Bitcoin Value: What Makes It Different?

In the world of investing, there are hundreds of different ways to value a security in order to determine whether the current price is a good buy.

People spend their whole lives studying finance and investing to get a better idea of what something is worth, but it seems like none of these scholars have a good idea of how to determine Bitcoin value.

Can We Forecast Bitcoin Value?

Bitcoin is the most popular use of blockchain technology, and many believe it has the power to change the world, but none of us know how to determine what the peak value of Bitcoin will be.

You don’t have to be an expert in financial analysis to see that Bitcoin’s price keeps rising at an almost exponential rate. Many naysayers have said that this signals a bubble, which is when an asset is priced way above its fundamental value.

The hard part of identifying a bubble is knowing what the fundamental price of Bitcoin is. There is no precedent for something like this and we have no way of discounting cash flows or applying multiple to the earnings since Bitcoin doesn’t work like a security.

Bitcoin Value by Function

Bitcoin and other cryptocurrencies are not thought of as securities since they do not represent an ownership or creditor relationship with any company. But at the same time, it is difficult to think of them as foreign currencies, since they are not tied to the actions of any government. Many investors have likened Bitcoin to gold in that it acts as a hedge against the entire economy. What these investors fail to realize is that Bitcoin is so much more useful than gold and organized in a very systematic manner.

Another way to look at Bitcoin value is in terms of its function. For it to be as useful as cash, it must be able to act as both a store of value and a medium of transfer. Gold acts as a good store of value, but nobody in their right minds would bring a brick of gold to a bar or convenience store to pay for goods because it is not a conventional medium of transfer.

In contrast, Paypal has become the standard medium of transfer for many online transactions, but very few people use Paypal to store all their cash. Therefore, if Bitcoin can adopt both these uses, and perform them better than regular cash, it will achieve a much higher adoption rate.

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Volatility in the Price of Bitcoin

Volatility is a large factor to consider when investing in Bitcoin. The prices go through huge swings that you won’t always be comfortable with, and you should be ready for these. They slightly lower Bitcoin value by making it seem more like a risky instrument than an early buy on the future.

Uber and Facebook probably had a wide range of customers and revenues in the beginning but had the benefit of this information being held private. The prices will swing, and many traders are using this to take advantage of arbitrage opportunities. That doesn’t help or hurt the currency, but just gives it utility to another subset of people for the time being.

The Value of Bitcoin Compared to Fiat Currency

Fiat currencies can be just as unstable, as many investors are all too ready to forget. If you read any book of economic history, there are numerous retellings of how a currency went through hyperinflation or depreciated massively against other countries’ currencies due to either poor monetary policy or political unrest.

There are many examples of this right now. You look to Venezuela and see mass inflation and many people wanting to get the States. If you look to the GBP or the Euro, you can see a huge change since Brexit occurred, and there’s no reason to think this won’t continue. Bitcoin value could just come from the idea that it is the most stable of the group.

Final Thoughts

Anyone who is thinking of investing in Bitcoin with a long-term perspective would probably agree with the idea that Bitcoin will eventually perform both these uses in society. The true believers see investing in Bitcoin as buying cash at a discount. If you could pay less than the market rate for a US dollar with the knowledge it would eventually be as widespread as it currently is, would you? I would wager so.

It is important to remember that another key part of Bitcoin value is the hype that is constantly floating around in the media. Anything as controversial as Bitcoin inspires opinions, and opinions often receive publicity and spread throughout the Internet. This has happened a ton so far with Bitcoin and will continue as long as there are seen to be two “sides.”

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