Why Is Bitcoin So Expensive? - An Economic Perspective on Scarcity And Valuation Formation

Bitcoin’s high price often causes confusion and scepticism, especially when compared to traditional assets like gold or fiat money (government-issued money). To understand why Bitcoin has such high value, one must examine how scarcity operates, how markets determine prices and how Bitcoin fundamentally differs from other scarce assets. If viewed through an economic lens, Bitcoin may be seen as a type of monetary good whose prices emerge from rational behaviour and, at times, speculative market behaviour, rather than an arbitrary assignment.

Scarcity: Bitcoin v/s Gold

Scarcity is central to discussions of value, but not all scarcity is the same.

Gold, which is usually referred to as the ultimate scarce asset, is limited by nature yet unconstrained by a fixed upper bound. As prices rise, more gold can be mined, new deposits or reserves can be discovered, and extraction technologies can improve to ensure maximum output. This is referred to as elastic scarcity (supply responds to price signals).

Bitcoin introduces something unprecedented. Its supply is limited to 21 million coins, enforced by software rules and a decentralised network rather than by any physical constraints. This cap is transparent, predictable and resistant to any kind of price incentives. (Rico et al, 2024)

From an economic standpoint, this makes Bitcoin closer to a perfectly inelastic supply asset. In such a system, price adjustments will absorb nearly all changes in demand (e.g., if the price exceeds the ‘reservation price’ or becomes too expensive, demand falls sharply). This alone may explain much of Bitcoin’s volatility and long-term price appreciation as adoption expands.

Gold, on the other hand, offers stability derived from millennia of social consensus, but its supply uncertainty remains a fundamental difference.

To determine whether Bitcoin is overpriced, we need to understand how its price is determined.

Price Formation in a decentralized global market

Bitcoin’s price is not set by miners, developers, or the government. It emerges from continuous interaction between buyers and sellers across global markets. It emerges from continuous trade interactions between buyers and sellers worldwide. On exchanges, prices are determined through order books where bids and asks are met.

The most recent transaction becomes the ‘price’, replicated across markets through arbitrage. (Markov, 2020)

From an economic standpoint, Bitcoin behaves like an early-stage monetary asset undergoing monetisation. As and when the demand fluctuates, due to macroeconomic conditions, like changes in regulatory developments or say shifts in investor sentiment, prices move sharply because supply cannot adjust in the short run or quickly, thus Bitcoin reacts strongly to changes in interest rates, inflation expectations, and industrial adoption.

Its valuation is therefore not derived from discounted income but from expectations of future utility as a store of value or as a medium of exchange. This places Bitcoin closer to monetary assets, where belief, trust, and network effects play dominant roles.

In a nutshell, Bitcoin is expensive because it combines absolute scarcity (its supply is capped at 21 million coins) with global demand in a market that continuously prices future expectations. Whether Bitcoin can fulfil its monetary promise remains pretty uncertain. Still, its price today is well understood and not a mystery, but rather the rational outcome of scarcity, belief, and decentralised market coordination.

Authored by: Sayali Chopra

Some references and additional readings:

Rico-Peña, J. J., Arguedas-Sanz, R., & López-Martín, C. (2024). Transactions Market in Bitcoin: Empirical Analysis of the Demand and Supply Block Space Curves. Computational Economics, 1-31.

Makarov, I., & Schoar, A. (2020). Trading and arbitrage in cryptocurrency markets. Journal of Financial Economics, 135(2), 293-319.

Cole, B. M., Dyhrberg, A. H., Foley, S., & Svec, J. (2022). Can Bitcoin be Trusted? Quantifying the economic value of blockchain transactions. Journal of International Financial Markets, Institutions and Money, 79, 101577.

Ilk, N., Shang, G., Fan, S., & Zhao, J. L. (2021). Stability of transaction fees in Bitcoin: A supply and demand perspective. MIS Quarterly, 45(2), 563-592.