It is no secret that more people than ever before are exploring the world of cryptocurrency, getting a wallet app and visiting an exchange to convert fiat currency into tokens to use on the blockchain.
The UK’s Financial Conduct Authority is preparing a roadmap to regulate crypto, the price of Bitcoin has soared past $97,000 nearing the end of the month and it appears that the once-elusive figure of $100,000 for a single BTC is rapidly becoming a matter of when, rather than if.
This surge, which emerged at the start of the year with spot Bitcoin exchange-traded-funds (ETFs), has maintained momentum throughout the year, and with crypto getting acceptance and potential regulation, 2025 is expected to be a huge year for the blockchain.
However, there are a lot of questions surrounding crypto, and whilst you do not necessarily need to understand something to invest in it and make money from it, there is a curiosity that emerges from investors about crypto and why it has become so valuable in such a relatively short space of time.
For example, one of the biggest questions that is asked, particularly by investors migrating from other financial markets is about intrinsic value. Why is Bitcoin or Ether worth what the market claims it is worth?
It is an interesting question, but to start examining it, we need to explore the idea of value and where it comes from.
What Is The Value Of A Digital Ingot?
The concept of intrinsic value comes from stock trading, and it is an easy question with a very difficult answer. Intrinsic value is an attempt to measure what an asset is actually worth, usually with the aim of seeing if it is undervalued or overvalued in the market.
For example, the intrinsic value of a stock in a company would be what the company is hypothetically actually worth, outside of the market sentiment, supply and demand that shape the price investors pay.
The idea is that if you have stock in a company, what do you get in exchange for buying it? In this case, it would be a fraction of ownership, and therefore a fraction of their assets and profits. That is its intrinsic value.
It is one of four forms of value a commodity has, alongside its price, exchange value and use value.
Price is self-explanatory; it is value as defined by what people will pay, divorced from all of the calculations that lead to that final figure.
Exchange value is similar in concept to price but is not the same. It tends to refer to an object’s value in relation to other goods, and is more useful for defining something like a liquid asset, a commodity or indeed a currency, and where cryptocurrency fits in this.
Finally, there is use value, which is the tangible features of a commodity, whether it is an actual purpose or whether it satisfies a need. It is an object’s value as defined by what it does rather than what it can be exchanged for.
All currencies have a use value, even if that can be quite different from their exchange value or price on the market. Many older currencies had values pegged to gold reserves or were actually made from gold, and thus the use value was the gold itself.
This can be seen with digital gold currencies; the value of DigiGold, for example, is that by owning a digital gram of gold, you can cash it in at The Royal Mint for the equivalent amount of gold.
All currencies can be characterised as a representation of some form of value, even if with modern fiat currencies, that value is typically the security that a sovereign bank will always be able to back the note or coin’s value, even if it can fluctuate over the time due to various market factors.
Cryptocurrency is unusual as a token exists on the blockchain; it is not inherently a representation of value like a bank account would be. Whilst some tokens can represent something else, it does not have to in order to have intrinsic value.
Bitcoin, for example, does not represent anything; it exists on the blockchain in wallet addresses, so what gives it value?
There are three criteria that are definitionally required for something to be money. Money has three uses as described by Aristotle:
- As a medium of exchange,
- As a unit of account,
- As a store of value,
If something can be agreed to be swapped for something else, it can be used to measure value as a common denominator and it can be used as a store of value, it is money.
The first two are already designed into the blockchain, and whilst the value of crypto can be volatile, it is a store of value.