![](https://steemitimages.com/DQmWfspVQjzWyrNZc1zcQeieVeQitU1kkwd973A7hF22AMR/image.png) Background A highly debated topic that has grown more popular is the question whether cryptocurrencies such as Bitcoin hold any intrinsic value. Additionally, the debate raises questions regarding which asset class cryptocurrencies belong to. Network effects are the theory that for each new user of a network, the number of possible connections in that network is larger, thereby adding value to the network. The very same principle is what governs the purchasing power and value of fiat currencies such as the US dollar. Rather than using the terminology supply and demand, I will explain intrinsic value definitions moving forward using the terms scarcity and utility. This better accommodates the characteristics of fiat currency, gold, and cryptocurrencies. The term supply is somewhat synonymous with scarcity, and demand is derived from its utility. Utility meaning the options for payment settlement, or the collective willingness to accept it as sufficient means of payment. Problem Ways of valuating these intangible crypto assets, and the networks as a whole has led to many well-known investors and institutions going against Crypto assets and deeming them to lack intrinsic value. The discussions regarding which asset class they belong to are highly debated since they exhibit characteristics of more than one asset class, and lack some of the characteristics of those asset classes. It becomes hard to know how to value these cryptocurrencies, and because of this it has become hard to assess true valuation for them. Price speculation leads to extreme volatility in the cryptocurrency market which jeopardizes the very future of this awesome technology. Cryptocurrencies are being traded on a global market and are used as a medium of exchange in many countries. Without a centralized authority to govern and set its purchasing power, and without clear boundaries set regarding where the cryptocurrency can be spent, the utility of cryptocurrencies cannot be measured using traditional methods of assessing purchasing power due to too many unknown factors. My argument What is intrinsic value? "The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors" (Investopedia). However, the argument can easily be made that intrinsic value can be stretched to include the value of a currency, which this post does. Intrinsic value of equity Equity is defined as the value of an asset after subtracting its liabilities. Ownership rights such as stocks belong to the equity asset class. Establishing the value of equity, and thereby its intrinsic value, is calculated by adding the expected future discounted cash flows generated by the asset in order to find its present value. Using this method of determining intrinsic value applied on cryptocurrencies such as Bitcoin will give support to Warren Buffet's claim that cryptocurrencies hold no intrinsic value since Bitcoin does not generate any cash flow. However, reading the title of the white paper produced by Satoshi Nakamoto: “Bitcoin - A Peer-to-Peer digital cash system”, one should get some sense that cryptocurrencies are a closer relative to currency than equity. Additionally, other cryptocurrencies than Bitcoin have differences in its underlying technology which provide these characteristics of equity asset class intrinsic value that Warren is searching for in an investment, but this is beyond the scope of this post. Intrinsic value of gold Gold gets its intrinsic value from the fact that there is only a limited supply of gold available in the world making it scarce. The utility of gold is fairly limited but is primarily derived from the fact that people all over the world like shiny things, and it has held attractive qualities for thousands of years, on every continent of the world, meaning there is a collectively formed opinion of its value around the world. The industrial use of gold is fairly limited, and therefore plays less of a significant role is determining the utility of gold. Because of these two facts, gold is deemed to be a great store of value. To qualify as a store of value, the asset or commodity must maintain its value over time, and not have any significant depreciation of value over time. This maintained value is solely derived from the collective consensus in the world that gold is valuable because for as long as time itself, it has been that way. Intrinsic value of fiat currencies Fiat currency on the other hand is not as scarce as gold since it is easy to increase the supply of the currency, instead fiat currency holds great utility which creates the intrinsic value of money. You can use dollars to purchase a great variety of different goods and services, the larger the options at which you can spend the currency, the greater its utility. Since the US dollar has a greater option for settlement of payments than using for example the Swedish Krona, it holds greater utility, and therefore has greater intrinsic value. Fiat currency on the other hand is not as scarce as gold since it is easy to increase the supply of the currency, instead fiat currency holds great utility which creates the intrinsic value of money. You can use dollars to purchase a great variety of different goods and services, the larger the options at which you can spend the currency, the greater its utility. Since the US dollar has a greater option for settlement of payments than using the Swedish Krona, it