Professor Andrew Urquhart is Professor of Finance and Financial Technology and Head of the Department of Finance at Birmingham Business School (BBS).
This is the eighth installment of the Professor Coin column, in which I bring important insights from published academic literature on cryptocurrencies to the Decrypt readership. In this article, I discuss what gives Bitcoin value.
In just over a decade, Bitcoin has gone from a niche innovation in cryptography to a globally traded asset with a market capitalization in the hundreds of billions.
Yet despite its prominence, a persistent question remains: what gives Bitcoin its value?
Bitcoin doesn’t generate cash flow like a company, isn’t backed by physical reserves like gold, and has no central authority guaranteeing its worth. So why are people willing to pay tens of thousands of dollars for a digital token? Recent academic research points to several factors.
Scarcity and Monetary Policy
The first pillar of Bitcoin’s value is its programmed scarcity. Bitcoin has a fixed supply: only 21 million coins will ever be created. This limit is enforced by the network's consensus rules and is viewed by supporters as a bulwark against inflation.
Academic studies have likened Bitcoin to gold because of this scarcity. Pagnotta and Buraschi (2018) model Bitcoin as a decentralized network whose value stems from user adoption and security, both of which are underpinned by the incentives embedded in its monetary policy. In their equilibrium framework, scarcity plays a key role in sustaining long-term value.
Scarcity makes Bitcoin attractive as a hedge against inflation, particularly in a world of expanding money supply. A number of economists have investigated whether Bitcoin's scarcity can explain its valuation with Kruger, Meyer, and Withagen (2022) showing the widely discussed stock-to-flow model fits historical data reasonably well, reaffirming the importance of scarcity as one component of Bitcoin’s perceived value.
Network Effects and Utility
Scarcity is not sufficient without demand—and Bitcoin’s demand comes from its use as a peer-to-peer digital asset and from the belief that others will accept it in the future.
This is where network effects come into play. According to Cong, Li, and Wang (2021) Bitcoin's value grows with its user base. Their tokenomics model shows that the more people adopt and trust Bitcoin, the more valuable the network becomes. This dynamic helps explain why Bitcoin has survived multiple boom-and-bust cycles.
Furthermore, Bolt and van Oordt (2016) argue that the value of a virtual currency arises if users expect it to retain value and be accepted in transactions. Their model formalizes how expectations of acceptance can stabilize a volatile asset like Bitcoin.
Cost of Production and Network Security
Bitcoin is also underpinned by a real-world cost: mining. To secure the network and process transactions, Bitcoin relies on a system called proof-of-work, where miners compete to solve cryptographic puzzles using electricity and hardware.
This energy-intensive process is not without controversy, but researchers such as Hayes (2015) have shown that the cost of production provides a fundamental floor for Bitcoin’s price. He finds that Bitcoin rarely trades below the marginal cost of mining, reinforcing the idea that energy and security provision matter for valuation.
Moreover, the work of Pagnotta and Buraschi (2018) supports this by showing that mining incentives and the strength of the network’s security are central to Bitcoin's equilibrium value, not just supply and demand in the traditional sense.
Speculation, Sentiment, and Attention
In practice, however, Bitcoin's price also reflects investor sentiment and speculation. A surge in media coverage or social media buzz can trigger price rallies or sharp selloffs.
Studies by Urquhart (2018) and Shen et al (2019) demonstrate that Bitcoin prices are strongly correlated with online search trends and that trading volume in turn, drives investor attention.
Similarly, Liu and Tsyvinski (2021) show that cryptocurrency returns are significantly predicted by investor attention proxies. Unlike traditional assets, Bitcoin lacks ties to macroeconomic fundamentals, so sentiment and belief play an outsized role.
Macroeconomic Role and Portfolio Demand
Bitcoin’s value is also shaped by its role in the broader financial system. In a low-interest-rate environment and amid concerns about fiat currency debasement, investors have turned to Bitcoin as a non-sovereign store of value. This is demonstrated by early work by Baur et al (2018) who show that investors are holding Bitcoin for long periods, but is supported by followup work by Jahanshahloo et al (2025).
Recent research has reassessed Bitcoin’s role in portfolios, particularly in times of market stress. Corbet, Larkin, and Lucey (2020) find that Bitcoin behaves more like a speculative asset than a traditional safe haven, but it can act as a weak diversifier under certain market conditions. In a similar vein, Ji, Bouri, Lau, and Roubaud (2021) use time-varying spillover models and show that Bitcoin's hedging properties fluctuate significantly, with greater hedging effectiveness during tranquil periods rather than during crises.
Conclusion: Value from Code, Community, and Belief
Bitcoin’s value emerges from a blend of engineering and economics: scarcity enforced by code, utility derived from decentralized consensus, and demand shaped by sentiment, costs, and macro conditions.
It behaves like a commodity, a tech stock, and a speculative token—often all at once. That complexity is what makes Bitcoin both so fascinating and so difficult to value with traditional models.
In the end, Bitcoin's worth is anchored not in what it does today, but in what its users believe it can become tomorrow. And as long as that belief persists—backed by utility, adoption, and incentives—the value may persist too.
References
Baur, D. G., Hong, K-H., Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets? Journal of International Financial Markets, Institutions and Money, 54, 177-189.
Bolt, W., & van Oordt, M. R. C. (2016). On the Value of Virtual Currencies. Journal of Financial Stability, 17, 81–91.
Cong, L. W., Li, Y., & Wang, N. (2021). Tokenomics: Dynamic Adoption and Valuation. Review of Financial Studies, 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 Research 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 Review, forthcoming.
Ji, Q., Bouri, E., Lau, C. K. M., & Roubaud, D. (2021). Dynamic connectedness and integration in cryptocurrency markets. International Review of Financial Analysis, 74, 101670.
Kruger, P., Meyer, C., & Withagen, P. (2022). Is Bitcoin’s Stock-to-Flow Model Valid? Finance Research 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. Review of Financial Studies, 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.
