Decoding Digital Gold: Professor Coin on Bitcoin’s Value

Professor Andrew Urquhart
serves as a Professor specializing in Finance and Financial Technology and heads the Finance Department at Birmingham Business School (BBS).

This marks the eighth contribution to the “Professor Coin” series, where I share essential insights from academic works on cryptocurrencies with the Decrypt community. This piece explores the factors driving Bitcoin’s intrinsic value.

Over a little more than a decade, Bitcoin evolved from a specialized innovation in cryptographic technology into a universally traded asset, now boasting a market capitalization worth hundreds of billions of dollars.

Despite its wide recognition, the fundamental question remains: What gives Bitcoin its perceived worth?

Bitcoin doesn’t generate revenue like businesses, isn’t secured by physical assets similar to gold, and lacks a central authority guaranteeing its value. Why, then, are individuals ready to spend significant sums on a digital asset? Contemporary scholarly research indicates various contributing aspects.

Limited Supply and Monetary Strategy

A fundamental factor in Bitcoin’s valuation is its predetermined limited availability. Only 21 million Bitcoins will ever exist. This restriction is enforced by the network’s rules and viewed as a safeguard against inflation by advocates.

Academic explorations have drawn parallels between Bitcoin and gold due to its scarcity. Pagnotta and Buraschi (2018) propose a model viewing Bitcoin as a decentralized network with value derived from user engagement and robust security measures, both supported by the incentives established in its monetary policy. Within their equilibrium structure, scarcity plays a critical part in maintaining long-term value.

The finite supply of Bitcoin enhances its appeal as an inflation hedge, specifically in times of widespread monetary expansion. Several economists have explored whether Bitcoin’s limited supply can explain its price, with Bui et al (2024) suggesting that it is an important factor in driving higher returns.

Network Dynamics and Practical Use

Scarcity alone does not secure value; it needs support from demand. Bitcoin’s demand arises from its function as a peer-to-peer digital asset and the assumption that it will be accepted for transactions in the future.

This is where network effects become significant. According to Cong, Li, and Wang (2021), Bitcoin’s value is amplified by its growing user base. Their study on tokenomics demonstrates that the more users adopt and trust Bitcoin, the more valuable the network becomes. This dynamic helps explain why Bitcoin has weathered multiple market fluctuations.

Moreover, Bolt and van Oordt (2016) propose that a virtual currency’s value appears when users believe it will hold its value and be commonly used in transactions. Their model illustrates how expectations of continued acceptance can stabilize assets like Bitcoin, which are generally volatile.

Production Costs and Network Integrity

Bitcoin’s operation is supported by real-world costs associated with its mining process. For the purpose of securing the network and processing transactions, Bitcoin employs a system known as proof-of-work, where miners compete to solve complex cryptographic problems, using significant amounts of computing power and electricity.

While this energy-intensive process is often debated, scholars like Hayes (2015) have shown that production costs create a fundamental lower limit for Bitcoin’s price. His research suggests that Bitcoin rarely trades below the marginal cost of mining, reinforcing that both energy consumption and network security are important for valuation.

The work of Pagnotta and Buraschi (2018) also supports this, demonstrating that mining incentives and the strength of the network’s security are vital to Bitcoin’s equilibrium value.

Market Sentiment and Public Attention

In reality, Bitcoin’s price also reflects investor sentiment and market speculation. Increased media attention or buzz on social media can lead to price increases or declines.

Studies by Urquhart (2018) and Shen et al (2019) show that Bitcoin prices correlate significantly with online search patterns, suggesting that trading volume drives investor attention.

Similarly, Liu and Tsyvinski (2021) reveal that cryptocurrency returns can be significantly predicted through tracking investor attention. Unlike conventional assets, Bitcoin lacks strong ties to macroeconomic indicators, making it particularly susceptible to market sentiment and prevailing beliefs.

Macroeconomic Significance and Portfolio Allocation

Bitcoin’s worth is additionally influenced by its position within the broader financial system. In periods of low interest rates and growing concerns about the weakening of traditional currencies, investors have increasingly sought Bitcoin as an independent 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 studies have revisited Bitcoin’s usefulness in investment portfolios, particularly during times of financial instability. Corbet, Larkin, and Lucey (2020) determined that Bitcoin acts more like a speculative asset than a safe investment. 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 Anchored in Code, Community, and Shared Expectations

Bitcoin’s value is a complex mix of technical innovation and economic principles, including scarcity enforced by code, the utility of decentralized agreement, demand shaped by expectations and market conditions.

It can act as a commodity, a tech stock, and a speculative token, all at the same time. This multifaceted nature is what makes Bitcoin equally intriguing and difficult to evaluate using traditional methods.

Ultimately, Bitcoin’s true value is anchored not in its current utility, but what its users believe it is capable of in the future.

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.

Bui, M., Pham, H., Thanh, B. N., Tiwari, A. K. (2024). Revisiting the determinants of cryptocurrency excess return: Does scarcity matter? International Review of Economics and Finance, 96, 103733.

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.