What is it and how is it calculated?
Key receivers
Cryptocurrencies like Bitcoin derive value from scarcity, utility and security, not physical backing. Common methods for calculating the intrinsic value of a cryptocurrency include Metcalfe's Law, product pricing, and integrated utility models. Estimating intrinsic value is challenging due to market volatility and speculation. data.Fiat currencies have no intrinsic value, based on trust, the value of cryptocurrencies is based on decentralization and scarcity.
Intrinsic value refers to the true value of an asset based on its fundamental characteristics rather than market value. For example, in traditional finance, a stock's intrinsic value is often derived from factors such as earnings, cash flow, and growth potential.
With cryptocurrencies, it's not that straightforward. Since crypto assets are not tied to physical entities or consistent income streams such as dividends, assessing their intrinsic value involves a mix of factors – technological, economic, and consumption-based. In simple terms, intrinsic value answers the question: What is this cryptocurrency worth more than its currency?
The intrinsic value of cryptocurrencies is derived from the following factors:
Utility: What problems does cryptocurrency solve? Scarcity: Is the supply limited or inflationary? Network Value: How large and active is the ecosystem? Security: How resistant is the blockchain to attacks?
For example, the intrinsic value of Bitcoin (BTC) lies in its fixed supply (21 million coins), decentralized network and security in proof-of-concept (PoW) mining.
On the other hand, Ethereum derives much of its value from being the backbone of decentralized applications (DApps) and smart contracts.
Did you know this? According to a June 2024 report by Triple A, global crypto ownership will increase from 420 million in 2023 to 562 million, accounting for 6.8% of the population, with Asia leading the growth.
How to calculate the intrinsic value of cryptocurrencies: three common methods
Let's move beyond theory and examine three widely used methods for estimating the intrinsic value of cryptocurrencies.
1. Metcalfe's Law
What it is: Metcalfe's Law states that the value of a network is proportional to the square of its active users. Basically, the more people use a network, the more its value grows exponentially. How to apply: This method is especially useful for cryptocurrencies with strong ecosystems and active users. It is calculated using the following formula.
Example: Ethereum
Ethereum is a vast ecosystem of developers, DApps and DeFi projects. Its value is supported by thousands of developers actively building on the blockchain and millions of users engaging with its applications. Specifically, the number of daily active addresses can be used as a proxy for the “network size”.
As of December 13, 2024, according to YCharts, Ethereum's daily active addresses will stand at 543,929. Here's how to apply Metcalfe's Law:
Net worth = (543,929) 2 = 296,086,104,841 or 296 billion units approximately (relative measure not in US dollars).
This shows how the value of the network grows exponentially with the number of users. If Ethereum's daily active addresses increase, the value of the network will increase exponentially.
Challenges
Oversimplification: Metcalfe's Law does not address the quality of user interactions. A network of 1,000 inactive users is worth less than a smaller, more engaged network. Accuracy of data: It is difficult to estimate the number of “active” users, especially as bots and spam accounts are increasing the metrics. It counts but offers faster transaction speeds. Metcalfe's Law alone does not capture these differences.
2. Product price
What it is: This method calculates the intrinsic value of a cryptocurrency based on the cost of producing or mining it. For PoW blockchains like Bitcoin, this includes electricity, hardware and operational costs. How it works: Production costs act as a “floor” for cryptocurrency prices because miners will not continue to work if the market price falls below their costs.
Example: Bitcoin
Bitcoin's intrinsic value is often determined by its mining price.
As of December 13, Bitcoin's average mining cost was $86,303, while its market price was $101,523. This shows that the intrinsic value of Bitcoin based on mining costs is at least $86,303. When the price exceeds this cost, mining remains profitable, encouraging miners to maintain the network. If the price of Bitcoin falls below the production price, miners may stop mining because it is not profitable, which may affect the security of the network. The $15,220 difference between price and mining costs reflects a healthy market, mining incentives continue and the network is secure. During the bear market of 2022, the price of Bitcoin briefly fell to $16,000, which is below the price it produces for some miners ($20,998). . This negative difference of $4,998 means that miners lose money for every bitcoin they spend. When this happens, inefficient miners may be forced to shut down, reducing the network's hashrate and security, as well as making adjustments that eventually cost the market price.
Challenges
Regional variation: Mining costs vary globally. For example, miners in Kazakhstan or Texas benefit from cheap electricity, while those in Europe demand high costs. However, many miners are turning to renewable energy sources, such as solar or wind power, to reduce costs and be environmentally sustainable. Market Volatility: The price of Bitcoin may temporarily fall below the production price, especially during market downturns.