holds greater utility, and therefore has greater intrinsic value. Currency is defined as something which can act as a medium of exchange and holds store of value properties (Investopedia). Fiat currency is not considered to be a reliable store of value however since it relies on centralized entities such as central banks to back its purchasing power. Every year newly minted cash is produced by these central banks which in turn creates inflation that decreases the purchasing power of every unit of the currency each year. That means each unit of a fiat currency does not hold the same value over time, and for it to be a deemed a store of value, the demand for the fiat currency has to appreciate continuously at an equal or greater pace than the inflation rate which dictates the growing supply. The current consensus regarding determining intrinsic value of a currency is more difficult than for equity since the paper note attached to the currency can easily be manufactured with minimum effort. This has not always been the case, but rather became a reality when the gold standard was removed in the 20th century. The gold standard provided a better sense of fixed supply since every paper note was backed by an equivalent value in gold. Since the removal of the gold standard, the value of a currency is based on faith in the backing authority of the currency, alongside an ever-growing supply and varying demand. Furthermore, currency has no cash flow generating properties, but is rather its value comes from the purchasing power it holds. This purchasing power is determined by the willingness to accept it as a means of payment by institutions and individuals. Intrinsic value of cryptocurrencies To answer this question regarding cryptocurrencies, I’m going to use Bitcoin as an example, but the following statements apply to most cryptocurrencies. Bitcoin is scarce, meaning it has a fixed supply of 21 million Bitcoins, this is similar to gold. This becomes the critical factor when finding support for the price increase in Bitcoin. In a fiat currency, the supply can continuously be increased to meet the demand, thereby creating a stabilized purchasing power of the currency, this is in contrary to Bitcoin which has a fixed supply but can be split up into as many decimals as you wish. So, to accommodate the growing adoption of Bitcoin as a medium of exchange, more people will want to use it to settle payments. With more people wanting to use it for this purpose, the valuation of Bitcoin needs to increase in order to make a smaller amount of one Bitcoin equal to a product's price in local fiat currency. To immediately settle any concerns regarding having to count fractions of one Bitcoin to translate it into a local currency value: When purchasing other cryptocurrencies or goods with Bitcoin, a more common denominator to use is Satoshi’s, or Sats, named after Satoshi Nakamoto. A Satoshi is the currently lowest decimal of one Bitcoin, one Satoshi = 0.00000001 Bitcoin. If Bitcoin where to increase even more in value, more decimals can simply be added to make it more user-friendly. Bitcoin holds characteristics of both gold and fiat currency and is in many ways far superior than both. Cryptocurrencies > gold From the perspective of spending a reliable store of value and using it for payment settlement; you cannot use gold to buy a cup of coffee, to do so you would first have to sell the gold into a fiat currency such as the US dollar, and then you can pay for the coffee with the newly received dollars. It would be a very inefficient to pay for the coffee using gold since you would have to use an industrial grade diamond cheese slicer to shave off the correct size of a gold flake that holds value equivalent to the price of the coffee, additionally there would have to exist a willingness to accept gold as sufficient means of payment, which there is not. Bitcoin can as mentioned be sliced up into as many pieces as you wish, with no effort. Cryptocurrencies > fiat currency Bitcoin, or rather its underlying technology called the Blockchain, is a trust machine. The technology has replaced the central banks role of creating this trust. Since this technology holds no political agendas, have no quarrels, and isn’t tied to a specific countries governance system or internal economics, it can be adopted by any country and institution. Bitcoin is border-less and can in theory replace the entire fiat currency system worldwide. Cryptocurrency utility = fiat currency utility Assessing the utility of Bitcoin determined in the same way as fiat currency better factors in for its use cases. Its ability to be used as settlement for payments should determine its utility. But with no centralized governance to back the purchasing power of Bitcoin, and no authority forcing institutions to accept it as payment settlement, its utility becomes solely reliant on the adoption of institutions to recognize it as a sufficient medium of exchange and accepting it as settlement. This utility therefore increases as more institutions adopt Bitcoin as means of settlement. As more institutions enable payments to be made using Bitcoin, the greater its intrinsic value becomes if you are to believe this method of assessing intrinsic value is valid. In case you liked this : If you liked this post, and want to read more of them, or if you want #ICO reviews, you are more than welcome to follow me here on Steemit. 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