Source: Cointelegraph Original: "{title}"

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

In the cryptocurrency space, it is not so straightforward. Since crypto assets are not tied to tangible or stable income streams (like dividends), assessing their intrinsic value involves various factors including technology, economics, and utility. Simply put, intrinsic value answers the question: what makes this cryptocurrency valuable aside from its price on exchanges?

The intrinsic value of cryptocurrencies comes from the following factors:

For instance, the intrinsic value of Bitcoin lies in its fixed supply (21 million coins), decentralized network, and the security provided by proof-of-work (PoW) mining.

On the other hand, Ethereum's value largely comes from its role as a foundation for decentralized applications (DApps) and smart contracts.

Did you know? According to a report by Triple A in June 2024, the global cryptocurrency ownership increased from 420 million in 2023 to 562 million, covering 6.8% of the global population, with Asia leading the growth.

Example: Ethereum

Ethereum is a vast ecosystem composed of developers, DApps, and DeFi projects. Thousands of developers are actively building on its blockchain, and millions of users interact with its applications, enhancing its value. Specifically, the number of daily active addresses can serve as a representation of its "network size."

According to YCharts data, as of December 13, 2024, Ethereum had 543,929 daily active addresses. Applying Metcalfe's Law:

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

This indicates that network value grows exponentially with the number of users. If the daily active addresses of Ethereum increase, the network value will grow at an even faster rate.

Limitations:

Example: Bitcoin

The intrinsic value of Bitcoin is often tied to its mining costs.

Limitations:

Example: BNB

The intrinsic value of BNB comes from its role within the Binance ecosystem.

BNB is used to pay transaction fees, participate in token sales, and earn staking rewards. According to YCharts data, as of December 14, the BNB Smart Chain processes approximately 3.795 million transactions daily. Analysts can calculate the present value of these transaction fees over time to estimate BNB's intrinsic value.

Here’s how to estimate BNB's intrinsic value using a discounted utility model:

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

3,795,000 × 0.10 = $379,500/day

This translates to annual transaction fees:

379,500 × 365 (non-leap year) = $138.52 million/year

To calculate the intrinsic value of BNB over the next 10 years, a discount rate of 10% can be applied. Using the present value formula below, the total present value of expected transaction fees for BNB over 10 years is $851.13 million.

Present Value = Annual Cash Flow ÷ (1 + Discount Rate)^Number of Years

Below are the present values for each year based on $138.52 million in annual transaction fees, over 10 years at a 10% discount rate (input values into the formula above):

In the example above, we used a hypothetical scenario to demonstrate how to apply the discounted utility model to estimate BNB's intrinsic value, assuming transaction fees remain constant over time. However, real-world fees vary, and factors such as BNB discounts, account levels, and transaction types play a crucial role in determining the exact costs.

Limitations:

Fiat currencies, such as the US dollar or euro, do not possess intrinsic value in the traditional sense. Unlike gold or silver, fiat currencies are not backed by physical commodities. Their value derives from factors such as government decree, trust, and their ability to serve as a medium of exchange. Even academic literature defines fiat currency as "essentially useless unsecured tokens."

Even without intrinsic value, fiat currencies can function because:

The debate over whether fiat or cryptocurrencies have "real" value often highlights the following differences:

According to the definition provided in the Oxford Handbook of Value Theory (page 29), intrinsic value is "something that has value in itself, by itself, for its own sake, or in its essence." In contrast, extrinsic value is "something that has value as a means or for the sake of something else."

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

Fiat currency relies on centralized trust, while Bitcoin's value stems from its unique, self-sustaining characteristics, sparking debates about its intrinsic value.

Did you know? The 2008 global financial crisis shook trust in the traditional banking system. It exposed irresponsible lending practices, flawed regulations, and the vulnerabilities of institutions once deemed "too big to fail." This erosion of trust drove the search for alternatives, ultimately paving the way for the creation of Bitcoin in 2009 as a decentralized, trustless financial system.

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

By focusing on intrinsic value, you can make informed decisions and avoid being misled by hype. For example, Bitcoin maintains its dominance because it demonstrates strong intrinsic value through scarcity, network effects, and utility, while many other tokens have gradually faded away.

Ultimately, understanding the intrinsic value of cryptocurrencies versus fiat currencies hinges on grasping the correct meanings of intrinsic and extrinsic value, and how these concepts apply to each.

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