Professor Coin: What gives Bitcoin his value?

Professor Andrew Urquhart is professor of finance and financial technology and head of the Finance department at Birmingham Business School (BBS).

This is the eighth episode of the Professor Coin column, in which I bring important insights from published academic literature on cryptocurrencies to the Decrypt Readers. In this article I discuss what gives Bitcoin value.

In just over a decade, Bitcoin has gone into a niche innovation cryptography Actively traded worldwide with market capitalization in the hundreds of billions.

But despite his fame, there is a persistent question: what gives Bitcoin his value?

Bitcoin does not generate a cash flow as a company, is not supported by physical reserves such as gold and has no central authority that guarantees its value. So why are people willing to pay tens of thousands of dollars for a digital token? Recent academic research indicates various factors.

Scarcity and monetary policy

The first pillar of the value of Bitcoin is the programmed scarcity. Bitcoin has a fixed stock: only 21 million coins will be made. This limit is maintained by the consensus rules of the network and is seen by supporters as a stronghold against inflation.

Academic studies have compared Bitcoin with gold because of this scarcity. Pagnotta and Buraschi (2018) Model Bitcoin as a decentralized network whose value arises from user acceptance and security, both supported by the incentives that are embedded in its monetary policy. In their balance framework, scarcity plays a key role in retaining long -term value.

Bitcoin makes scarcity attractive as a hedge against inflation, especially in a world of expanding the money supply. A number of economists have investigated whether the scarcity of Bitcoin can explain the appreciation, whereby Mui et al (2024) documents that scarcity is an important determining factor for surplus returns.

Network effects and utility

Schaarste is not sufficient without demand and the requirement of Bitcoin comes from its use as a peer-to-peer digitally active and the conviction that others will accept it in the future.

This is where network effects play a role. According to Cong, Li and Wang (2021), the value of Bitcoin grows with its user base. Their tokenomics model shows that the more people take Bitcoin and trust, the more valuable the network becomes. This dynamic helps explain why Bitcoin survived multiple tree-and-bustcycles.

In addition, Bolt and Van Oordt (2016) claim that the value of a virtual currency arises if users expect this value to retain and be accepted in transactions. Their model formalizes how expectations of acceptance can stabilize volatile assets such as Bitcoin.

Cost of production and network security

Bitcoin is also supported by a real-world costs: mining. To secure network and processing transactions, Bitcoin trusts a system called Proof-of-Work, where miners Compete to resolve cryptographic puzzles with the help of electricity and hardware.

This energy-intensive process is not without controversy, but researchers such as Hayes (2015) have shown that the production costs offer a fundamental floor for the price of Bitcoin. He believes that Bitcoin rarely acts under the marginal costs of mining, which enhances the idea that energy and security provision is important for appreciation.

In addition, the work of pagnotta and Buraschi (2018) supports this by demonstrating that mining stimuli and the strength of the network protection are central to Bitcoin’s equilibrium value, not just supply and demand in the traditional sense.

Speculation, sentiment and attention

However, in practice, however, Bitcoin’s price Also reflects the sentiment and speculation of investors. A wave in media -attention or social media -buzzz can cause price rallies or sharp sale.

Studies by Urquhart (2018) and Shen et Alt Alto (2019) Show that Bitcoin prices are strongly correlated with online search trends and that trade volume in turn stimulates the attention of investors.

Similarly, Liu and Tsyvinski (2021) show that cryptocurrency returns are considerably predicted by investors attention -looking proxies. In contrast to traditional assets, Bitcoin is missing tires with macro -economic Fundamentals, so sentiment and faith play a major role.

Macro -economic role and portfolio -question

The value of Bitcoin is also formed by its role in the wider financial system. In an environment with a low interest rate and in the midst of concern about the factor of Fiatruututa, investors have turned to Bitcoin as a non-sovereign value shop. This is demonstrated by Baur’s early work et Alt Alto (2018) who show that investors hold Bitcoin for a long time, but are supported by the follow -up work by Jahanshahloo et Alt Alto (2025).

Recent research has reassessed the role of Bitcoin in portfolios, especially in times of market stress. Corbet, Larkin and Lucey (2020) believe that Bitcoin acts more as a speculatively active than as a traditional safe haven, but it can act as a weak diversifyer under certain market conditions. In a similar vein, JI, Bouri, Lau and Roubaud (2021) use time-dependent overflow models and show that Bitcoin’s hedgehog features fluctuate considerably, with greater hedging effectiveness during quiet periods instead of during crises.

Conclusion: Value of Code, Community and Faith

The value of Bitcoin stems from a mix of engineering and economy: scarcity enforced by code, utility derived from decentralized consensus and demand formed by sentiment, costs and macro conditions.

It acts like a raw material, a tech stock and a speculative sign – often in one go. Bitcoin makes this complexity both fascinating and so difficult to appreciate with traditional models.

In the end, the value of Bitcoin is not anchored in what it is doing today, but in what its users believe it can be tomorrow. And as long as that conviction continues – returned by usefulness, adoption and stimuli – the value can also persist.

References

Baur, DG, Hong, KH., Lee, AD (2018). Bitcoin: Medium or Exchange or Speculative Activa? Journal of International Financial Markets, Institutions and Money54, 177-189.

Bolt, W., & van Oordt, MRC (2016). About the value of virtual currencies. Journal of Financial Stability17, 81–91.

Cong, LW, Li, Y., & Wang, N. (2021). Tokenomics: dynamic acceptance and appreciation. Overview of financial studies34 (3), 1105–1155.

Corbet, S., Larkin, C., & Lucey, B. (2020). The infection effects of the COVID-19 Pandemie: proof of gold and cryptocurrencies. Finance research letters35, 101554.

Hayes, A. (2015). A production costs for Bitcoin. Telematica and computer science34 (7), 1308–1321.

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

Ji, Q., Bouri, E., Lau, CKM, & Roubaud, D. (2021). Dynamic connectedness and integration in cryptocurrency markets. International assessment of financial analysis74, 101670.

Bui, M., Pham, H., Thanh, BN, Tiwari, AK (2024). The determinants of Cryptocurrency Relocate Restplash Release: Does scarcity matter? International Review of Economics and Finance96, 103733.

Liu, Y., & Tsyvinski, A. (2018). Risks and returns of cryptocurrency. Nber Working Paper No. 24877.

Pagnotta, E., & Buraschi, A. (2018). A balance valuation of bitcoin and decentralized network assets. Overview of financial studies31 (9), 3498–3531.

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

Urquhart, A. (2018). What causes Bitcoin’s attention? Economics Letters, 166, 40-44.