3. Discount utility model
What it is: This approach estimates the intrinsic value of a cryptocurrency by projecting its future utility as transaction volume or adoption and discounting that value to the present. Reduce future benefits by using a fixed discount rate.
Example: BNB
BNB derives its intrinsic value from its role in the Binance ecosystem.
BNB is used to pay transaction fees, participate in token sales, and earn share rewards. According to YCharts, as of December 14, the BNB Smart Chain processes about 3.795 million transactions per day. To estimate the intrinsic value of BNB, analysts can calculate the discounted value of these transaction fees over time.
Here's how to use the discounted utility model to estimate the intrinsic value of BNB:
Assuming the average fee per transaction is $0.10, the total daily transaction fees are:
3,795,000 × 0.10 = $379,500 or 0.3795 million per day
This translates into an annual transaction fee of:
379,500 × 365 (non-leap year) = $138.52 million per year
To calculate the intrinsic value of BNB over the next 10 years, you can apply a 10% discount rate. Using the discount rate formula below, the expected total discounted value of BNB's transaction fees over 10 years is $851.13 million.
Here are the discounted prices for each year based on $138.52 million in annual transaction fees at 10% for 10 years (input prices in the formula above).
In the example above, assuming that transaction fees are constant over time, the hypothetical scenario is used to show how utility models can be applied at discount rates to estimate the intrinsic value of BNB. However, real-world fees vary, and factors such as BNB discounts, account level, and transaction types play a critical role in determining the actual cost.
Challenges
Estimated data: Estimating future transaction volumes and adoption rates involves assumptions. Discount rate sensitivity: Small changes in the discount rate can have a large impact on the valuation. Changes in the ecosystem: If Binance faces regulatory issues or competition, the BNB utility may decline, which is a previous It makes predictions worthless.
Why do fiat currencies have no intrinsic value?
Fiat currency, like the US dollar or the euro, traditionally has no intrinsic value. Unlike gold or silver, fiat money is not backed by a physical commodity. Value is instead derived from government regulation, trust, and the ability to serve as a medium of exchange. Even scholarly literature describes fiat money as an “intrinsically useless unbacked token.”
No Tangible Backing: Fiat money cannot be redeemed for gold, silver or any other physical asset. The “gold standard” system was abandoned decades ago. Value based on confidence: The value of fiat depends on the confidence in the government's ability to manage the economy and honor its debt. For example, the US dollar is trusted due to the economic and political stability of the United States. Unlimited supply: Governments and central banks can print fiat money at will, which means that the supply is not fixed, unlike BTC or gold. This makes the fiat vulnerable to inflation, which erodes its purchasing power over time.
You may be wondering how fiat currencies work. Let's get together. Look at the crowd.
How is fiat value maintained?
Even without intrinsic value, fiat currency works by:
Legal tender laws: Governments mandate the use of fiat currency for taxes and debts. For example, in the UK, taxes must be paid in pounds.Economic utility: Fiat is very liquid, universally accepted and easy to use for daily transactions, which makes it useful for practical purposes. Institutional support: central banks and create financial systems. “Trust” in managing the supply of fiat and ensuring stability.
The debate over whether fiat or crypto has “real” value often highlights the following differences.
To better understand the above distinction, let's interpret it through the lens of the definitions given in the Oxford Handbook of Value Theory (p. 29), which defines intrinsic value as “something valuable for its own sake, in itself, as an end, or as such.” In contrast, extrinsic value is “valued as a method or something else.”
Based on the above definitions, fiat currencies have no intrinsic value; Their value comes from government support and legal frameworks (external value). But Bitcoin's scarcity (21 million caps), decentralization, and utility as a trustless, peer-to-peer network have qualities that make it valuable independently.
While fiat relies on central trust, Bitcoin's value derives from its unique, self-sustaining properties, which has sparked debate about its intrinsic value.
Did you know this? In the year The global financial crisis of 2008 shattered confidence in the traditional banking system. It exposed reckless lending practices, flawed regulations and the fragility of institutions once considered “too big to fail.” This erosion of faith has fueled the search for an alternative.
Why is intrinsic value important?
Understanding intrinsic value helps investors distinguish solid projects from speculative ones. During the 2017 ICO boom, thousands of tokens were launched with little to no intrinsic value. Many have failed because they lack the basic attributes — utility, security, or lack thereof — to sustain long-term demand.
By focusing on intrinsic value, you can make informed decisions and avoid second thoughts. For example, Bitcoin remains dominant because it exhibits strong intrinsic value through scarcity, network effects, and consumption, while many other tokens are fading away.
Ultimately, the key to understanding the intrinsic value of crypto versus fiat lies in understanding the true meaning of intrinsic and extrinsic value and how it applies to each.
