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What gives crypto any value?

Beginner · Foundations · about 5 min read

Crypto is worth what people will pay for it. The useful question is why anyone would pay.

Reasons people give

• It is useful. On Ethereum, you need ETH to pay the fees for sending money or using apps, and validators lock up ETH to help run the network. That creates steady demand for it.
• It is scarce. Bitcoin’s supply is capped at 21 million coins. Ethereum burns part of every fee, which removes that ETH from supply for good, though it still creates new ETH as rewards.
• Many people want it. Some hold it as an investment, so demand from buyers pushes the price up, and a rush to sell pushes it down.
• Trust in the network. Value also rests on people believing the network will keep working and keep being used.

Keep in mind

• Not everyone agrees it has value. In June 2022 the Governor of the Bank of England, Andrew Bailey, told UK lawmakers that crypto assets have no intrinsic value. That is one official’s view, and the question is still debated.
• Prices are volatile. The US Federal Trade Commission warns that there is no guarantee a price will recover after it falls.
• A coin that is useful is different from a coin that is only talked about. Ask what people can actually do with it.
• General information, not financial advice.

Price, value and market cap are different things

The price is simply what the last buyer and seller agreed on. Value is a judgement about what something is worth to you. Market cap is the price multiplied by the number of coins in circulation, a way to compare size and not a measure of money invested. A coin can have a high price and a small market cap, or the reverse. See the lesson on market cap for how to read it.

Two views, side by side

• The sceptics' view. Crypto assets produce no earnings or rent, so their value depends only on what the next buyer will pay. This is the thinking behind the Bank of England governor's remark described above.
• The supporters' view. A network that many people use has value in itself, like a payment system. Scarcity, such as a fixed supply, and real demand for fees can support a price.

Both views are held by serious people, and the question is still open. Your job as a learner is to know which arguments you are hearing.

Scarcity is not enough

A unique drawing by someone nobody knows is scarce, but nobody wants it. Scarcity helps only when many people also want the thing. This is why a fixed supply does not stop prices from falling when interest fades.

Questions to test a claim about value

• Who actually uses this, and for what, apart from traders?
• Is the supply fixed, or can more be created, and by whom?
• Do a few holders own most of it?
• What would make people stop wanting it?
• Is the person making the claim selling something?

Common mistakes

• Treating a rising price as proof of value.
• Comparing prices of coins with very different supplies instead of market caps.
• Believing a fixed supply guarantees a higher price.
• Taking "everyone is talking about it" as a reason.

Try it yourself

1. Pick one coin. On a price website, find its price and circulating supply and multiply them to check the market cap shown.
2. Write three reasons people might want it and three that could make them stop.
3. If its price fell 80 percent, how large a gain would it need to get back? (Hint: the answer is 400 percent.)

Key terms

Value, demand, scarcity, supply cap, burn, volatility.

Sources and credits

Fees, burning and why ETH is needed: ethereum.org, Gas and fees. Volatility and recovery warning: US Federal Trade Commission. General information, not financial advice.

Module quiz

3 questions. Tap an answer to see if you are right and why. Get 2 right to complete the module.

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