The true value of bitcoin

Even if tighter controls would reduce illicit transactions related to Bitcoin, its value would not decrease.

Last December, the Bitcoin received its first badge of honour: two U. S. stock markets - the Chicago Board Options Exchange and the Chicago Mercantile Exchange - launched futures contracts on Bitcoin. A week later, just before Christmas, the Bitcoin experienced a fourth crash since its launch in 2009: its price collapsed from $18,000 to $11,000.

The price has since risen to $15,000 and continues to fluctuate rapidly without anyone knowing why. In a recent op-ed for the New York Times, Nobel Economics Prize Robert Shiller sees the bitcoin as an asset with no fundamental value, fluctuating with beliefs and moods.

Should we give up bitcoin analysis? Can't we say anything about its "fundamental" value? We propose a way of apprehending the problem and getting a few orders of magnitude.

"Dark wealth"

Let's take as a starting point that in the long run, cryptocurrencies will be used for transactions. Today, most of the transactions on bitcoin concern illegal activities: tax evasion, money laundering, arms purchases, drugs, etc. Most of these transactions are illegal.

What is the demand for such transactions? The value of global financial assets is in the order of $280 trillion. One can assume that the "obscure" wealth is about one tenth of the legal wealth, or 28 trillion. The total value of cryptocurrencies (bitcoin, litecoin, ripple, ethereum...) is about 0.5 trillion. To put these two figures in relation, let's take a detour through economic theory.

Monetary economics analyses the concept of "velocity", i. e. the speed at which money circulates. A swift change allows for more transactions per unit of time. For example, in our countries, the stock of money represents about half of annual GDP, and about one tenth of the stock of wealth (value of movable and immovable assets). This stock of currency is sufficient to carry out our transactions (purchase of housing, payment of wages, ...).

Applying the same ratio of 1 to 10, one can imagine that obscure wealth requires 2.8 trillion virtual and anonymous currency to carry out its illicit transactions. As such, the total value of cryptocurrencies could therefore be further multiplied by 5 or 6. Anticipating this, investors are buying massive amounts of bitcoins. This would explain much of the recent surge in prices.

Strengthening of controls

Fortunately, we can only hope that this calculation will not succeed. Regulators and central bankers rightly worry about the use of bitcoin for money laundering operations, and governments cannot tolerate an exponential increase in tax evasion.

However, tighter controls would not necessarily mean the death of Bitcoin. On the contrary, stricter controls would make it possible to separate the chaff from the wheat.

Also, not all cryptocurrencies are used for illicit transactions. Ethereum, for example, is used to quickly execute smart contracts between companies. Ripple also uses blockchain technology and allows immediate execution of payments between financial institutions and private individuals.

As for the bitcoin, it could retain its value even in the event of a drop in illicit transactions, since it is the reference medium for transactions between different cryptocurrencies, much like the dollar serves as a reference currency for international trade.