What Gives Cryptocurrency Its Value?

If you have bought, traded, or simply read about cryptocurrency in Australia, you probably asked the obvious question: if a Bitcoin is not a physical coin and is not backed by gold or a government, where does its value come from? The answer matters because it shapes how you assess risk, how you report gains to the Australian Taxation Office (ATO), and how you avoid scams. 

The short Answer: Supply, Demand and Shared Belief

At its core, cryptocurrency value works like any other market: buyers and sellers agree on a price. When more people want to buy a coin than sell it, the price rises. When selling pressure outweighs demand, the price falls. 

Unlike the Australian dollar, cryptocurrency is not issued by a central bank. According to ASIC’s Moneysmart service, unbacked crypto “can have no intrinsic value and are not worth what people are willing to pay for them, but they derive their value from the demand for the use of the blockchain”. A cryptocurrency is worth what the market collectively believes it is worth, a shared belief sustained by scarcity, utility, security, and adoption. 

Scarcity and Tokenomics

Scarcity is one of the strongest drivers of value. According to the Reserve Bank of Australia (RBA), Bitcoin’s supply “is capped at around 21 million” and “has been commonly compared to the supply of a commodity, such as gold”.

Not every cryptocurrency is scarce. Some tokens have no maximum supply, while others are regularly “burned” (permanently removed from circulation) to reduce supply. The rules governing a token’s supply, distribution, and incentives are known as tokenomics, and they directly influence how much a coin is worth over time. 

Utility and Use Cases

A cryptocurrency is more likely to hold its value if it has a genuine purpose. Utility can take many forms: payments, smart contracts, decentralised finance (DeFi) applications, or access to a blockchain network’s services.

Moneysmart notes that the price of unbacked crypto may depend on “how easy it is to trade or use,””the perceived value of the asset”, and “its underlying blockchain technology”. The more practical uses a network has, the more demand there tends to be for its token.

Network Effects and Adoption

Value also grows through network effects — the principle that a product becomes more useful as more people use it. A blockchain with millions of users and merchants is worth more than one with only a handful. As adoption increases, so does liquidity, making it easier to buy and sell without moving the price sharply.

For Australians, adoption is still developing. Moneysmart is clear that crypto assets “are not widely accepted as payment” and that “few people use it for everyday transactions”. For most Australians, crypto functions more as an investment or speculative asset than as everyday money.

Security and Trust

Trust underpins crypto value differently than it underpins the dollar. Rather than trusting a central bank, users trust the cryptography and the decentralised network of computers that maintain the blockchain. The RBA explains that transactions are verified by participants (“miners”) who contribute computing power to the network, rather than by a central authority. This does not make crypto risk-free. Moneysmart warns that “a hacker can potentially steal the contents of your digital wallet” and that “if a hacker steals your crypto, you have little hope of getting it back”. Network-level security is strong; individual security depends largely on you.

Not Legal Tender: The Australian Reality

A common misconception is that cryptocurrency is money equivalent to the Australian dollar. It is not. ASIC and Moneysmart state plainly that “crypto-assets (even Australian dollar stablecoins) are not legal tender in Australia and are not widely accepted as payment”. The Reserve Bank of Australia (RBA), not a crypto network, issues Australian banknotes, and the dollar derives its acceptance from government backing and the broader economy.

This distinction explains why crypto prices are so volatile: without a central authority stabilising value, prices are driven entirely by market forces and sentiment.

Market Sentiment and Speculation

Because crypto is not legal tender and has no guaranteed backing, its price is heavily influenced by sentiment. Media coverage, social hype, regulatory news, and macroeconomic conditions can all move prices sharply. Moneysmart notes that market value “can fluctuate a lot over short periods of time” and “is affected by things like media and social hype, and investor opinion”.

This makes much of the market speculative. Moneysmart describes investing in crypto-assets as “highly speculative” and warns Australians to “be prepared to lose everything that you put in”.

Stablecoins and Backing

Not all cryptocurrencies are unbacked. Stablecoins aim to maintain a stable value relative to an asset such as a national currency, and some track the Australian dollar (AUD) — examples include AUDM, AUDF, and AUDD. Moneysmart explains that stablecoins try to stabilise their value by being “physically backed 1-for-1 by an external asset, such as government-issued currency, gold or securities,” or by using algorithms to control supply.

Even so, the RBA has noted that stablecoins currently pose limited but potentially growing risks to the financial system if their use expands. A stablecoin is only as reliable as the reserves behind it.

What This Means for Your Tax

Understanding where crypto’s value comes from also helps you understand your obligations. The ATO does not treat cryptocurrency as money or foreign currency. Instead, “the most common use of crypto is as an investment, in which case the crypto asset is a capital gains tax (CGT) asset”.

A CGT event happens when you dispose of a crypto asset — for example, by selling it, swapping it for another cryptocurrency, gifting it, converting it to Australian dollars, or using it to buy goods or services. You must convert the value to Australian dollars at the time of each transaction using exchange rates the ATO takes from the Reserve Bank of Australia. If you hold a crypto asset as an investment for more than 12 months, you may be eligible for the CGT discount, and records must be kept for five years.

Because every disposal can create a taxable gain or loss — even when no Australian dollars change hands — keeping accurate records from the outset is essential, particularly when using a crypto tax calculator to prepare your return.

Risks for Australian Consumers

Crypto’s value drivers also create its risks. Prices are volatile, many platforms are not licensed, and scams are common. Moneysmart warns that “many crypto-asset providers are not licensed at this point in time,” meaning “you may not be protected if the platform fails or is hacked”. ASIC likewise reminds consumers that they are only protected by financial services laws to the extent a digital asset is covered by them.

Always check whether a platform holds an Australian Financial Services (AFS) licence, be sceptical of social media promotions and “guaranteed returns,” and never share your private keys or seed phrase.

Conclusion

Unbacked cryptocurrencies get their value from supply and demand, scarcity, utility, network effects, security, and the shared belief of their users — not from government backing or physical reserves. For Australian consumers, that means crypto is volatile, largely speculative, and treated as a capital asset for tax purposes. Understanding these value drivers helps you make informed decisions, keep proper records for the ATO, and recognise the warning signs of scams. As with any high-risk investment, never commit money you cannot afford to lose.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. For guidance specific to your circumstances, consult a registered tax agent or licensed financial adviser.