Intrinsic value of crypto: What is it and how to calculate it

Key takeaways

• Cryptocurrencies like Bitcoin gain value from factors like scarcity, utility and security, not physical backing.
• Common methods to calculate intrinsic worth of a cryptocurrency include Metcalfe’s Law, cost of production and discounted utility models.
• Estimating intrinsic value is challenging due to market volatility and speculative data.
• Fiat currencies have no intrinsic value, relying on trust, while cryptocurrencies’ value is based on decentralization and scarcity.

Intrinsic value refers to the actual worth of an asset based on its fundamental characteristics, rather than its market price. For example, in traditional finance, the intrinsic value of a stock is often derived from factors such as earnings, cash flow and growth potential.

In cryptocurrencies, it’s not so straightforward. Since crypto assets are not tied to physical entities or consistent income streams like dividends, assessing their intrinsic value involves a mix of factors — technological, economic and utility-driven. In simple terms, intrinsic value answers the question: What makes this cryptocurrency valuable beyond its price on an exchange?

The intrinsic value of cryptocurrencies is derived from factors such as:

• Utility: What problems does cryptocurrency solve?
• Scarcity: Is the supply limited or inflationary?
• Network value: How large and active is the ecosystem?
• Security: How resilient is the blockchain against attacks?

For example, Bitcoin’s (BTC) intrinsic value lies in its fixed supply (21 million coins), decentralized network and security powered by proof-of-work (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? A June 2024 report by Triple A reveals that global crypto ownership rose to 562 million, up from 420 million in 2023, covering 6.8% of the population, with Asia leading the growth.

How to calculate intrinsic value of cryptocurrencies: Three common methods

Let’s move beyond theory and explore three widely-used methods to estimate a cryptocurrency’s intrinsic value.

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. Essentially, as more people use a network, its value grows exponentially.
• How to apply it: This method is particularly relevant 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 bolstered by thousands of developers actively building on its blockchain and millions of users engaging with its applications. Specifically, the number of daily active addresses can serve as a proxy for its “network size.”

As of Dec. 13, 2024, according to YCharts, Ethereum’s daily active addresses stand at 543,929. Here’s how you can apply Metcalfe’s law:

Network value = (543,929)2 = 296,086,104,841 or 296 billion units approx  (a relative measure, not in USD). 

This shows how the network value grows exponentially with the number of users. If Ethereum’s daily active addresses increase, the network’s value increases at an even faster rate.

Challenges

• Oversimplification: Metcalfe’s Law doesn’t account for the quality of user interactions. A network of 1,000 inactive users is less valuable than a smaller, highly engaged network.
• Data accuracy: Estimating the number of “active” users is tricky, especially with bots and spam accounts inflating metrics.
• Comparative limitations: Some blockchain networks may have lower user counts but offer faster transaction speeds. Metcalfe’s Law alone doesn’t capture these differentiators.

2. Cost of production

• What it is: This method calculates a cryptocurrency’s intrinsic value based on the cost to produce or mine it. For PoW blockchains like Bitcoin, this includes electricity, hardware and operational costs.
• How to apply it: Production costs act as a “floor” for the cryptocurrency’s value because miners won’t continue operations if market prices fall below their expenses.

Example: Bitcoin

Bitcoin’s intrinsic value is often anchored to its mining cost.

• As of Dec. 13, Bitcoin’s average mining cost is $86,303, while its market price was $101,523. This indicates that Bitcoin’s intrinsic value, based on mining costs, is at least $86,303. When the price exceeds this cost, mining remains profitable, incentivizing miners to secure the network. If Bitcoin’s price falls below the cost of production, miners may stop mining due to unprofitability, potentially impacting network security. The difference of $15,220 between the price and mining cost reflects a healthy market, where mining continues to be incentivized and the network remains secure.
• During the 2022 bear market, Bitcoin’s price briefly fell to $16,000, below the production cost for some miners ($20,998). This negative difference of $4,998 meant that miners were losing money for each Bitcoin they mined. When this happens, less efficient miners may be forced to shut down, reducing the network’s hashrate and security while also causing difficulty adjustments to eventually bring costs more in line with market prices.

Challenges

• Regional variance: Mining costs differ globally. For instance, miners in Kazakhstan or Texas benefit from cheap electricity, while those in Europe face higher costs. However, many miners are moving toward renewable energy sources, such as solar or wind power, to lower costs and become more environmentally sustainable.
• Market volatility: Bitcoin’s price can temporarily fall below production costs, especially during market downturns.

