What is the basic value of bitcoin?

As it reaches new highs, there is no shortage of bold predictions about Bitcoin reaching $ 100,000 or more.

They are often based on nothing but extrapolations from people with their own interests: the price has risen sharply, so it will continue to rise. If it gets above its previous maximum, it must go further.

There is also “mapping” or “technical analysis” – looking at graphs and seeing patterns in them. There may be fictitious terms like “resistance levels”And”Tenkan-Sen“. It is said about “basics“.

Let’s look at this last thought. Does bitcoin have a base value?

Calculation of basic values

Baseline value in traditional financial terms means the value based on what return (or cash flow) an asset generates. Think of an apple tree. For the investor, its basic value is in the apples it produces.

In the case of company shares, the basic value is the dividend paid out of the profit. The standard measure used by investors is the price-to-profit ratio. For real estate, the base value reflects the rent that the investor earns (or the owner-user saves). The value of a bond depends on the interest it pays.

Gold also has a basic value based on its use in jewelry, dental fillings or electronics. But this value is not the reason why most people buy gold.

Basics for cryptocurrencies

National currencies are different. Their value is that they are a trusted and accepted unit of exchange.

Coins made of gold and silver had a basic value in the past because they could be melted down for their precious metals. This is no longer the case for fiat names whose value depends solely on people who believe that others accept them as face value.

Most cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin, are essentially private fiat meny. They have no corresponding assets or income. This makes it difficult to determine the baseline value.

In September, analysts of the British Standard Chartered Bank he argued Bitcoin could peak at around $ 100,000 by the end of 2021. “Bitcoin, as a means of exchange, may become the dominant peer-to-peer payment method for global non-banks in the future cashless world,” said the crypto-bank chief. research team Geoffrey Kendrick (former Australian Treasury official).

In theory, that would be possible. Global estimate 1.7 billion people lack of access to banking services. But bitcoin has been considered the future of payments since its invention in 2008. He has made little progress.

There are at least two significant barriers. The first is the computational plot needed to process payments. Technology can overcome this. The second obstacle is more difficult: the volatility of its price.

Digital currencies that can maintain a stable value are more likely to become payment instruments. These include existing stablecoins, Meta bumped into Diem a central bank digital currencies, already operational in some Caribbean economies.

So far, the only major company that has accepted bitcoin payments is Tesla, which announced the policy in March only to cancel it. in May.

The only country that has adopted Bitcoin as an approved currency is El Salvador (which also uses the US dollar). However, it is far from clear what the benefits are. Laws that force businesses to accept cryptocurrency have also led to protests.

Bitcoin as digital gold

If bitcoin has no real value as an extended means of payment, then what as a store of value, such as digital gold? It has this advantage over most “altcoins”. Its supply, like gold, is (probably) limited.

One tool that cryptocurrency enthusiasts use to compare bitcoin deficiency to gold is called Stock-to-flow model. This approach argues that gold retains its value because existing gold reserves are 60 times greater than the amount of new gold mined each year. The supply of bitcoins is more than 50 times greater than the number of new coins that are “mined” each year.

However, this does not explain why the price of bitcoin was halved earlier this year. It also has no theoretical basis in economics: prices do not only depend on supply.

Some Bitcoin promoters they predict higher prices, assuming that fund managers eventually invest any part, say 5%, of their funds in bitcoins.

But such predictions implicitly assume that Bitcoin, as the largest and best-known cryptocurrency, will continue to maintain its dominant position in the crypto market. This is not guaranteed. And there is no limit to the number of cryptocurrency alternatives.

Do you remember your bank card? This credit card company had 90% of the Australian market in the early 1980s. It expired in 2006. And what about MySpace? Before 2008, it was a larger social network than Facebook.

And here we are again

In September The Economist He claimed that Bitcoin was “now distracting” from the future of decentralized finance, with competing blockchain cryptocurrency Ethereum “reaching a critical mass.”

There are parallels between the bitcoin bubble and the dotto bubble of 2000, which are driven by overly optimistic assumptions about new technologies – and human greed.

Just as several stars, such as Amazon, have emerged from the wreckage of the dot.com bubble, it is possible that some applications of the blockchain technology that is the basis of Bitcoin will have lasting usefulness. However, I doubt Bitcoin will be one of them.Conversation