According to some people, Bitcoin has intrinsic value. According to others, it doesn’t. Bitcoin only exists within computer networks, yet it has appreciated in price faster than the shares of even the hottest technology stocks. How is this possible without there being anything of value behind it? There must be something that allows it to be valuated.
But what is it? This has puzzled investors and analysts for years, and many have competing views. Here are some of the arguments for both sides.
Key Takeaways
- Bitcoin and other cryptocurrencies have seen their market value rise incredibly since 2009.
- Determining an intrinsic value for a virtual token has confounded analysts and investors.
- Today, a handful of approaches are considered appropriate for valuing Bitcoin and its peers, including those based on scarcity, its network, and its marginal cost of production.
- There are also those who deny that Bitcoin has intrinsic value, citing no company involvement, lack of adoption, and its convertibility.
Arguments for Bitcoin Intrinsic Value
When it comes to digital currencies, there have been several methods proposed to attempt valuation. Most of these approaches differ in how one views the nature of a digital “coin.”
Expected Value
It’s believed by some that if one views Bitcoins as equivalent to stocks or bonds, pricing models can appraise its expected value. Expected value is the discounted value attributed to an investment’s payoff in the future. Since Bitcoin does not pay dividends or interest, the expected value would be due to a strong belief in the underlying technology and its potential to be disruptive or even revolutionary.
Supply and Demand
Using scarcity as an argument for value, it is believed that Bitcoin’s value can be determined using the principles of supply and demand. Like any other market, the market for Bitcoin achieves price discovery through the interactions of a multitude of buyers and sellers. If there is a high demand that outpaces the number of new bitcoins that are mined, this pushes up its price. If demand drops, its price should fall.
Like many assets, there is only a limited supply of Bitcoin (21 million ever to be produced by the year 2140), but unlike other securities that have a finite supply, the new supply of Bitcoin cannot be increased by decree or vote among shareholders or boards of directors. Some believe this to be akin to precious metals with limited supplies, which help give them more intrinsic value.
Network Effects
Another valuation mechanism is to view Bitcoin not as an asset but as a network. Thus, its value could arise from the network’s size, estimated costs, and robustness. The term “network effects” refers to the number of users or nodes mining a cryptocurrency.
Originally devised for understanding the value of telecommunication networks, Metcalfe’s law states that a network’s value is proportional to the number of its users (or nodes) squared. While there are limitations, this perspective theorizes that as the Bitcoin network grows, so should its value.
Cost of Production
Another way some believe Bitcoin’s intrinsic value can be determined is to view it as a produced commodity, similar to that of oil or silver. Most commodity prices are driven by their marginal cost of production, or the cost to producers to make one additional unit. Economic theory states that in a market where many producers of the same product (in this case, Bitcoin miners) are competing with one another to sell their product to consumers, this process of competition will drive down the selling price to its marginal cost.
Thus, even if demand falls short of supply, producers will be reluctant to sell below the cost of production and incur losses. From this view, Bitcoin’s price should be driven by similar dynamics.
The major difference between bitcoin production and, say, mining ore or producing something like chairs or tables is that an increase in demand cannot spur producers to make more bitcoins—since production is limited to one block every ten minutes (approximately). Thus, as higher market prices spur new and larger miners to join the network, the number of bitcoins produced remains the same.
Utility as a Store of Value
One of the most popular arguments used to claim Bitcoin has intrinsic value is that it stores it. During the COVID-19 pandemic, the global economy basically shut down as businesses and governments scrambled to solve the massive issue that loomed. Some investors turned to Bitcoin and experienced tremendous gains. Investors who held on to or purchased during the crypto winter of 2022 and 2023 found themselves with nearly four times the value in January 2024 after the Securities and Exchange Commission approved Bitcoin Spot ETPs.
Arguments Against Bitcoin Intrinsic Value
There are as many arguments against the possibility of Bitcoin’s intrinsic value as there are claiming the cryptocurrency has an underlying value. Here are a few of them.
Bitcoin Is a Convertible Currency
Products, services, wages, and salaries are not valued in bitcoin but in fiat currency. Bitcoin must be converted to a government-backed currency to be used, even in countries where it is recognized as legal tender.
The argument here is that because Bitcoin is convertible, it doesn’t have any underlying value.
Nothing Has a Fundamental Value
Based on the subjective theory of value, the argument against Bitcoin’s intrinsic value is that resources, labor, production costs, or other expenses involved in getting a product or service to market are variable and depend on its context, perception, and value to whoever purchases it.
Thus, it is believed that no intrinsic or underlying value can be assigned to Bitcoin—only the value placed on it by those who purchase or use it is relevant.
A Bitcoin Collapse Will Not Shake the Economy
Bitcoin is not a legal tender but a currency that can be converted to legal tender. Some also argued that it is not inherently linked to current financial systems nor used by enough people to be a concern. So, its lack of widespread adoption is believed to be evidence that if the cryptocurrency were to fail, it would not affect anyone not invested in it.
Since it is believed that economies in general will not be affected if Bitcoin collapses, it has no intrinsic value.
Bitcoin Is Not a Company
Stocks are issued by companies to raise funding. These companies transfer fractions of ownership to the stock’s purchasers. Some pay dividends to stockholders, sharing any profits made.
Bonds are issued by governments and businesses to raise capital, promising returns in the form of yields or interest rates on the amount loaned. Bitcoin doesn’t do this, so the argument is that there is no value behind it. No company, no government, no debt, no interest payments—it simply exists as an electronic way to transfer value from one party to another.
Does Bitcoin Have Intrinsic Value?
It depends on who you talk to. There are arguments for its intrinsic value and arguments against it.
What Gives Bitcoin Its Intrinsic Value?
Those who claim Bitcoin has intrinsic value point to its utility as a store of value, cost of production, expected value, and scarcity.
Is Bitcoin Undervalued?
It depends on which analyst you talk to. Some believe it is; others claim it isn’t.
The Bottom Line
Bitcoin’s price constantly changes based on demand and investors’ perception of its worth. Whether Bitcoin has intrinsic value appears to depend—at least for now—on how it is individually valued.
Whether it has intrinsic value or not, early investors and those who captured the cryptocurrency at more recent lows have benefitted from significant price increases. Another consideration is that Bitcoin is still new and continues to develop into whatever it will be in the future—its value, at least in 2024 and the years following, might be impossible to determine until it matures.
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