3. Discounted utility model

• What it is: This approach estimates a cryptocurrency’s intrinsic value by projecting its future utility, such as transaction volume or adoption, and discounting that value to the present.
• How to apply it: Analysts evaluate potential use cases, adoption rates and transaction activity, then discount the future benefits using a specific discount rate.

Example: BNB

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 access staking rewards. According to YCharts, as of Dec. 14, the BNB Smart Chain processes about 3.795 million transactions per day. Analysts can calculate the discounted value of these transaction fees over time to estimate BNB’s intrinsic worth.

Here’s how you can use the discounted utility model to estimate BNB’s intrinsic value:

Assuming the average fee per transaction is $0.10, the daily transaction fees total:

3,795,000 × 0.10 = $379,500 or 0.3795 million per day

This translates to 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 could apply a 10% discount rate. Using the discounted value formula below, the total discounted value of BNB’s expected transaction fees over 10 years is $851.13 million.

Here are the discounted values for each year based on $138.52 million annual transaction fees, discounted at a 10% rate for 10 years (inputting values in the above formula):

In the example above, the hypothetical scenario was used to demonstrate how discounted utility models could be applied to estimate the intrinsic value of BNB, assuming transaction fees were constant over time. However, real-world fees vary, and factors such as BNB discounts, account level and transaction types play a crucial role in determining the exact cost.

Challenges

• Speculative data: Estimating future transaction volumes and adoption rates involves guesswork.
• Discount rate sensitivity: Small changes in the discount rate significantly impact the valuation.
• Ecosystem changes: If Binance faces regulatory issues or competition, BNB’s utility might decline, invalidating earlier projections.

Why don’t fiat currencies have intrinsic value?

Fiat currency, like the US dollar or the euro, does not have intrinsic value in the traditional sense. Unlike gold or silver, fiat money isn’t backed by a physical commodity. Its value is instead derived from factors like government decree, trust and its ability to serve as a medium of exchange. Even scholarly literature defines fiat money as “an intrinsically useless unbacked token.” 

• No tangible backing: Fiat money is not redeemable for gold, silver or any physical asset. The “gold standard” system was abandoned by most countries decades ago.
• Value based on trust: The worth of fiat depends on people’s belief in the government’s ability to manage the economy and honor its debts. For example, the US dollar is trusted because of the economic and political stability of the United States.
• Unlimited supply: Governments and central banks can print fiat money at will, which means its supply isn’t fixed, unlike BTC or gold. This makes fiat susceptible to inflation, which erodes its purchasing power over time.

You might be wondering how fiat currencies work. Let’s find out.

How is fiat value maintained?

Even without intrinsic value, fiat currency works because of:

• Legal tender laws: Governments mandate using fiat currency for taxes and debts. For example, in the UK, taxes must be paid in pounds.
• Economic utility: Fiat is highly liquid, universally accepted, and easy to use in daily transactions, making it valuable for practical purposes.
• Backing by institutions: Central banks and financial systems create “trust” by managing fiat issuance and ensuring stability.

The debate over whether fiat or crypto has “real” value often highlights the following differences:

To further understand the above distinction, let’s interpret it through the lens of the definitions provided in the Oxford Handbook of Value Theory (p.29), which defines intrinsic value as “what is valuable for its own sake, in itself, on its own, in its own right, as an end, or as such.” In contrast, extrinsic value is “what is valuable as a means, or for something else’s sake.” 

Based on the above definitions, fiat currencies have no intrinsic value; their worth comes from government backing and legal frameworks (extrinsic value). Bitcoin, however, possesses qualities that make it independently valuable through its scarcity (21 million cap), decentralization and utility as a trustless, peer-to-peer network. 

While fiat relies on centralized trust, Bitcoin’s value stems from its unique, self-sustained properties, sparking debate about its intrinsic worth.

Did you know? The 2008 global financial crisis shattered trust in the traditional banking system. It exposed reckless lending practices, flawed regulations and the fragility of institutions once deemed “too big to fail.” This erosion of trust fueled the search for alternatives, eventually paving the way for Bitcoin’s creation in 2009 as a decentralized, trustless financial system.

Why intrinsic value matters

Understanding intrinsic value helps investors separate strong projects from speculative ones. During the 2017 ICO boom, thousands of tokens were launched with little to no intrinsic value. Many collapsed because they lacked the fundamental characteristics — utility, security or scarcity — to sustain long-term demand.

By focusing on intrinsic value, you can make informed decisions and avoid falling for hype. For example, Bitcoin remains dominant because it demonstrates strong intrinsic value through scarcity, network effects and utility, while many other tokens fade away.

Finally, the key to understanding the intrinsic value of crypto versus fiat lies in grasping the correct meaning of intrinsic versus extrinsic value and how it applies to each.