Introduction: Bitcoin’s Rapid Evolution

In just over a decade, Bitcoin has transformed from a niche cryptographic experiment to a globally traded asset with a market capitalization exceeding hundreds of billions.

Despite its widespread adoption, a fundamental question persists: what actually gives Bitcoin its value? Unlike traditional assets or commodities, Bitcoin lacks physical backing, corporate cash flow, or central authority guarantee.

The Academic Perspective

Recent academic studies have identified several key factors contributing to Bitcoin’s valuation:

• Programmed scarcity
• Network effects
• Cost of production
• Investor sentiment and belief

Scarcity: The Bitcoin Analogy to Gold

At its core, Bitcoin’s value is underpinned by its fixed supply limit of 21 million coins. This programmable scarcity creates a deflationary characteristic similar to gold.

Academic research frames Bitcoin as a decentralized network where value derives from user adoption and security, with scarcity playing a crucial role in sustaining long-term value according to models by Pagnotta and Buraschi (2018).

The scarcity hypothesis is supported by studies showing Bitcoin rarely trades below mining marginal costs (Hayes, 2015) and that scarcity constitutes a major determinant of excess returns (Bui et al., 2024).

Network Effects and Utility

Scarcity alone is insufficient without demand. Bitcoin’s value is amplified by network effects:

Bitcoin’s utility grows with its user base, creating a self-reinforcing cycle where increased adoption enhances value according to Cong et al. (2021).

The expectation of acceptance drives value as well, with studies by Bolt and van Oordt (2016) demonstrating that user expectations regarding transaction acceptance are crucial for stabilizing Bitcoin’s value.

This network dynamic helps explain Bitcoin’s resilience through multiple market cycles.

Economic Foundations: Mining and Security

Securing the network requires real-world resources. Bitcoin’s proof-of-work system incentivizes miners to solve cryptographic puzzles using electricity and specialized hardware.

Research shows the production cost provides a fundamental floor to Bitcoin’s price per Hayes (2015). This physical cost anchor complements the economic model presented by Pagnotta and Buraschi (2018), emphasizing that valuation depends on real world underpinnings.

Market Sentiment and Attention

Unlike traditional assets tied to macroeconomic fundamentals, Bitcoin’s price reflects investor attention and sentiment more directly:

Bitcoin’s price volatility correlates strongly with investor attention, as evidenced by studies showing search trends (Urquhart, 2018), social media sentiment (Shen et al., 2019), and online activity predict price movements.

This attention-driven aspect demonstrates Bitcoin’s unique position in the financial landscape.

Financial Integration and Portfolio Role

Bitcoin has assumed a role in broader financial systems:

In low interest rate environments or amid concerns about fiat currency debasement, Bitcoin is increasingly viewed as a non-sovereign store of value (Baur et al., 2018).

Research examining Bitcoin’s portfolio properties shows mixed results: it can function as a weak diversifier under specific conditions (Corbet et al., 2020), though its hedging effectiveness is more pronounced during market tranquility rather than crises (Ji et al., 2021).

Conclusion: A Blend of Code, Community and Belief

Bitcoin’s value emerges from a complex interplay of digital scarcity enforced by code, network effects derived from decentralized consensus, and market demand shaped by sentiment, cost structures, and external conditions.

Its value proposition resembles a commodity, technology stock, and speculative asset simultaneously, reflecting the challenges in traditional valuation models.

Ultimately, Bitcoin’s worth derives from its perceived future utility and persisting belief among its user base, supported by network effects and economic incentives.

References

• Baur et al. (2018). Bitcoin: Medium of exchange or speculative assets?
• Bolt & van Oordt (2016). On the Value of Virtual Currencies
• Cong et al. (2021). Tokenomics: Dynamic Adoption and Valuation
• Corbet, Larkin & Lucey (2020). The contagion effects of the COVID-19 pandemic
• Hayes (2015). A Cost of Production Model for Bitcoin
• Jahanshahloo et al. (2025). Bitcoin under the microscope (forthcoming)
• Ji et al. (2021). Dynamic connectedness and integration in cryptocurrency markets
• Bui et al. (2024). Revisiting the determinants of cryptocurrency excess return
• Liu & Tsyvinski (2018). Risks and Returns of Cryptocurrency
• Pagnotta & Buraschi (2018). An Equilibrium Valuation of Bitcoin
• Shen et al. (2019). Does twitter predict Bitcoin?
• Urquhart (2018). What Causes the Attention of Bitcoin?