By Avinash Shekhar Founder, TaxNodes; Member- Bharat Web3 Association
Intrinsic value is the property of anything that is valuable on its own. The concept of intrinsic value is different from the concept of extrinsic value or market value. For example, fresh breathable Air has more intrinsic value than Gold. However, the market value of Gold is significantly higher.
Gold has limited or no practical use while one can’t live without Air. Gold drives value from the fact that a large number of people agree that it has value (network effects) and scarcity. Even after almost a century of moving away from Gold standards, Central Banks across the world are the biggest holder and buyers of physical gold.
Many times, the network effects and scarcity reinforce each other. For example, there is only one Twitter and only one Meta (formerly Facebook). One can create Twitter and Meta Facebook-like apps from a technological point of view but those apps will not be Twitter and Meta Facebook as they will not have the same network effects. These platforms, which have become natural monopolies in their own right, can also claim their intrinsic value because of these entry barriers that they have enforced for other social networking apps to replicate their network effects.
Another example of a network effect is the UPI payments network. The UPI payments interface was introduced in India in 2016. Since then, it has become the most widely used payment mode in India. Other players may attempt to replicate UPI’s methodology, but can practically never achieve the scale that UPI has reached. In fact, so widespread is the adoption that many fintech experts claim that it will hamper the success of the e-Rupi, India’s attempt at creating a digital Fiat Currency.
As Bitcoin is the first and oldest Crypto with the highest market capitalization, let’s try to understand the intrinsic value of Crypto by using Bitcoin as an example. Bitcoin is a peer-to-peer, open source, decentralised, censorship-resistant and permission-less system to communicate (transfer) value across space and time. Bitcoin is the only open-source system with no hacks and almost 100% uptime. Despite the recent downturn in terms of price and market capitalization, the number of BTC addresses with non-zero balances has reached an all-time high of ~ 43 million 1. Bitcoin reached a market capitalization of $1.28 trillion in 2021, thus taking only twelve years to reach this milestone. In contrast, the New York Stock exchange reached a market capitalization of $ 1 trillion in 1980, and it took ~200 years since its inception in 1792 to reach this milestone 2. Further, the Bitcoin network is owned by everyone and no one. The Bitcoin network ‘s truly democratized ownership makes it the foundation for the Decentralised Networks of the future.
All these characteristics give an inherent intrinsic value and also make it extrinsically valuable for millions of users/investors.
Individuals are adopting Crypto assets, corporates, and financial institutions are collecting it as part of their treasuries, and countries are accepting Bitcoin as legal tender and drafting legislation to regulate it. In the history of Mankind, no ~10-year-old technology has ever gathered so much momentum, support, and criticism.
Crypto marks the beginning of a new epoch, not only in the aspects of technology and finance, but importantly in terms of how humans intrinsically and extrinsically conceptualise value. Crypto may still fail (unlikely), but my bet is that it will succeed (some believe that it has already succeeded) and when it does, it will be bigger and better than anything Humankind has ever built.