What is bitcoin really worth?

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First of all, I think it makes sense to distinguish price from value. If you want to know what the price of bitcoin is, just google it. However, to understand the ‘value’ of bitcoin requires a little more digging, and even then I think you’ll see it is quite hard to determine the value in an absolute sense.

Value is inherently a subjective measure, just ask someone who doesn’t believe in or ever intends to own bitcoin. In order to try and begin to think about the value of bitcoin, we need to understand the two major use cases:

  1. A medium of exchange or currency
  2. A store of value

From a currency point of view, I’m not a bitcoin fan just yet. Not everywhere accepts it, despite PayPal and Square’s adoption of it driving headlines, the fact is you can’t go anywhere and pay in bitcoin like you can with a local fiat currency (this could change over time). Further, due to the mechanism by which bitcoin transactions are recorded and validated on the blockchain ledger via “proof of work”, there is a tremendous cost involved. Huge amounts of computing power are required to solve computer puzzles which essentially involve guessing at an entirely random sequence of numbers called the hash. Once the hash is correctly guessed, the miner successfully adds a block containing about 500 transactions to the bitcoin blockchain and is rewarded with a small amount of bitcoin for their effort.

This means that large amounts of computing power and electricity are wasted as miners across the globe dedicate resources to do all this guesswork yet only one will solve the hash. The electricity usage of bitcoin could be as high as seven gigawatts, about 0.21% of global electricity consumption, and slightly ahead of the entire country of Switzerland (Source BBC).

So then, for the purposes of this article I’ll focus on the bitcoin use case as a store of value. To do this, we can compare bitcoin with the likes of gold which has been used as a store of value for the last 4000+ years (Source Bullion Vault). The current global value of gold is approximately $US9.5tn based on the current spot price of $1841. At the time of writing this, the total market cap of bitcoin is worth around $US661bn or about ~7% of the total value of gold. If we assume that bitcoin continues to grow in value next to gold and reach perhaps 20% of the global gold value ~US$1.9tn, then we can divide the number of bitcoins in circulation (18.6m as at Jan 2021) by the 20% estimated market cap of gold to arrive at a value per bitcoin of $US102,150.

Of course, the difficulty arises when trying to determine a percentage figure. Nobody really knows how much demand there will be for bitcoin in the future, and all we can really say is how much people are willing to pay for it right now. Some investors and company CEOs like Michael Saylor (CEO of MicroStrategy) have converted their entire company’s cash balance into bitcoin, believing in its properties as the first truly decentralised store of value and expect that its value will exceed that of gold.

There are critics on the contrary including the likes of Warren Buffet and Peter Schiff who ultimately see limited to no value in owning bitcoin. So, where then does it leave us in understanding and placing a value on bitcoin? Unfortunately, this is a little bit like wanting a crystal ball – we just don’t have one of those yet. With the sheer amount of monetary and fiscal stimulus that is being introduced to the global economy, there is good reason to believe that the price of assets and commodities, particularly those that can serve as a store of value, will rise over the coming years.

If mass adoption continues across both retail and institutional investors in bitcoin, in conjunction with a finite supply (scarcity) and increasing amounts of stimulus injected into the economy (possible demand), it’s not hard to see why the price has been foisted north. How far north it will it go? Only time will tell.

James Brannan

Director of Operations at STAX

All views, investment or financial opinions expressed are those of the author and do not necessarily reflect the official policy or position of STAX. The information contained in this post is not investment advice or a recommendation to buy or sell any specific security.

Information is currency.
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