What’s Bitcoin really worth? This question might really drive you mad if you think hard enough about it. $0? $10? Maybe $1,000,000 for one coin? The range of the numbers can make your head spin but it is the explanation behind the number that matters. For the most part, investors don’t have a good reason why Bitcoin is worth this or that, apart from claims that “it will take over the world” and so on. This hasn’t stopped people from trying, though. Is it even important for short-term traders? Can it boost profits on our hypothetical positions?
In an article on the Bloomberg Businessweek website, we have stumbled upon a number analyses of the value of the cryptocurrency. We read:
It took two economists one three-course meal and two bottles of wine to calculate the fair value of one Bitcoin: $200.
It took an extra day for them to realize they were one decimal place out: $20, they decided, was the right price for a virtual currency that was worth $1,200 a year ago, flirted with $20,000 in December, and is still around $8,000. Setting aside the fortunes lost on it this year, Bitcoin, by their calculation, is still overvalued, to the tune of about 40,000 percent. The pair named this the Côtes du Rhône theory, after the wine they were drinking.
If this sounds pretty definite, it actually isn’t. What the two economists used to value Bitcoin is called the quantity theory of money. Without getting too technical, it is a relatively simple equation which lets you recover the value of the currency. The caveat here is that this method is sensitive to the underlying assumptions and inputs. One of the crucial inputs is the value of what the currency buys and things go downhill from here pretty quick.
Does Bitcoin support $1.2 billion in payments? Or maybe it’s transmitting money from illegal activities and we should include this in the figure? Or it’s not that important what kind of resources Bitcoin transmits today but we should focus on what it will transmit in a year (two? three? ten?) and calculate what it’s value is going to be going forward? So, even though we do have an established model, the uncertainty about the critical input is a hindering factor.
