Determining the Value of Bitcoin

Bitcoin

Anyone who has long been involved with the cryptocurrency community will probably remember Bitcoin’s early days. Yes, those days when you had to spend 10,000 bitcoins to get one pizza. It is true that save for the prescient few, most of us despised the days of small beginnings till around November 2013 when Bitcoin’s value breached the US$ 1,000 mark for the first time.

Since then, Bitcoin has continued to attract attention from regulators, traders, Wall Street and backstreets alike. Without contradiction, the year 2014 has been a good year for Bitcoin and the general cryptocurrency community. It is a year that has seen the installation of several bitcoin ATMs around the world. It is also the year in which we have seen inspired ideas and policies from some financial authorities and bitlicenses from others.

The consensus, therefore, is that we have in Bitcoin something of value. And going as we are into 2015, we can only surmise that Bitcoin is going to increasingly take a more prominent role in global finance. One of the aspects of Bitcoin that will continue to occupy the minds of most is how to determine the value of Bitcoin, or any other cryptocurrency that may yet emerge into common use.

Also read: Bitcoin Reality Not Shown in Value

Traditional Approaches to Valuation

For most traditional assets such as stock, bonds or real estate, valuation will involve terminally valuing an asset’s or entity’s discounted cashflows so as to get a fair present value price for those future cashflows. For example, when it comes to stock, there are many companies that can provide a comparative and or historical analysis. Since there is only one Bitcoin, this method becomes useless for valuation.

The same can be said about instruments that bear interest. Bonds, for example, can provide predictable cashflows and all that a holder of bonds does is to wait and collect at set intervals. While this can also be built on top of the blockchain technology, it nonetheless runs into problems with bitcoin due to the lack of regular cash payments. Real estate as an investment project also produces steady revenue that act in much the same way as interests and dividends. Since Bitcoin cannot be pigeonholed in the same way, it would, therefore, require a different method for determining its value.

Valuing Bitcoin as a Commodity

The other approach is to look at Bitcoin as a commodity in assessing its value. Value is created when someone is willing to pay for a commodity. Bitcoin much like gold and silver before it has properties of a commodity and a currency. The best approach is to treat Bitcoin as a virtual currency-cum-commodity.

One condition of a stable currency is scarcity. Both gold and Bitcoin are scarce and can thus be viewed as stores of value. They however come with advantages and disadvantages. Gold has been used as a store of value for thousands of years on different continents, and in some cases the standard on which paper currency is issued. Bitcoin has only acquired a monetary value in the last five years, and as such it is a newcomer. In addition, Bitcoin is dependent on the availability of electrical power and internet connectivity.

Developing New Methods of Determining Bitcoin’s Value

Therefore, while Bitcoin seems to be coming into its own, there still remain challenges before it can become widely accepted around the world, and this renders determining its fair value problematic still. We are still at Bitcoin’s dawn in anno Domini 2014. It remains to be seen what factors will eventually become stable determinants of the value of bitcoin going forward. Will it be technology, government policies and politics, or will it be other market forces? Only time will tell.

In the meantime, the time may be now to acquire a good education on Bitcoin. Such an education will empower learners with the ability to come up with models that will be used in determining the value of Bitcoin. These models will then build on the present methods that include technical and correlation analyses that provide less than optimum results. More and more educational institutions are offering courses on Bitcoin and cryptocurrency in general, and all we can tell those interested in cryptocurrency is the rallying cry of the ancients, carpe diem, in other words, seize the moment.

What do you think? How can the fair value of bitcoin be determined? Comment below!

Also Read: What Determines the Value of Bitcoin?

Images from Shutterstock.

Last modified (UTC): January 2, 2015 4:42 PM

Share
John Weru Maina @bitmaina

John Weru is a Kenya-born writer who has been writing since his teenage years. He believes that digital currencies hold the key to unlocking the potential of e-commerce and m-commerce globally, and powering Africa's participation in international trade.

News Tip?

tips (at) ccn.com