Ministry of Finance at Birmingham Business School (BBS).
This is Professor Coin Coin Collus’s eighth article, bringing important insights from published academic literature on cryptocurrencies. Decryption reader. This article explains what gives Bitcoin value.
In just 10 years, Bitcoin has left its niche innovation Encryption It is an asset that has been traded worldwide at a market capitalization of hundreds of millions of millions.
But despite its standout, there are still enduring questions. What gives Bitcoin its value?
Bitcoin does not generate cash flow like the company, is not backed by physical reserves like gold, and there is no central authority to guarantee its value. So why are people willing to pay tens of thousands of dollars for digital tokens? Recent academic research points to several factors.
Rarity and monetary policy
The first pillar of Bitcoin’s value is programmed rarity. Bitcoin has a fixed supply. Only 21 million coins will be created. This limit is implemented by network consensus rules and is considered by supporters as a breakwater against inflation.
Academic research compares Bitcoin to gold because of this shortage. Pagnotta and Buraschi (2018) model Bitcoin as a decentralized network derived from user adoption and security. In an equilibrium framework, rarity plays an important role in maintaining long-term value.
Rarity makes Bitcoin attractive as a hedge against inflation, especially in a world that expands money supply. Many economists have investigated whether Bitcoin’s rarity could explain its assessment with Kruger, Meyer, and withagen (2022).
Network Effects and Utilities
Rareness is not sufficient without demand. And the demand for Bitcoin comes from its use as a peer-to-peer digital asset and the belief that others will accept it in the future.
This is where network effects occur. According to Cong, Li, and Wang (2021), Bitcoin’s value grows along with the user base. Their talk nemics model shows that the more people adopt and trust Bitcoin, the more valuable the network becomes. This dynamic helps explain why Bitcoin survived multiple booms and bust cycles.
Furthermore, Bolt and Van Oordt (2016) argue that cryptocurrency value arises when users expect value to be retained and accepted in transactions. Their model formalizes how acceptance expectations stabilize volatile assets like Bitcoin.
Production Cost and Network Security
Bitcoin is also supported by real-world cost:mining. To protect networks and process transactions, Bitcoin relies on a system called Proof of Work. Miner Compete to solve encryption puzzles using electricity and hardware.
While this energy-intensive process is not without controversy, researchers such as Hayes (2015) have shown that production costs provide a basic floor to the price of Bitcoin. He discovers that Bitcoin rarely falls below the marginal costs of mining, and reinforces the idea that energy and security provision is important for evaluation.
Furthermore, the work of Pagnotta and Buraschi (2018) supports this by showing that mining incentives and network security are central to Bitcoin’s equilibrium value, not just supply and demand in the traditional sense.
Speculation, emotions, and attention
But in reality, Bitcoin Price It also reflects investors’ sentiment and speculation. A surge in media coverage and social media talk can lead to price increases and sharp selling.
Research by Urquhart (2018) and Shen et al (2019) Bitcoin prices are strongly correlated with trends in online searches, indicating that trading volumes attract investors’ attention.
Similarly, Liu and Tsyvinski (2021) show that cryptocurrency returns are significantly predicted by investor attention proxies. Unlike traditional assets, Bitcoin has no connection to the fundamentals of the macroeconomics, so emotions and beliefs play an extraordinary role.
Macroeconomic roles and portfolio demands
Bitcoin’s value is also shaped by its role in the broader financial system. With a low interest rate environment, investors have turned to Bitcoin as a valueless non-sovereign store amid concerns about the decline of Fiat currency. This has been demonstrated by early studies by Baul et al (2018) showing investors hold Bitcoin for a long period, but supported by Jahanshahloo’s follow-up work et al (2025).
Recent research has reassessed the role of Bitcoin in portfolios, particularly during times of market stress. Corbet, Larkin, and Lucey (2020) found that Bitcoin behaves more like a speculative asset than traditional safe havens, but could act as a weak diversifying device under certain market conditions. In a similar vein, Ji, Bouri, Lau, and Roubaud (2021) use a time-varying spillover model to show that Bitcoin’s hedging characteristics are significantly fluctuating and have a high hedging effect during quiet periods rather than during crisis.
Conclusion: Values from Codes, Communities and Beliefs
The value of Bitcoin comes from the fusion of engineering and economics. It is a rarity implemented by code, utilities derived from decentralized consensus, and demand shaped by emotions, costs and macro conditions.
It behaves like a merchandise, high-tech inventory, speculative token. Its complexity is very appealing and difficult to cherish both Bitcoin in traditional models.
Ultimately, Bitcoin’s value is locked into what users believe is likely to be tomorrow, not what they are today. And as long as that belief continues, as long as it is backed by utilities, recruitment and incentives, the value can also last.
reference
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