Objective: Introduce the concept of value creation and exchange.

Outcome: Understand why Bitcoin, Ethereum, and other assets are considered stores of value.

Introduction

Welcome to the first lesson of the Start Smart Crypto Economics series. To understand why assets like Bitcoin and Ethereum hold value, we must first explore the principles of value itself. In this lesson, I’ll walk you through the key economic concepts of scarcity, utility, and trust, setting the stage for a deeper understanding of why digital assets are revolutionising finance.

What Determines Value in Economics and Crypto?

1. Scarcity as a Driver of Value

Scarcity is the cornerstone of value creation. When an asset is limited in supply, its desirability increases. Bitcoin exemplifies this principle with its capped supply of 21 million coins. Unlike fiat currencies, which central banks can print at will, Bitcoin’s scarcity creates an inherent resistance to inflation.

For example, consider gold—its rarity and difficulty to extract make it valuable. Similarly, Bitcoin is "mined" digitally, with diminishing rewards every four years through halving events. This scarcity ensures that as demand grows, the value of Bitcoin is likely to increase.

2. Utility: Adding Functionality to Value

Utility refers to the usefulness of an asset. Ethereum, for instance, derives its value from its role as the backbone of decentralised applications (dApps) and smart contracts. Projects like $AAVE and $COMP use Ethereum’s blockchain to enable peer-to-peer lending and borrowing, transforming traditional finance.

Imagine Ethereum as the infrastructure of a digital city where developers build decentralised marketplaces, games, and financial services. Its utility lies in being the platform that powers these innovations.

3. Trust: The Foundation of Modern Value Systems

Trust underpins the value of every currency, whether traditional or digital. In fiat systems, this trust lies in governments and central banks. Cryptocurrencies shift this trust to code and decentralised networks. For instance, Bitcoin’s blockchain guarantees the integrity of transactions, making them secure and immutable.

Think of the 2008 financial crisis—it eroded trust in banks and governments, leading to the creation of Bitcoin. With its decentralised model, Bitcoin removes intermediaries and places control in the hands of users.

round red and white Trust signage
Photo by Bernard Hermant / Unsplash

Real-World Application of Value Principles

Let’s compare Bitcoin to gold again. Gold requires mining, transportation, and storage, whereas Bitcoin is digitally mined and stored in wallets accessible globally. Meanwhile, Ethereum adds another layer of utility by enabling entire ecosystems like DeFi protocols and NFTs. These applications highlight how scarcity, utility, and trust interact to define value.

Conclusion

In this lesson, we uncovered the three pillars of value: scarcity, utility, and trust. Together, they explain why assets like Bitcoin and Ethereum are redefining financial systems. In the next lesson, we’ll explore how these principles have evolved throughout history, tracing the journey of money from barter to Bitcoin.